New York Community Bancorp’s decisions to reduce dividends and build reserves sent its stocks tumbling by a record 38%, causing the KBW regional bank index to suffer its worst day since the Silicon Valley Bank collapsed in March last year. Similarly, Tokyo-based Aozora Bank plunged over 20% after warning of a loss related to US commercial real estate investments. In Europe, Deutsche Bank more than quadrupled its provisions for US real estate losses to €123 million in the fourth quarter compared to the previous year.

The problem has become chronic, reflected in the declining value of commercial properties due to remote work induced by the pandemic and the rapid rise in interest rates, making refinancing more expensive for struggling borrowers. Barry Sternlicht warned this week that the office market is heading for over $1,000 billion in losses. This is a significant issue that the market must contend with.

Bank balance sheets do not account for the fact that many real estate properties will not be profitable at maturity, which could lead to some bankruptcies within the US banking sector. Banks face around $560 billion in commercial real estate loans maturing by the end of 2025, accounting for more than half of the total real estate debt maturing during that period. Regional lenders, mainly, are more exposed to the sector and would be hit harder than larger, more diversified US banks.
According to a JPMorgan study published in April, commercial real estate loans make up 28.7% of small banks’ assets, compared to only 6.5% at larger lenders. This exposure has prompted closer scrutiny from regulators, who are already on alert after last year’s regional banking turmoil.

The link between commercial real estate and regional banks is clearly an extreme risk for 2024, and if cracks appear, they could affect the banking sectors.
So far this year, the earnings of many regional lenders have shown little signs of strain. However, the nervousness surrounding smaller lenders is exacerbated by the unpredictability of when and where deteriorating real estate loans might surface, with only a few payment defaults capable of causing havoc. New York Community Bancorp said that the increased provisions were related to a cooperative building and an office building.
While offices are a particular concern for real estate investors, the company’s most significant risk comes from multifamily buildings, with the bank holding about $37 billion in real estate loans. Nearly half of these loans are secured by rent-regulated buildings, making them vulnerable to strict 2019 New York State regulations that severely limit landlords’ ability to increase rents.
The percentage of loans that banks have reported as troubled is a drop in the ocean compared to the payment defaults that will occur throughout 2024 and 2025.