The scale of this construction loan is as staggering as the Miami skyscrapers it's helping to build.
The recently announced $688 million financing for the Waldorf Astoria Hotel & Residences, which will rise 1,049 feet along Biscayne Boulevard in downtown Miami, comes courtesy of Arkansas-based Bank OZK and Related Fund Management.
But the building's impressiveness — it will be the tallest residential building south of New York — isn't so important to a finance professor at Florida Atlantic University. What worries him is the cumulative loan portfolios of Bank OZK and other banks across the country, which hold large amounts of commercial real estate loans in a high-interest economy. Borrowers took out many of these loans years ago, and many are due to come due in 2025 and 2026. If they need to refinance, borrowers will have to pay higher interest rates.
Rebel Call examined the commercial real estate lending exposure of 157 U.S. banks with more than $10 billion in assets and concluded that “more than 60 of the nation's largest banks are at increased risk of failure due to their commercial real estate (CRE) exposure.”
“This is a very real event for the banking system as commercial real estate loans are repricing in a high interest rate environment,” he said in a statement. “With commercial real estate selling at significant discounts in the current market, banks will ultimately be forced by regulators to write down their exposures.”
The Wall Street Journal reported this week that some banks have turned to buying credit insurance from investors who, for large fees, essentially assume some of the lending risk from the institution.
The FAU study used publicly available quarterly data from the Federal Financial Institutions Examination Council's (FRB) Central Data Repository to show each bank's total exposure level as a percentage of that bank's total capital. “Bank regulators consider a ratio above 300% to be excessive exposure to CRE, increasing a bank's risk of failure,” Cole said in a statement accompanying the study's release earlier this month.
Bank OZK, formerly known as Bank of the Ozarks, is known in finance and development circles as the most aggressive lender of condominiums in Florida and other types of commercial projects in the U.S. In the FAU study, the company's loan exposure level to equity was 620.5%, ranking it second on the list. Dime Community Bank of New York topped the list at 653.7%.
OZK Bank did not respond to an emailed inquiry about FAU's findings. In the eyes of analysts, the bank's loan for the Miami skyscraper is not in question, since 90% of the project's 307 apartments have reportedly sold. But analysts at two Wall Street brokerages, including Citigroup, downgraded the bank's shares to “sell,” citing the bank's overall exposure to commercial real estate.
Two Florida banks topped the FAU list with ratios above 300 percent: City National Bank of Florida, ranked 23rd at 438.7 percent, and Southstate Bank of Winter Haven, ranked 56th at 320.5 percent.
City National said in a statement that FAU's investigation was “inaccurate.”
“City National Bank's commercial real estate concentration is within regulatory guidelines and below risk thresholds established by the Office of the Comptroller of the Currency,” the bank said, adding that the bank's commercial real estate portfolio “continues to perform above the industry average.”
The bank cited several metrics to indicate the health of its loan portfolio, including loan-to-value ratios, which compare loan amounts to the value of assets purchased (50% in City National's case), a healthy debt service ratio with net operating income at 1.8 times debt, and outstanding balances related to unsecured loans where borrowers have not made a payment for more than 90 days (just 0.4% of the portfolio).
“These metrics are the result of CNB's disciplined credit process and sharp focus on relationship banking within Florida, the strongest commercial real estate market in the United States,” the bank said.
South State did not respond to an emailed request for comment.
Three other banks in the state fell below the survey's 300% loan-to-equity ratio: Seacoast National Bank in Jupiter ranked 90th with 251%, EverBank in Jacksonville ranked 103rd with 186.5% and Raymond James Bank in St. Petersburg ranked 111th with 142.3%.
“The bank intentionally maintains a very conservative risk posture and, as FAU's analysis found, has lower exposure to commercial real estate (CRE) mortgages than most other banks. Our commitment to maintaining the highest levels of capital in the banking industry is reflected in our Tier 1 capital ratio of 14.6%, ranking Seacoast Bank in the top 10% of the strongest banks in the nation,” Seacoast Bank Chairman and CEO Chuck Shafer said in a statement.
“Seacoast Bank's exposure to commercial real estate is relatively low,” Schaffer added. “By regulatory definition, our commercial real estate exposure represents 221% of our regulatory capital, well below the 300% threshold that FAU considers high exposure to commercial real estate mortgages. Additionally, the bank has a diversified lending strategy across various asset classes, industries and loan types, giving us broad exposure diversification that helps us manage risk.”
He added that the bank's conservative balance sheet principles “position it well to serve its clients and communities through any economic cycle with strong asset quality that reaffirms our high credit standards.”
The bank does not lend to large office buildings in downtown business districts and its commercial real estate investments are “primarily concentrated in Florida, which continues to perform significantly better than many other parts of the country,” the bank said.
Another bank, EverBank, said it could not comment.
In an interview, Cole argued that the biggest problem facing the industry is that trillions of dollars of commercial real estate loans originated in 2018 and 2019 will start to be refinanced this year at higher costs as interest rates rise due to inflation.
“If they need to refinance, they'll have to go from a 3 percent mortgage to a 6 percent or 7 percent mortgage,” Cole said. “Some borrowers will just hand over the keys to the bank.”
Banks will sell or try to sell the properties, many at a discount, driving the market down.
“Like the first few pebbles that hit the water, the ripples are just starting,” he said.
Cole acknowledged that the current health of Florida banks is “fairly good.”
“But they'd be better off getting inland because a tsunami is coming,” he said. “That means taking some of that property off their books.”
The interest rate conundrum
“There's definitely a lot of pressure on lenders,” said Brett Forman of Forman Capital in Boynton Beach. “Interest rates are definitely a big factor … it's an unknown.”
That's mainly because the Federal Reserve has threatened to cut rates this year but ultimately refrained from doing so. “If rates stagnate without a cut this year, that just makes an adjustment even more likely,” he said.
“Even if interest rates start to fall sooner or later, [troubled] “They have to borrow from their assets or from another lender,” he said. “If they can't repay the full loan through a refinancer, what happens? Does someone have to put up more of their own money? Does the bank have to start the foreclosure process?”
Florida is more resilient
Investors and industry service professionals say Florida's commercial real estate situation is better than the Northeast, Midwest and other parts of the country, as the coronavirus pandemic has brought an influx of new residents and businesses from outside the state.
“Florida is going to be a little more protected than other markets,” said Anthony Scavo, chief operating officer at Basis Industrial, a real estate management and development company with an office in Boca Raton.
“There are a lot of buyers in Florida,” he said. “I think there's a lot of capital sitting around right now.”
Miami attorney Daniel Diaz Leyva, head of Day Pitney's real estate practice, said South Florida and Florida are “uniquely positioned” compared to the rest of the country.
“Not all markets are equal,” he said. “We're already seeing some markets struggle. Markets like New York and San Francisco are seeing owners give up the keys to primarily their office buildings. These markets are clearly in a tough spot, to say the least.”
“The population continues to grow [in South Florida]”However, it is a bit lower than it was immediately after the COVID pandemic,” he said. “The rhythm is consistent and strong compared to other markets, which should help us get through this difficult period.”
Forman said that even if banks have to repossess certain properties, “they will be worth more in certain areas of Florida because of rising real estate values.” [population] The impacts of COVID-19 have increased density and demand.
Meanwhile, banks are “reining in commercial lending to some extent,” helping nonbank lenders fill the gap for borrowers seeking capital, Diaz Leyva said.
“Of course there will be challenges,” Diaz Leyva added, “but I would much rather be sitting in Florida than in Kansas.”
This story has been updated to correct the spelling of Miami attorney Daniel Diaz Leyva and Arkansas-based Bank OZK.