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As commercial real estate continues to struggle to recover from pandemic-era changes that have resulted in rising vacancies in buildings (especially office space) and rising interest rates, banks across the country are fighting to prevent these problems from worsening even further.
New York Community Bancorp's (NYCB) recent struggles highlight the rapid decline in the value of rent-regulated apartment loans in New York City. Banks have offered such loans for decades, but the Housing Stability and Tenant Protection Act passed in New York state in June 2019, combined with rising interest rates and inflation, is making it harder for landlords and property managers to turn a profit, said David Chiaverini, an analyst at Wedbush Securities.
Seth Glasser, a multifamily real estate broker at Marcus & Millichap, said the assessed value of rent-regulated properties in New York City has fallen by half since 2019. The Housing Stability and Tenant Protection Act, which capped rent increases, limited the amount of profit landlords can make on renovations and ended eviction programs, among other provisions, marked a turning point for rent-regulated properties.
Chiaverini said the law puts a strain on the net operating income of rent-regulated properties, making it harder for borrowers when their loans mature in a high-interest rate environment. Additionally, the costs of renovating and maintaining properties have increased, and interest rates have nearly doubled, yet rent increases are prohibited, Glasser said.
NYCB's new CEO, Alessandro “Sandro” Dinero, said last month that the bank is “committed to reducing” its concentration in commercial real estate as quickly as possible, but when it comes to rent-regulated multifamily properties, Chiaverini said there's no quick fix.
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Like NYCB, Valley National Bank is heavily concentrated in commercial real estate. CRE-related loans make up about half of Valley's portfolio, which consists of apartments, retail buildings, offices, industrial buildings, medical facilities, etc. The portfolio is primarily located in New Jersey, New York City, other parts of New York state, and Florida, where it expanded a few years ago to diversify its footprint.
The office sector has been hit especially hard by the shift to remote work, with New York City especially struggling as floors in office buildings remain empty. Fortunately, Valley Bank has largely stayed away from large Manhattan office buildings, whose values have plummeted. Instead, its office portfolio consists mostly of smaller buildings in the suburbs, whose owners remain in good shape, bank executives said.
“When these property owners run into problems, because Valley specializes in smaller buildings, it makes it easier for us to convert troubled office buildings into apartments or industrial centers,” said Tom Iadanza, president of Valley Corp. Officials around the country have considered converting troubled office buildings into new housing, but the math has proven unsuccessful.
“You can't repurpose a high-rise in Midtown today. Financially, it doesn't work,” Iadanza said, contrasting it with office loans in the Valley, where “the space isn't as big, so you can do a lot more.”
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These trends have led Treasury Secretary Janet Yellen to comment on the state of commercial real estate and its impact on banking. “There are some institutions that are facing pressure from commercial real estate, where we know that office buildings have been particularly hard hit by the pandemic,” Yellen said in recent testimony before the Senate Banking Committee. “Interest rates are rising, which will be a concern for some banks as they need to refinance loans in an environment of rising interest rates, falling valuations and rising vacancy rates. But overall, I think the system is well capitalized.”
Read on to find out how banks and governments are addressing current challenges and concerns in commercial real estate.