America’s slow-burning commercial real estate crisis continues to produce a slow drip of headlines.
Steve Mnuchin said Thursday during an interview with CNBC that the biggest problem at the bank he now effectively runs is its New York office portfolio, which isn’t especially likely to improve.
A day after Mnuchin’s Liberty Strategic Capital injected a billion into NYCB, the bank said it lost around 7% of its deposits over the last month. That bleed will presumably stop now, but what happened to NYCB is a blueprint for how the CRE story can manifest as an existential threat to affected (afflicted) lenders, if not necessarily to the system.
Nobody knows quite how this is going to pan out, but on Thursday, Jerome Powell told the Senate the Fed’s been in touch with banks that have both a high level of uninsured deposits and lots of exposure to the ailing office space.
As he did on Wednesday (and as he’ll continue to do unless and until circumstances conspire to render any and all optimistic spin untenable) Powell parroted Janet Yellen’s line that although CRE woes will almost surely lead to another failure or two (or three or five), the situation’s “manageable.”
This is absolutely a small bank problem, but the latest installment of the FDIC’s quarterly bank report, released on Thursday, showed a sharp increase in large banks’ past due non-owner-occupied property loans.
“This trend is being driven primarily by deterioration in office loans in several major metropolitan central business districts, which tend to be serviced by large banks,” Martin Gruenberg said. Note that the past-due-and-nonaccrual rate for banks with more than $250 billion in assets was more than double the overall industry rate in Q4.
Noncurrent loan balances were highest last quarter in CRE and credit cards. Gruenberg cited “weak demand for office space” which he said is “softening property values,” while sharply higher rates “are affecting the credit quality and refinancing ability of office and other types of CRE loans.” The result: The highest noncurrent rate for non-owner occupied CRE loans in a decade, again driven by portfolios at the largest lenders.
Notably, the quarterly net charge-off rate at banks rose 14bps and now sits 17bps above the pre-pandemic average. The sequential increase looks like the largest since 2009 to me.
Again, that’s (no) thanks to credit cards and CRE. The credit card net charge-off rate, at 4.15%, is now 67bps higher than the pre-COVID average.
While chatting with US lawmakers Thursday, Powell conceded the Fed’ll be working on CRE for “years.” He doesn’t sound like he knows much more than anybody else. The proximate cause of the problem is the work-from-home revolution, which created a secular shift in CRE, and that has unknowable implications for downtown districts, where office vacancy rates will likely stay elevated.
The Fed, Powell went on, is liaising with lenders to be sure they’re “being truthful” not just with regulators, but with themselves.
This is what’s scary about the economy and markets: Most people think “They” know what’s going on, and They are managing it, and so nothing can go (terribly) wrong.
That was proven wrong in the aftermath of the GFC. We did recover eventually, thanks to a bazooka of monetary and some fiscal stimulus.
A lot of observers note that, just like during peak covid lockdowns and the attendant economic damage, with the government (Fed), we can always print our way out of any serious crisis. It is a strong and valid point in my opinion, but I wonder whether the very strong belief in this causes moral hazard at some large scale, with possibly devastating consequences sometime down the line.
Thinking back to lessons learned in GFC and Tech Bust. When something big and multi-tentacled is going wrong, you don’t try to understand or quantify it – you just get far away and watch. With that cowardly confession out there, who has been tempted to get into NYCB?
Work from home leads to devastating homelessness, drug problems and crime in CBD’s/downtowns, which leads to people continuing to choose to not live downtown (see “Los Angeles”). This is a negative spiral that is still spiraling.