Why New York City Apartments Could Become a Big Problem for NYCB

Investors have punished shares of commercial real estate lender New York Community Bancorp (NYCB) so far this month. To see why, it helps to understand the changing economics of one of New York City's staples: the rent-stabilized apartment building.

The largest regional bank loan exposure is to apartments. Nearly half of that portfolio is associated with dozens of multifamily complexes in the Big Apple where annual rent increases are regulated by the government.

This is what worried investors. These properties could end up being worth much less than they were before due to higher interest rates and new limits on rent increases, leading Wall Street to question whether this $116 billion lender will be able to withstand the expected losses over the course of… the time.

The bank, which is headquartered in Hicksville, New York, is trying to convince investors that the situation is under control.

New York Commercial Bank's new CEO, Alessandro Dinello, told analysts Wednesday that the company will work to reduce its exposure to commercial real estate. The bank also has $3 billion in loans tied to office properties, another potential area of ​​future weakness as business patterns shift in major cities.

On Friday, DiNello and other board members bought nearly $873,000 worth of NYCB stock, and that vote of confidence helped push the stock up 17%.

It is still down 53% since Jan. 31, when it surprised analysts by cutting its dividend and reporting a quarterly net loss of $252 million. The bank announced that day that it had set aside $552 million for future loan losses, an amount well above estimates, to account for vulnerabilities associated with office properties and multifamily apartments.

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NYCB has its roots in New York City. Founded in 1859 as the Queens County Savings Bank, it was the first New York State-chartered savings bank in Queens. The company went public in 1993, and in subsequent decades became one of the city's largest lenders to rent-stabilized building owners.

FILE PHOTO: A man walks past a closed branch of the Community Bank of New York in New York City, US, January 31, 2024. REUTERS/Mike Segar/File Photo

Community Bank of New York branch in New York City. (Mike Segar/Reuters/File Photo) (Reuters/Reuters)

Nearly half of all apartments in New York City are rent stable. It was a system designed to keep some units affordable, especially in older buildings built before 1974.

What made multifamily complexes valuable for so long were local laws that gave landlords greater freedom to raise rents to match market rates, making these properties low-cost but stable sources of income.

A 2019 change by New York State limited rent increases, putting pressure on building owners' profits and giving them less incentive to fix up properties. Then rising inflation and interest rates made the maintenance and debt associated with these buildings more expensive.

NEW YORK, NEW YORK - MAY 19: An old apartment building, now converted into expensive apartments, as seen on May 19, 2023 in the Lower East Side neighborhood of New York City, New York.  (Photo by Andrew Lichtenstein/Corbis via Getty Images)NEW YORK, NEW YORK - MAY 19: An old apartment building, now converted into expensive apartments, as seen on May 19, 2023 in the Lower East Side neighborhood of New York City, New York.  (Photo by Andrew Lichtenstein/Corbis via Getty Images)

A view of apartments in the Lower East Side of New York City. (Andrew Lichtenstein/Corbis via Getty Images) (Andrew Lichtenstein via Getty Images)

The fear now is that losses or defaults could start to pile up as the loans come due or there will be a forced sale of these properties at a deep discount.

That's what happened at the end of last year when the Federal Deposit Insurance Corporation sold nearly $15 billion in loans backed by rent-regulated buildings that were previously owned by Signature Bank, one of the Big Three lenders seized by regulators in 2023. Sell ​​39%.

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“None of this can happen fast enough.”

This is the challenge facing the New York Commercial Bank as it tries to emerge from its current predicament. She says she wants to reduce her focus on commercial real estate, but doing so without incurring losses will be difficult.

“I suspect [NYCB] “Investors have a right to be concerned,” said Joshua Siegel, a former banker and current CEO of New York City-based StoneCastle, an asset management and advisory firm that provides equity and deposit financing to smaller U.S. banks.

“This is going to end badly for the city, because we're all on borrowed time and someone has to pay,” Siegel said, speaking more broadly about the dynamics of New York City's multifamily real estate market.

“What you want to see them do is diversify their book,” Chris Marinac, an analyst at Janney, told Yahoo Finance.

But “none of this can happen fast enough for investors concerned about their stocks.”

Rating agency Moody's highlighted the bank's exposure to rent-regulated residential properties this week while announcing it had downgraded New York Commercial Bank's credit rating to junk. Moody's said such buildings “have historically performed well for themselves,” but “this cycle may be different.”

Community Bank of New York said last week that its rent-regulated portfolio had a loan-to-value ratio of 58% and that its non-performing loan ratio was a minimum of 0.52%. But “criticized” loans made up 14%, or $2.4 billion, of the portfolio.

Across the bank's multifamily book, loans in loans accounted for 8.3%.

“Nothing like what we saw in 2008”

There is debate among analysts about whether the New York City Bank's problems are unique or just the beginning of a larger drag on a number of regional banks across the United States.

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Banks own half of all outstanding commercial real estate loans, according to the Mortgage Bankers Association, with small banks holding the majority.

Past due interest on non-owner-occupied commercial real estate loans rose in the fourth quarter to its highest level since 2013, according to Apollo Chief Economist Torsten Slok (Apollo is Yahoo Finance's parent company).

This is not a nationwide crisis, according to Siegel. “It's a market crisis, and I would say first and foremost, commercial real estate in major cities that haven't modeled vacancy rates this high.” he added.

“I hope and believe that 'vulnerabilities in commercial real estate' will not ultimately pose a systemic risk to the banking system,” Treasury Secretary Janet Yellen told Senate lawmakers on Thursday.

Treasury Secretary Janet Yellen testifies during a Senate Banking, Housing, and Urban Affairs Committee hearing examining the Financial Stability Oversight Board's annual report to Congress, Thursday, February 8, 2024, on Capitol Hill in Washington.  (AP Photo/Maryam Zohaib)Treasury Secretary Janet Yellen testifies during a Senate Banking, Housing, and Urban Affairs Committee hearing examining the Financial Stability Oversight Board's annual report to Congress, Thursday, February 8, 2024, on Capitol Hill in Washington.  (AP Photo/Maryam Zohaib)

Treasury Secretary Janet Yellen testified last Thursday before lawmakers in the Senate. (Maryam Zohaib/AP Photo) (News agency)

But “smaller banks may be nervous because of these developments.”

Sheila Burr, former head of the Federal Deposit Insurance Corp., told Yahoo Finance the same day that there may be “a few more bank failures” if lenders don't reserve enough to absorb potential commercial real estate losses.

“But it's nothing like what we saw in 2008,” she added, referring to the real estate crash that ultimately led to the collapse of some of the country's largest financial institutions and hundreds of other banks across the United States.

David Hollerith is a senior reporter at Yahoo Finance covering banking, cryptocurrency, and other areas of finance.

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