Regional Banks Brace for CRE Challenges
In the wake of the Silicon Valley Bank and Signature Bank collapses, US regional banks are girding themselves for potential commercial real estate losses. The sector’s vulnerability has become more pronounced, particularly after New York Community Bank’s unexpected fourth-quarter deficit, casting a spotlight on the industry’s multifamily loans exposure.
The scrutiny has intensified as banks prepare to report their first-quarter earnings, with a focus on how they will manage their CRE portfolios. Stephen Buschbom from Trepp anticipates an uptick in reserve buildups, with office loans marked as a significant concern alongside multifamily sector stress.
The pandemic’s shift towards remote work has left a mark on office loans due to increased vacancies, while multifamily properties face pressure from past rent regulation policies in cities like New York and San Francisco. The International Monetary Fund highlighted that non-performing CRE loans doubled as a percentage of US banks’ portfolios by the end of 2023, prompting banks to bolster provisions for bad loans.
Analysts from Morgan Stanley and Argus Research predict a rise in CRE reserve ratios for regional banks, citing high office vacancies and the Federal Reserve’s interest rate policies as contributing factors. The CRE holdings are a substantial part of US banking assets, especially for regional banks, which account for 44 percent of their balance sheets according to an Ares Alternative Credit report.
Investor confidence seems shaken as reflected by the KBW regional bank index’s decline compared to the S&P bank index. S&P Global Ratings downgraded its outlook for several US banks due to CRE market stress, which could impact asset quality and performance.
Despite these challenges, there is a silver lining as potential buyers, including private equity investors, show interest in supporting the banks. Deals are being made, with regional lender PacWest selling construction loans at a significant discount and Signature Bridge Bank divesting part of its stake in a real estate loan portfolio to a Blackstone-led consortium.
Ran Eliasaf from Northwind Group notes that banks are adopting a more conservative stance and expects further write-offs. However, analysts remain cautiously optimistic, suggesting that the banking sector’s CRE exposure may lead to a gradual downturn rather than an abrupt crash.
