New York Community Bancorp (NYCB) has faced a tumultuous month on the stock market, leaving investors seeking answers. To comprehend the situation, it’s crucial to delve into the evolving dynamics of a quintessential New York City asset – the rent-stabilized apartment building.
The regional bank finds itself heavily invested in apartments, with roughly half of its portfolio tied to numerous multifamily complexes in the city where annual rent increases are government-regulated. This has sparked concerns among investors about the potential devaluation of these properties, driven by soaring interest rates and new restrictions on rent hikes. Wall Street is now questioning whether NYCB, with a $116 billion valuation, can weather the anticipated losses.
Alessandro DiNello, NYCB’s new executive chairman, assured analysts of the bank’s commitment to mitigating risks by reducing its exposure to commercial real estate. The bank’s loan portfolio also includes $3 billion tied to office properties, posing another area of vulnerability as work patterns shift in major cities.
The announcement of DiNello and other board members purchasing around $873,000 of NYCB shares on Friday provided a boost, leading to a 17% increase in the stock. Despite this, the stock remains down by 53% since January 31, when the bank surprised analysts by slashing its dividend and reporting a net quarterly loss of $252 million.
NYCB, rooted in New York City since 1859, has been a major lender to owners of rent-stabilized buildings, with almost half of NYC apartments falling under this category. These apartments, prized for their low but steady income, faced a turning point in 2019 when the state of New York implemented changes limiting rent increases.
The fear now is that these properties might incur losses or defaults, especially if loans come due or there is a forced sale at a considerable discount. A recent example is the Federal Deposit Insurance Corporation (FDIC) selling approximately $15 billion in loans backed by rent-regulated buildings at a 39% discount.
Despite NYCB emphasizing its intent to reduce its commercial real estate concentration, concerns persist among investors. Moody’s recently downgraded NYCB’s credit rating to junk, citing exposure to rent-regulated apartment properties. The bank’s rent-stabilized portfolio has a loan-to-value ratio of 58%, with “criticized” loans accounting for 14%.
Analysts are debating whether NYCB’s challenges are unique or if they signal broader issues for regional banks across the US. Smaller banks, in particular, hold a significant share of commercial real estate loans, and delinquencies in non-owner-occupied commercial real estate loans have reached the highest level since 2013.
While this situation isn’t viewed as a nationwide crisis, concerns remain about potential stress on smaller banks and the need for adequate reserves to absorb potential losses. Treasury Secretary Janet Yellen has expressed hope that commercial real estate weaknesses will not pose a systemic risk to the banking system, while former FDIC Chair Sheila Bair has acknowledged the possibility of a few more bank failures without equating it to the 2008 real estate meltdown.
