Fears about the US commercial real estate market resurface after bank losses

The mounting losses of banks in Asia, Europe and the US have reignited concerns about the weakness in the US Commercial Property Market, which has been under pressure due to lower occupancy rates and higher interest rate.

The regional US lender New York Community Bancorp revealed on Wednesday that it has suffered large losses in relation to loans related to commercial real estate, while Japan’s Aozora Bank (Deutsche Bank) and the Bank of Japan (Aozora Bank) warned on Thursday about their exposure to US Real Estate.

Losses are the latest result of the US Commercial Property market’s twin problems: fewer workers in offices after the pandemic, and higher borrowing costs.

Kiran Raichura is the deputy chief property economist of Capital Economics. She said, “We expect signs of distress to increase this year with loan extensions ending.” Many borrowers will have to inject new capital or return assets to lenders, or sell in a soft market.

NYCB’s share price rose last year when it acquired the Signature Bank, which collapsed at the height the US regional lender crisis. On Wednesday, the company said that it had suffered losses of $185mn on only two property loans, and it has set aside over $500mn for potential loan losses.

Investors were shocked by the revelations. The stock of NYCB dropped almost 40%, wiping out all its gains made since it acquired Signature. Stocks closed down an additional 11 percent on Thursday.

The fallout of NYCB has weighed on regional bank stocks. This sector is still recovering from the collapse last year of Silicon Valley Bank, and other midsized lenders.

Worries about regional banksalso sparked an increase in Treasury bonds. These are a safe haven investment that usually benefits from market turmoil. The yield on the 10-year bond fell to its lowest level in over a month as traders worried about possible lending restrictions that could affect US growth.

Thierry Wizman is a financial market analyst at Macquarie. He said that the rally in bonds today has a lot to do with fears over regional banks.

Wizman noted that the rally in bonds may also be linked to the expectation of a response by the Federal Reserve. When faced with balance sheet issues, the Fed tends to implement liquidity programs. These programmes tend to bid up bonds because they favor the use of the bonds as collateral for the Fed’s credit,” said he.

Banking analysts said NYCB’s poor results were due to factors specific to the lender – especially its move to higher regulatory oversight as a result of its greater scale after the Signature acquisition – but warned that it still served to remind people of the concerns around real estate.

In a recent note, Bank of America analysts noted that the higher losses associated with commercial real estate offices “remind us of a credit normalisation process that is likely to continue across the industry”.

The ripple effect was felt in Tokyo where Aozora shares crashed to their maximum limit after the company forecasted a loss for a full year on loans made overseas and warned that it could take up to two years before the US office market stabilizes.

Aozora is a mid-sized bank that revised its forecast of a profit for the year ending March from Y=24bn to a loss of Y=28bn. The bank’s shares dropped by more than 21% after the profit warning. They had previously been trading at a high of five years.

Deutsche Bank has also increased provisions to €123mn for losses on loans linked to US commercial real-estate, up from €26mn just a year ago.

Real estate worries are not confined to the US. Switzerland’s Julius Baer announced a drop of more than 50% in its profit on Thursday, after writing off SFr606mn (about $700mn) due to its exposure to Signa – the crisis-hit Austrian real estate group. The losses were so severe that Philipp Rickenbacher, the chief executive of Signa, resigned.