Real estate pain for US regional banks is piling up, say investors

Real estate pain for US regional banks is piling up

NEW YORK/WASHINGTON, Feb 12 (Reuters) - New York Community Bancorp's (NYCB.N),
Opens new tab exposure to commercial real estate has intensified investor scrutiny around regional banks, with some expecting more pain for those with office and multifamily property loans.

Fears about the health of the smaller banks have escalated again a year after the collapse of Silicon Valley Bank in spring of 2023 triggered a regional banking crisis.

NYCB's recent earnings release which sparked a dive of about 60% in its shares has particularly focused investors on combing through portfolios of regional banks, as small banks account for nearly 70% of all commercial real estate (CRE) loans outstanding, according to research from Apollo.

“As long as interest rates stay high, it's hard for the banks to avoid problems with CRE loans," said short-seller William C. Martin of Raging Capital Ventures, who decided to place a bet against NYCB after the bank's disastrous Jan. 30 earnings release which detailed real estate pain and led him to believe that shares could sink further on more real estate losses.

Martin, who shorted Silicon Valley Bank last year before its collapse, said he shorted NYCB because he thought its earnings power would be diminished and that it might have to raise capital. NYCB said on Wednesday that a capital increase is an option, but that it has no plan to do this "right at the moment."

The bank declined to comment on the short-seller's view.

"The regional banks ... (are) doubly more exposed to rates," said Dan Zwirn, co-founder and CEO of distressed debt investment firm Arena Investors, who is avoiding real estate for the next year or two, citing in part higher risk of default. The KBW Regional Banking index (.KRX), opens new tab is down around 11% since NYCB's announcement.

The CRE market has been hit by the repercussions of the COVID-19 pandemic. Delinquency rates on commercial mortgage-backed securities (CMBS) are expected to rise to 8.1% in 2024, according to Fitch, as many companies struggle to convert remote and hybrid-working employees. Meanwhile CMBS loan delinquencies in commercial multifamily - housing properties with more than five units - are expected to touch 1.3% in 2024 versus 0.62% in 2023.