Global Span of Banks’ Commercial Real Estate Problem Starts Locally
International banks often have greater exposure to U.S. downtowns and big cities
By Telis Demos
San Francisco had the biggest percentage-point increase in office vacancies among U.S. metro areas over 12 months. PHOTO: LOREN ELLIOTT/BLOOMBERG NEWSWhy are U.S. commercial real estate problems rapidly going global?
The reasons are actually quite local.
Many of the problems identified in the property market, such as low occupancy rates for office buildings and the challenge of higher interest rates on refinancing, aren’t evenly spread around the country.
They are often concentrated in the downtowns of certain cities.
So while U.S. regional banks have borne the brunt of investor worries because of their overall large presence in commercial property lending, they can have a relatively lighter presence in the bigger-city, bigger-building market.
But the converse might be true for global banks that lend into the U.S., which can gravitate to those population centers.
So it is no coincidence that two banks that have reignited worries about property lending in recent days are one based in the New York region, New York Community Bancorp, and one based in Japan, Aozora Bank.
Shares of both banks plunged this past week after they reported increased credit concerns related to commercial property risks in the U.S.
Recent lending trends illustrate the split.
In the first half of 2023, international banks represented 25% of loan originations to U.S. central business district offices, compared with 17% for regional and local banks, according to MSCI Real Assets.
By contrast, regional and local banks did 54% of lending in that period for medical offices and 45% for suburban offices—versus 2% and 6% at international banks, respectively.
At Aozora, the at-risk property loans identified were concentrated in big cities.
Of the 21 nonperforming U.S. office loans, with $719 million outstanding, that it reported this past week, the largest chunks by city were $171 million in Chicago and $127 million in Los Angeles.
“The volume of property sales remains very low,” the bank wrote about Chicago’s office market in a presentation.
In a January report, Moody’s Analytics found the biggest percentage-point increase in office vacancies among U.S. metro areas over 12 months was in San Francisco, followed by Austin, Texas.
The biggest drops were in Columbia, Md., and Knoxville, Tenn.
Some European banks have exposure to top-tier U.S. markets.
In its fourth-quarter report this past week, Deutsche Bank took 123 million euros ($134 million) in credit-loss provisions for U.S. commercial real estate, up from €66 million in the prior quarter.
Some 60% of the U.S. office commercial real estate loans that Deutsche Bank evaluated in an internal stress test were split across New York, Los Angeles and San Francisco, the bank said in a presentation.
At NYCB, 54% of its office portfolio is in Manhattan.
In multifamily property lending, the majority of its loans are in New York City, and on what it describes as “nonluxury, rent-regulated buildings.”
New York, like some other states and cities, has rules that can in some cases make it harder for apartment building owners to raise rents to offset higher interest costs.
That can depress buildings’ value and make it harder to refinance their mortgages.
There are a number of U.S. regional banks with exposures to big-city office or apartment markets.
For example, Little Rock, Ark.-based Bank OZK is a major construction lender in places like New York, Miami, San Diego, Los Angeles and San Francisco.
The bank’s stock outperformed in 2023 as lending income jumped and credit quality was steady.
But its shares are down more than 10% over the past two sessions.
“Our commercial real estate business model is vastly different than NYCB’s, as was clearly evident in our outstanding financial results recently reported,” said Brannon Hamblen, Bank OZK president, in a statement.
Still, for many U.S. banks, commercial property lending is concentrated away from big cities or central business districts, known as CBDs.
Particularly for smaller banks, they tend to be relatively more concentrated in what is known as “owner-occupied” commercial property lending, according to Fitch Ratings.
Think of, say, a medical practice that owns its building.
In that market, things like rental income streams or occupancy rates aren’t the big concern.
“The magnitude of stress is very different so far,” said Brian Foran, analyst at Autonomous Research.
“Part of it is the underlying fundamentals.
Suburban offices are just getting used more.”
Salt Lake City-based Zions Bancorporation said in its fourth-quarter report that 70% of its office lending is suburban.
It reported no new office nonaccrual loans or charge-offs in the quarter.
It holds allowances against credit losses of 3.8% of balances for its office loans.
NYCB this past week raised its office reserve ratio to around 8%.
The banks tracked by Autonomous have disclosed fourth-quarter office reserve ratios ranging from 2% to 13%.
Some credit trends are already moving in different directions.
U.S. banks’ owner-occupied commercial real estate loans saw a jump in the delinquency rate in 2020, according to figures tracked by S&P Global Market Intelligence.
But they have fallen back to levels below what they were before the Covid-19 pandemic.
On the other hand, loans on nonowner-occupied properties—like office buildings or apartment complexes whose investor owners aim to lease them out—last year had quarterly delinquency rates climb back above what they were in 2020, according to S&P.
America’s downtowns and big cities are also the world’s problem.
But they aren’t a problem for all U.S. banks.
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