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NY Fed: Banks Concealing CRE Risks with Loan Extensions

NY Fed: Banks Concealing CRE Risks with Loan Extensions

The NY Fed is calling out the ‘extend and pretend’ practice that regional banks are using to delay recognition of troubled CRE loans.

Jordan B. & Han-Gwon Lung
October 28, 2024

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Good morning. The NY Fed is whistleblowing the ‘extend and pretend’ practice that regional banks use to delay recognition of troubled CRE loans.

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Market Snapshot

S&P 500

GSPC

5,808.12

Pct Chg:
-0.030%

FTSE NAREIT

FNER

825.96

Pct Chg:
-0.95%

10Y Treasury

TNX

4.242%

Pct Chg:
+0.04

SOFR

30-DAY AVERAGE

4.96%

Pct Chg:
0.0%

*Data as of 10/25/2024 market close.

CRE LOANS

NY Fed Warns of 'Extend-and-Pretend' Risk in Regional Banks’ CRE Portfolios

Regional banks’ delays in addressing CRE loan issues could increase financial instability, according to a new report from the Federal Reserve Bank of New York.

Maturity wall: Regional banks have been pushing back loan maturities rather than recognizing defaults, leading to a backlog of $400B in near-term CRE loan maturities, reports Bisnow. This strategy, known as "extend-and-pretend," has reduced new mortgage originations by 4.8%—5.3% since early 2022. Meanwhile, the share of maturing CRE debt on bank balance sheets has grown to 27% of bank capital, up from 16% in 2020.

The above graphic from the Federal Reserve Bank of New York shows how the wall of CRE loan maturities has grown as banks have extended and modified loans.

Threat to stability: According to the report, delaying recognition of loan distress may temporarily satisfy investors and regulators but raises systemic risk. The authors argue that banks' regulatory capital could take a significant hit if multiple CRE loans default simultaneously, potentially triggering bank runs, mass property foreclosures, and fire sales.

Feeling the pinch: The Fed report highlights that smaller, weaker banks are most likely to rely on extensions to defer CRE losses. The report notes that these banks are 0.2% more likely to extend terms than better-capitalized institutions. As of late 2023, banks hold over half of the $5.8T CRE loan market, making the sector vulnerable to further deterioration.

Case in point: This practice contributed to New York Community Bancorp’s near-collapse earlier this year, requiring a $1 billion capital infusion and leadership overhaul.

➥ THE TAKEAWAY

Big picture: Regional banks’ efforts to hide CRE loan distress complicate recovery efforts, with slower lending signaling rising risks. Despite these pressures, there has been no widespread credit crunch in CRE. Meanwhile, Fed rate cuts and Moody’s upgrade of the banking sector to “stable” could relieve banks, particularly regarding CRE loan quality.

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✍️ Editor’s Picks

Market mayhem: US home sales are at their lowest since 1995, with September's rate of 3.84M the lowest total in nearly 30 years. Current median home prices hover around $404.5K.
Southern shift: Southern US cities like Dallas, Miami, and Atlanta are experiencing rapid growth but still lag in global influence compared to legacy cities like NYC, LA, and Chicago.
Unbalanced: CRE mortgage delinquencies rose in Q3, driven by office and multifamily struggles, while retail, industrial, and hotel sectors saw improvements.
Campus fire sale: Metropolitan College of New York is selling part of its Financial District campus to avoid default, as declining enrollment and mounting debt push the institution to offload assets.

🏘️ MULTIFAMILY

Construction slump: New housing construction in NYC remained low in Q3, with 326 new building filings marking a slight quarterly bump, but still 43% below the historical average since 2008.
Stairway to innovation: Peskin urges San Francisco to consider single-stair buildings up to six stories to spur housing development in the notoriously pricey city.
Major acquisition: Prime Residential purchased The Gabriel, a 312-unit multifamily property in Pomona, for $115M, marking one of the largest multifamily deals in LA County this year.

🏭 Industrial

Outdoor storage boom: Tampa Bay's industrial outdoor storage is thriving with a 32% cost per acre growth due to heightened demand, turning Tampa into a top IOS city.
Queens conquest: Tesla leased 150 KSF at 30-02 Whitestone Expressway, a former shopping center, in College Point, Queens, despite prior expansion limits.
Dallas triumph: Grandview Partners and TRG Development secured $99.8M in financing for the Core45 industrial park in suburban Dallas.

🏬 RETAIL

Retail revival: In Manhattan, two new leases will revitalize retail spaces, including the 25 KSF Liberty Theatre and another 50 KSF at 11 Times Square.
Brick-and-mortar: Google (GOOGL) opens its fifth US store in Oakbrook Center—and first store in Chicago—to showcase Google devices and compete with Apple (AAPL) in smartphones.

🏢 OFFICE

Ziggurat sold: The famed Ziggurat in Laguna Niguel near LA was sold in a competitive auction for $177M, exceeding the initial bid by a whopping $106.7M.
Market misstep: A $52.4M CMBS loan on 401 Market Street in Philadelphia was sent to special servicing after main tenant Wells Fargo left and vacated 72% of the building’s occupancy.
East Bay bonanza: Clarion Partners just enjoyed a record-breaking $162M sale of a 362.4 KSF East Bay office complex, the largest West Coast multi-tenant sale since 2022.

📈 CHART OF THE DAY

According to U.S. News & World Report, 45% of the $1.64B in private construction spending went to nonresidential projects in August, with manufacturing leading at $237M.

Meanwhile, over the past year, spending increased for manufacturing (18.1%) and offices (1.1%) but declined for commercial/retail (-14.8%) and lodging (-10.6%).