New York Community Bancorp (NYCB), a commercial real estate lender, is facing concerns from investors regarding its exposure to rent-stabilized apartment buildings in New York City. The bank’s largest loan exposure is to apartments, with approximately half of its portfolio tied to multifamily complexes in the city where rent increases are regulated by the government. However, the changing economics of these properties, including high interest rates and new limits on rent increases, have raised worries among investors about the potential decrease in their value and the bank’s ability to withstand future losses.
To address these concerns, NYCB’s new executive chairman, Alessandro DiNello, assured analysts that the bank is taking steps to reduce its commercial real estate exposure. The bank also has $3 billion in loans tied to office properties, which could be another area of weakness as work patterns shift in major cities. In a show of confidence, DiNello and other board members purchased approximately $873,000 worth of NYCB shares, resulting in a 17% increase in the stock price.
Despite this positive development, NYCB’s stock is still down by 53% since January 31, when it surprised analysts by cutting its dividend and reporting a net quarterly loss of $252 million. On that day, the bank set aside $552 million for future loan losses related to office properties and multifamily apartments.
NYCB has a long history in New York City, having been founded in 1859 as the Queens County Savings Bank. Over the years, it has become one of the city’s major lenders to owners of rent-stabilized buildings. Rent stabilization is a system designed to keep some units affordable, particularly in older buildings constructed before 1974. These properties have been valuable due to local laws that allowed landlords to increase rents to match market prices.
However, changes implemented by the state of New York in 2019 limited rent increases, reducing profits for building owners and discouraging property maintenance. Additionally, inflation and interest rate rises have made the upkeep and debt associated with these buildings more expensive. As a result, there is now concern that losses or defaults could accumulate as loans come due or if these properties are sold at a significant discount.
This fear is exemplified by the Federal Deposit Insurance Corporation’s sale of approximately $15 billion in loans backed by rent-regulated buildings at a 39% discount. NYCB now faces the challenge of working through its current predicament and reducing its commercial real estate concentration without incurring losses.
Analysts suggest that diversifying NYCB’s loan book would be beneficial, but investors are eager to see progress as they worry about the stock’s performance. Moody’s, a ratings agency, downgraded NYCB’s credit rating to junk due to its exposure to rent-regulated apartment properties. While these properties have historically performed well for the bank, Moody’s believes that this cycle may be different. NYCB reported that its rent-regulated portfolio has a loan-to-value ratio of 58%, with a minimal percentage of nonperforming loans but a significant portion of criticized loans.
The debate among analysts centers on whether NYCB’s problems are unique or if they signal a broader issue affecting regional banks across the US. Smaller banks hold the majority of outstanding commercial real estate loans, and interest past-due for non-owner-occupied commercial real estate loans reached its highest level since 2013 in the fourth quarter. However, experts believe that this is not a nationwide crisis but rather a market-specific issue, particularly in metropolitan areas with high vacancy rates.
Treasury Secretary Janet Yellen expressed hope that weaknesses in commercial real estate would not pose a systemic risk to the banking system, but she acknowledged that smaller banks could be stressed by these developments. Former FDIC Chair Sheila Bair also noted the potential for a few more bank failures if lenders have not reserved enough to absorb commercial real estate losses. However, she emphasized that the situation is not comparable to the real estate meltdown of 2008, which led to the collapse of major financial institutions and numerous banks across the US.
In conclusion, NYCB is facing investor concerns over its exposure to rent-stabilized apartment buildings in New York City. The changing economics of these properties, including high interest rates and new limits on rent increases, have raised worries about potential losses and the bank’s ability to withstand them. NYCB is taking steps to reduce its commercial real estate concentration, but investors remain cautious. The situation is not yet a nationwide crisis but rather a market-specific issue. While there may be some bank failures, experts believe it will not be on the scale of the 2008 real estate meltdown.