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By: Hadassa Kalatizadeh
At the end of March, investors had one thing on their mind when meeting with Morgan Stanley analysts— commercial real estate loans.
As per a recent article in Crain’s NY, banks have collectively loaned close to $3 trillion to office buildings, hotels, shopping centers and other commercial real estate in the country. No bank can say they don’t have a share in commercial loans, with some exposed at a more moderate level and some more heavily invested.
The shared anxiety was summed up in an April 2nd Fitch Ratings report with the alarming headline: “Global Contagion Risk Growing from Rising CRE Losses, Led by Office.” Fitch forecasts that the delinquency rate will jump to 4.9% next year for U.S office loans packaged into securities and sold to investors, up from 2.3% in February. The ratings firm expects that default is likely for three out of four of these loans, which will mature in 2024 with options to refinance only available at much higher interest rates.
Investors are looking closely at five smaller New York banks who have particularly heavy exposure in commercial real estate relative to their size, leaving them with only minimal cushion from other sectors to soften the blow should losses materialize, per Crain’s. For example, the Dime Community Bank, which has a total of $14 billion-in-assets, carries $7 billion worth of commercial real estate loans on its books.
Its portfolio is more concentrated than any other bank with over $5 billion in CRE loans, Morgan Stanley said. The commercial loans make up 662% of Dime Community’s Tier 1 capital, meaning that the bank’s dollar amount of the CRE loans is close to seven times the capital actually held by the Long Island bank. The figure is being closely watched to assess potential exposure at local banks. Similarly, the CRE loan-to-capital ratio at Long Island-based Flushing Bank is 653%.
New Jersey-based Valley National Bank also has a high ratio of 590%, and New Jersey-based ConnectOne Bank has a ratio of 587%, per Crain’s. Also, Long Island-based New York Community Bancorp, which required a $1 billion infusion last month after concerns grew over its CRE portfolio, has a CRE loan-to-capital ratio of 545%. .
Those are the 5 local banks with heavy CRE exposure, whilst the median figure for all banks is at 215%, said Morgan Stanley. Larger lenders tend to be better protected with a greater variety in their portfolio—such as JPMorgan’s total $140 billion CRE loan book which has CRE loans amounting to just 64% of the giant bank’s capital. Bank of America similarly has a low 42% ratio, and Citigroup has a ratio of 18%.
So far, CRE losses have remained low, but that may be because lenders have been reappraising properties and restructuring loans
to give borrowers more leeway. Some 1.3% percentage of CRE loans required an extension or some other modification in 2023, up from just 0.1%, per data from Evercore ISI.
Some of the smaller banks named with high CRE loan-to-capital ratio responded to Crain’s, commenting that they are still well-positioned and have mostly avoided the ailing office market. Dime’s commercial real estate portfolio is about half apartment loans, and has only$200 million of its portfolio in Manhattan office loans, it said. The bank has no past-due or non-performing office loans.
“We don’t even have one 30-day delinquency,” said Chief Executive Stuart Lubow. “We’ve always been a very conservative lender.”
