The US commercial real estate market has been in turmoil since the onset of the Covid-19 pandemic. But New York Community Bancorp and Japan’s Aozora Bank Ltd. delivered a reminder that some lenders are only just beginning to see the pain.

New York Community Bancorp’s decisions to slash its dividend and stockpile reserves sent its stock down a record 38% and dragged the KBW Regional Banking Index to its worst day since the collapse of Silicon Valley Bank last March. Tokyo-based Aozora Bank plunged more than 20% after warning of a loss tied to investments in US commercial property. In Europe, Deutsche Bank AG more than quadrupled its US real estate loss provisions to €123 million ($133 million) in the fourth quarter from a year earlier.

The concern reflects the ongoing slide in commercial property values coupled with the difficulty predicting which specific loans might unravel. Setting that stage is a pandemic-induced shift to remote work and a rapid run-up in interest rates, which have made it more expensive for strained borrowers to refinance. Billionaire investor Barry Sternlicht warned this week that the office market is headed for more than $1 trillion in losses.

For lenders, that means the prospect of more defaults as some landlords struggle to pay loans or simply walk away from buildings.

“This is a huge issue that the market has to reckon with,” said Harold Bordwin, a principal at Keen-Summit Capital Partners LLC in New York, which specializes in renegotiating distressed properties. “Banks’ balance sheets aren’t accounting for the fact that there’s lots of real estate on there that’s not going to pay off at maturity.”

Moody’s Investors Service said it’s reviewing whether to lower New York Community Bancorp’s credit rating to junk after Wednesday’s developments.

Banks are facing roughly $560 billion in commercial real estate maturities by the end of 2025, according to Trepp, representing more than half of the total property debt coming due over that period. Regional lenders in particular are more exposed to the industry, and stand to be hurt harder than their larger peers because they lack the large credit card portfolios or investment-banking businesses that can insulate them.

Offices Lead Slump in US Commercial Real Estate Values | Prices have tumbled for most property types
Commercial real estate loans account for 28.7% of assets at small banks, compared with just 6.5% at bigger lenders, according to a JPMorgan Chase & Co. report published in April. That exposure has prompted additional scrutiny from regulators, already on high alert following last year’s regional banking tumult.

“It’s clear that the link between commercial property and regional banks is a tail risk for 2024, and if any cracks emerge, they could be in the commercial, housing and bank sector,” Justin Onuekwusi, chief investment officer at wealth manager St. James’s Place, said.

While real estate troubles, particularly for offices, have been apparent in the nearly four years since the pandemic, the property market has in some ways been in limbo: Transactions have plunged because of uncertainty among both buyers and sellers over how much buildings are worth. Now, the need to address looming debt maturities — and the prospect of Federal Reserve interest-rate cuts — are expected to spark more deals that will bring clarity to just how much values have fallen.

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