Will commercial real estate hurt regional banks?

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Ethan Wu (0:36)

Pushkin.

Shares in New York Community Bancorp fell 40% yesterday after a pretty brutal fourth quarter earnings call. The regional bank took losses on two real estate loans, one on an apartment building and one on an office building. It all raised uncomfortable questions about the state of the commercial real estate sector, which a lot of folks from regulators to market participants have been worried about. Today on the show, what's going on in commercial real estate and is it going to blow up the economy? This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined by the man who is definitely not going to blow up the US economy, Robert Armstrong.

Robert Armstrong (1:19)

You sell me short, Ethan. I find that a little hurtful.

Ethan Wu (1:23)

Well, if you can cause a bank run with your Collins, maybe it's a different story. And from London, commercial property correspondent, Joshua Oliver.

Joshua Oliver (1:30)

Hey, Ethan.

Ethan Wu (1:31)

Josh, I don't know what you're blowing up over there in London.

Joshua Oliver (1:33)

And that's if I can help it.

Ethan Wu (1:34)

Well, hopefully, hopefully. We're glad to have you here. We need someone that understands this stuff.

Before we get into CRE in some detail, I mean, we should start with this New York Community Bancorp story. I think it gave markets a rightful spook yesterday. Rob, you wrote a piece about this today in the Unhedged newsletter. What's going on with NYCB?

Robert Armstrong (1:54)

Ethan, with troubled banks, as with cockroaches, there is never just one. So it is very sensible whenever a bank falls by 40% in a single day, looks to be under stress, it's natural to wonder what else is crawling around.

Who's the next bank that's going to have trouble?

Now, in the case of New York Community Bancorp, I will say that there is at least one important extenuating circumstance, that this bank did two big acquisitions in the last couple of years, the second of which was quite famous because they bought the assets and liabilities of Signature Bank, which is one of the ones that blew up in the Silicon Valley Bank. Yes. That was a kind of marriage arranged by the banking regulators. And it is normal for a bank to have some digestive problems after doing large acquisitions. That said, those two losses that you referred to, and on top of those losses, a pretty big provision for future losses, that's real.

And if there's gonna be trouble in commercial real estate, some bank has to be the first to really get hit by it. And so it is correct to say, maybe New York Community Bancorp is the first of many.

Ethan Wu (3:19)

Canary in the coal mine, I think, is where a lot of people's minds go when they see any bank, especially a regional bank, struggling with commercial real estate.

Josh, let me throw to you about this. This is your patch. Describe the fears that people have about what's going on in CRE, spilling over into the banking system.

Joshua Oliver (3:39)

Yeah, I mean, from a real estate point of view, it's not a new story. It's a story that's been going on for a year or more.

Basically, what's happening is almost all commercial real estate has debt on top of it. And here, actually, it's worth pausing and just saying, when we talk about commercial real estate in the US or in Europe or wherever, think about this as all commercial buildings. So walk down the street and think about how many commercial buildings there are around you. It is a huge generalization to talk about it as all one market. But many of these buildings do tend to have debt on top of them. And because of interest rates, values are falling.

How that plays out depends on the individual circumstances of what different asset owners and different lenders have done.

But obviously, in the long period of very low interest rates that we had, a lot of people levered up too far. Values are coming down. There are challenges to offices from working from home and other trends.