NYCB Stock Plunge Offers Reminder of Looming CRE Debt Crisis

Owners of small companies may feel disconnected from the nation’s $20.7 trillion commercial real estate market, but a potential surge in loan defaults could shake the economy like an earthquake. As one of the bellweather banks connected to the sector’s looming debt bubble showed on Thursday, there are many reasons for every business to keep an eye on developments that could turn into a crisis.

Stocks of New York Community Bank (NYCB) plunged 20 percent yesterday after it revealed more bad news regarding its commercial real estate (CRE) loan portfolio. For starters, it warned of an additional $2.4 billion write-off on top of the $252 million 2023 fourth quarter loss announced in January. That red ink is attributable to financing agreements with CRE clients who now appear to be probable or certain default candidates. 

Arguably more worrying was NYCB saying two senior officials had left the company, following discoveries of “material weaknesses in internal controls.” That was interpreted by investors to mean insufficient vetting of proposed CRE loan deals, risking potentially bigger write-offs still to come. Share prices sagged anew and were trading at $3.70 on Friday morning.

Why small business owners should care about NYCB 

Problems at the beleaguered community bank may soon show up in the wider CRE market, whose landlords are scheduled to repay nearly $1 trillion in debt to lenders this year. That’s not even half the value of the $2.2 trillion in loans maturing by 2027, as calculated by financial data company Trepp. That potential default bubble is swelling as property owners see falling revenues from commercial tenants, exacerbating the financial squeeze.

The reason? The return to office rate has been far lower than expected, as many employees stick with work-from-home or hybrid arrangements, sharply reducing demand for commercial space. Spread across the entire economy, that has resulted in the highest CRE vacancy rates in history, at 19.6 percent in the fourth quarter of 2024, compared to pre-pandemic averages of 16.8 percent. 

Lower or no occupancy means decreased rent receipts, and precious little for landlords to finance loan payments with. That, combined with rising interest rates, has led to increased delinquencies, and a growing number of lessors simply walking away from their CRE deals when they’re irrecoverably underwater. That leaves banks like NYCB holding those empty bags.

Exacerbating the problem is the risk of contagion, thanks to the particularities of CRE financing. Unlike residential mortgages, CRE loans require only monthly interest payments, with the principal to be paid in one fell swoop at the end of the loan term. Those lump-sum arrangements mean the amounts involved in any defaults are huge. 

Meanwhile, according to a recent Goldman Sachs report, banks own 47 percent of the nearly $1 trillion in CRE debt maturing in 2024. Significantly, nearly 80 percent of those are relatively small, regional lenders like NYCB–a fact threatening to concentrate the fallout from defaults in a sector still feeling the effects of the crisis ignited by last year’s Silicon Valley Bank failure.

The biggest pessimists fear the bursting of the CRE debt bubble could spread to wider financial markets, and generate a credit freeze similar to 2007-2008. Even short of that worst case scenario, plummeting rents and property values would certainly erode tax revenues in major cities, reducing the ability to pay for government services.

“I think it’s going to be a very, very ugly market in owning real estate over the next 18 months, two years,” Cantor Fitzgerald CEO Howard Lutnick told Fox Business in January, saying a potential crisis will likely alter CRE markets for good–unless interest rates miraculously fall and take some heat off landlords.

There is the option of banks refinancing deals to give landlords more breathing space. But the large number of maturing loans renegotiated last year makes that tricky to repeat, and would be only a short-term fix if business owners can’t herd employees back into empty offices.