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Mounting losses from banks in the US, Asia and Europe have led to renewed concerns about weakness in the US commercial real estate market, a sector that has been under pressure due to low occupancy levels and high interest rates.
US regional bank New York Community Bancorp revealed on Wednesday that it had incurred significant losses on loans linked to commercial real estate, while Japan's Aozora Bank and Deutsche Bank warned on Thursday of the risks of their exposure to US real estate.
The losses represent the latest fallout from the U.S. commercial real estate market's twin problems of fewer people working in offices since the pandemic and higher borrowing costs.
“We expect evidence of distress to increase this year as loan extensions expire,” said Kiran Raichura, deputy chief real estate economist at Capital Economics. “Many borrowers will have to either inject new capital, return assets to lenders, or sell in a soft market.”
New York Commercial Bank, whose stock prices rose last year after it acquired collapsed Signature Bank at the height of the crisis among U.S. regional lenders, said on Wednesday that it had suffered losses of $185 million on just two mortgages and had set aside more than $500 million in real estate loans. Cover potential loan losses.
The revelations shocked investors, sending New York Mercantile Bank stock down nearly 40 percent, erasing its gains since its acquisition of Signature. The pressure continued Thursday, as the stock closed down another 11 percent.
The fallout from the New York central bank weighed on other regional bank stocks, a sector that has not fully recovered from the collapse of Silicon Valley Bank and other mid-sized banks last year.
Concerns about regional banks also sparked a rally in Treasuries, a haven bet that typically benefits during moments of market turmoil. The yield on 10-year bonds fell to 3.82 percent, the lowest level in a month, with traders concerned about how potential restrictions on lending would affect growth in the United States.
“Today’s bond rally certainly has something to do with concerns about regional banks,” said Terry Wiseman, financial market economist at Macquarie.
Weissman also noted that the rise in bonds may be related to expectations of the Federal Reserve's reaction. “The Fed, when faced with bank balance sheet problems, tends to create liquidity programs,” he said. “These programs tend to bid under bonds, because they prefer to use bonds as collateral against the Fed’s credit.”
Banking analysts said New York Commercial Bank's weak results resulted from lender-specific factors — particularly its move to a higher rating in regulatory oversight due to its greater scale after the Signature acquisition — but they cautioned that it remains a reminder of real estate-related concerns.
The higher losses associated with commercial real estate office exposure “are a reminder of the ongoing credit normalization we are likely to see across the industry,” Bank of America analysts wrote in a note.
The ripple effects were felt in Tokyo, where Ozora shares collapsed by the maximum on Thursday after it forecast a full-year loss on overseas mortgages and warned that it would take up to two years for the US office market to stabilize.
Ozora Bank, a mid-sized bank, revised its previous forecast of a profit of 24 billion yen ($164 million) for the fiscal year ending in March to a net loss of 28 billion yen. The profit warning led to a more than 21 percent drop in the bank's shares, which were trading near a five-year high before the announcement.
Meanwhile, Deutsche Bank also raised its provision for loan losses associated with US commercial real estate to €123 million, from just €26 million a year earlier.
Concerns about real estate are not limited to the United States. Swiss company Julius Baer reported a more than 50 percent drop in profits on Thursday after it wrote off 606 million Swiss francs ($700 million) from its exposure to Cigna, the Austrian real estate group hit by the crisis. The losses were severe enough to lead to the departure of CEO Philip Rickenbacker.
Additional reporting from Kate Duguid in New York
