02/04/2024 – 7:30
Many of the problems identified in the real estate market – such as low occupancy rates in office buildings and the challenge of higher interest rates on refinancing – are not evenly distributed across the United States, which affects regional and international lenders differently. It's no coincidence that two banks that have reignited concerns about home loans in recent days are one based in the New York area, New York Community Bancorp, and one based in Japan, Aozora Bank.
Recent lending trends illustrate this divide. In the first half of 2023, international banks accounted for 25% of office loan originations in U.S. central business districts, compared with 17% for regional and local banks, according to MSCI Real Assets. On the other hand, regional and local banks made 54% of loans during this period to medical offices and 45% to suburban offices – compared to 2% and 6% for international banks, respectively.
At Aozora, the at-risk real estate loans identified were concentrated in large cities. Of the 21 defaulted U.S. office loans with $719 million outstanding that the bank disclosed last week, the largest installments by city were $171 million in Chicago and $127 million in Los Angeles.
“Real estate sales volume remains very low,” the bank wrote about the Chicago office market in a presentation.
In a January report, Moody's Analytics found that the largest percentage point increase in office emptying among U.S. metro areas over 12 months was in San Francisco, followed by Austin, Texas. The biggest drops were recorded in Columbia, Maryland, and Knoxville, Tennessee.
Some European banks are exposed to US blue-chip markets. In its fourth-quarter report released the week before last, Deutsche Bank made 123 million euros ($134 million) in provisions for U.S. commercial real estate credit losses, up from 66 million euros in the previous quarter. About 60% of U.S. commercial office real estate loans that Deutsche Bank evaluated in an internal stress test were split between New York, Los Angeles and San Francisco.
At NYCB, 54% of its office portfolio is in Manhattan. In lending for multifamily properties, the majority of its loans are in New York City and in what it describes as “non-luxury, rent-regulated buildings.”
New York, like some other states and cities, has rules that can make it difficult in some cases for apartment building owners to raise rents to offset higher interest costs. This can lower the value of buildings and make it difficult to refinance your mortgage.
However, for many U.S. banks, commercial real estate lending is concentrated outside large cities or central business districts. Particularly for smaller banks, they tend to focus relatively more on what are known as “owner-occupied” commercial real estate loans, according to Fitch Ratings. For example, in a medical clinic that owns its building.
In this market, aspects such as rental income streams or occupancy rates are not a major concern, as demonstrated by Bank OZK, which works with this segment and had much better corporate results than expected in 2023.
“The magnitude of stress is very different so far,” says Autonomous Research analyst Brian Foran. “Part of it is the underlying fundamentals. Suburban offices are being used more.” Source: Dow Jones Newswires
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