Worries about the US commercial property sector have been simmering for more than a year, becoming a kind of bogeyman among investors. With occupancy rates troublingly low and interest rates high, the fear is that many, many property owners will default on their loans.
Those fears are playing out once again, nearly a year on from the 2023 banking crisis that took down three US lenders and forced an emergency takeover of Credit Suisse.
On Wednesday, shares in New York Community Bancorp fell 38% after it reported a loss of $252 million for the last quarter, my colleague Anna Cooban reports. The regional lender set aside $552 million in the fourth quarter to absorb loan losses — about nine times more than the previous quarter, largely because the bank expects losses on a loan used to finance an office building.
NYCB's drop helped drag the KBW Regional Banking Index down 6% on Wednesday, its biggest daily fall since last May. The index slid another 2% on Thursday.
NYCB's stock fell more than 11% Thursday, with other regional lenders also down sharply.
What's going on?
A big chunk of NYCB's losses were tied to office buildings (remember those?). CEO Thomas Cangemi cited "general office weaknesses throughout the country" in a call with investors.
Put simply: The value of office buildings has crashed since the pandemic ushered in remote work across much of the workforce. At the same time, historically high interest rates have made it harder for real estate developers — who often take out huge loans to finance projects — to make good on their repayments.
And right now, a lot of those loans are coming due. Last year, $541 billion in debt backed by commercial real estate came due, the highest amount ever for a single year, according to the Wall Street Journal, citing the data firm Trepp. Between now and 2028, an estimated $2.2 trillion in commercial debt is coming due.
NYCB's losses spooked investors on three continents.
On Thursday, shares of Japan's Aozora Bank sank more than 20% after it said bad loans tied to US offices were partly to blame for its projected annual loss of $190 million last year. That's especially painful given that the lender had previously expected to make a net profit $160 million.
Losses are mounting in Europe, too. Swiss private bank and wealth manager Julius Baer announced Thursday that its adjusted profit had fell 55% last year because of $680 million in losses on loans to a single, unnamed "European conglomerate." Its CEO Philipp Rickenbacher announced his departure in the wake of the losses.
According to Reuters, that conglomerate was Signa Group, an Austrian property developer that, in 2019, bought part of New York's Chrysler building.
Is it time to panic?
No, it is absolutely not time to panic.
Some of NYCB's pain is particular to its business, which acquired $13 billion worth of loans when it absorbed Signature Bank, one of the three regional US lenders that collapsed during last year's banking crisis.
Philip Lawlor, managing director of markets research at Wilshire Indexes, said the recent turbulence is unlikely to rock big, well-capitalized banks this time around.
"One should not be complacent," he told CNN, noting that last year's bank runs all "started with small ripples that just built and built."
The KBW Bank Index, which tracks 24 leading US banks, is up 29% since hitting a low last May. Europe's benchmark banks index is up 23% since a low in late March.
"This could be sort of a replay of what we saw last year — there could be contagion — but it could be limited to a number of smaller banks and not ripple through to the systemically important ones," Lawlor said.
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