Downward angle icon Downward angle icon. Nick Laham/Getty Images Regional bank stocks are feeling the effects of the unfolding commercial real estate crisis in a sell-off reminiscent of the SVB collapse. Commercial real estate loans are going bad, and huge defaults are looming, hitting banks from New York to Tokyo. Regional banks have a much greater risk and vulnerability to commercial real estate loans.
The sell-off in regional bank stocks is giving investors deja vu, but the underlying issue this time is the commercial real estate crisis.
The KBW Nasdaq Regional Banks Index closed down 6% on Wednesday, its worst day since the collapse of Silicon Valley Bank in March. Leading the decline was New York Bancorp, which plunged nearly 40% on Wednesday after the company reported a $260 million fourth-quarter loss due to bad commercial real estate loans.
U.S. real estate losses also sent shares in Tokyo-based Agora Bank tumbling 20%, according to Bloomberg. And Deutsche Bank in Europe is quadrupling its reserves for future losses to $123 million. Even New York Bancorp is putting most of its $552 million reserve into its commercial real estate portfolio.
The turmoil at regional banks reflects the malaise gripping the U.S. commercial real estate sector, which is burdened with $2.2 trillion in debt coming due in 2027. Real estate experts have called the market a “slow-moving train wreck,” with a potential $700 billion default looming.
The combination of the pandemic, which wiped out demand for office space, and rising interest rates, which made borrowing more expensive, has dealt a double whammy to the real estate industry: Landlords are now struggling to make loan payments, which is a problem for U.S. banks, especially smaller ones.
Regional banks are far more vulnerable to a collapse in the commercial real estate sector. Unlike giants like JPMorgan, smaller banks can't rely on large credit card portfolios or investment banking branches to cushion losses. At the same time, they also have four times the exposure to commercial real estate loans than the larger banks.
According to one report, CRE loans make up 28.7% of small banks' portfolios, compared to 6.5% for larger banks.
And the pressure on real estate loans is driving lenders out of the market. Recent loan sales show banks are trying to limit their exposure to the real estate sector. From Florida to California, banks including Amerant Bank and Fidelity Bancorp Funding are shrinking their real estate loan portfolios and forgoing commercial real estate loans offered by other bank executives.