How Worried Should Markets Be About A CRE Spiral?
Last week, following the first of what would ultimately be several very bad days for shares of New York Community Bancorp, I described the potential for a spiral dynamic to take hold in commercial real estate.
Rather than paraphrase myself, I'll quote from the linked article. "As we get visibility into what these properties are actually worth, more banks will 'unexpectedly' increase provisions, and it’ll be impossible for market participants to determine with anything approaching certainty th
Some individual or group of regulators approved the purchase of Signature Bank by an organization not prepared to handle the issues such an acquisition would create. That’s on the regulators as much as the acquiring entity. Act in haste, repent in leisure. We’ve now taken one bad bank and used it to infect another. What’s next, sell the whole mess to JPM for pennies? Regulation in this country is a necessary set of guardrails, whether it’s on the financial markets, healthcare, or the air frame companies. However, all our regulatory agencies could use some serious oversight. It’s a shame those responsible for such oversight are messing about with politics and ignoring real work.
Hoping the regulators are keeping an eye on Citibank, 85% of 1.3 Trillion in deposits are uninsured.
Is this a serious comment? I really wish you’d stop with this kind of thing, Stevevan. You say stuff like this fairly often in our comments section, and it’s almost always nonsense. Nothing’s going to happen to Citi. You come here about once every two months and basically repeat doomsayer talking points you read on conspiracy blogs and related portals, which you apparently believe to be reliable sources. I’ve asked you (repeatedly) not to do that, but you do it anyway, and the only reason I countenance it is because I’m convinced by now that you’re convinced that these bombastic storylines and implicit warnings (e.g., Citi might collapse) are based in reality, bless your heart. But let me reiterate to you, Stevevan, that it’s very unlikely, to the point of being not worth discussing, that Citi or JPMorgan or BofA are going to run into trouble. And if they did, their troubles would quickly be the least of anyone’s worries, because the conditions under which that would happen would surely entail some exogenous calamity on an existential scale. So, rest easy, my friend. It’s gonna be ok. There are no black helicopters and there’s not going to be a run on Citi.
No, your right, there’s no way another GFC can happen again.
An asteroid could hit the Earth too. Or a super-hurricane could wipe out Florida. But more to the point, if you’re so convinced of this risk (as you seem to be), then why not put some money on it, big man? Downside’s never been cheaper. Literally. Between historically cheap protection and what you implicitly claim are very high (relative to consensus) odds of a cataclysm, seems like you’d be piling into lottery ticket downside. No? If not, why not?
(Also: “You’re,” and you don’t need “again” when you already have “another.”)
Must say, my spelling and grammar have improved immensely since reading you and I’ve never used the “look up” feature on my iphone as much as when I started reading you. (Can you correct that last sentence please, something doesn’t sound quite right)
I went back and looked at NYCB’s 4Q22 report. “Majority of [loan] portfolio focused on low-risk multi-family loans on non-luxury, rent-regulated buildings. Market leader in this asset class having developed strong expertise and industry relationships over the last five decades.” and “Majority of [multi-family] loans are in New York City” The current problem for NYCB (NYC rent-controlled multifamily exposure) predated NYCB’s acquisition of SBNY’s assets. In 4Q22 the MFD LTV was 60%, in 2Q23 61%, in 4Q23 61%, implying they haven’t done any significant mark-to-market of values. If NYC rent-controlled apartments really have fallen steeply in value then real LTV cushion may be thin to nil.
From what I’m seeing, pricing on multifamily properties has generally declined around -10% in the past year and -20% or more since the peak in 2021/22. Highly dependent on local conditions – new supply, population growth, rent control, taxes, etc.
Rent growth is now slightly negative. As an example, CPT just reported new lease rent growth -4%, renewal rent gro +4%, blended gro -1%. A year ago, blended rent growth was +HSD. Its 2024 outlook is for same store rent revenue +LSD, same store expense +MSD (including insurance +18%!). Varies by market, with expected rent growth +LSD in some markets vs flat in others.
The public MFD REITs are profitable, can continue investing, and can issue debt at 5% (vs at 3-4% a year ago). Unfortunately for banks, they loan to smaller privates, who may be more stressed than the big public REITs. While 50-60% LTVs provide some protection against ultimate loss, they don’t protect against provisions and NPLs.
I will be tuned into the EQR earnings release for some “color” on the state of affairs in apartments in the average to luxury end of the market.
Plus, my tribute to Sam Zell by staying tuned in.
EQR reported, nothing dramatic. I just read through the calls for EQR ESS AVB CPT and MAA is tmrw am. All are seeing lenders extend, capital flowing in, no distress sales. Maybe add a “yet” to that, but anyway not bullish for the multifamily doomers. The group is so interesting (my opinion, not investment advice, etc). P/AFFO for practically every multifamily REIT is at/near early 2020 lows.
I’m reading about $240BN of institutional dry powder waiting patiently to buy multifamily buildings when they get to high-5s%/low-6s% yields. Not sure how far apart buyers/sellers are, but some comments about 50bp-ish gap on the 4Q REIT calls.
Makes sense.
NCBs mistake is that when the bought the portfolio they should have put in some provision for losses that were very conservative- maybe that would have lowered their bid, who knows? I recall their stock popped after buying the loans. If they had been smart they would have raised capital at the time of buying the portfolio to give them some headroom in the event of writedowns. I recall that UBS did that when they bought credit suisse…..
meaning in ubs case, they took conservative provisions for write offs