Property sector concerns affect US banking system
NEW YORK: When it comes to commercial real estate, investors in the US banking sector are on edge.

Axos Financial Inc – the latest target – slumped on Tuesday after a short seller took aim at what it called the bank’s “glaring” property loan problems.

Bank OZK was hit in May after a Citigroup report dug into debt on properties such as a sprawling San Diego waterfront complex.

And earlier this year, New York Community Bancorp was steeped in a crisis after the bank had to set aside more provisions for real estate loan losses.

Concerns about the property market, and just how exposed certain lenders are to the riskiest parts, are pervading the banking system. That’s causing investors to get jittery.

And there’s little clarity on when the pressures may ease up as deposit-taking institutions prepare to contend with a wall of maturing property debt this year that’s estimated at US$441bil.

“This business is run on herd mentality,” said Nicole Schmidt, a managing partner at investment bank Oberon Securities.

“So when information comes out, there’s a knee-jerk reaction to sell the whole category. It’s the cockroach theory: If there’s one cockroach, there’s thousands.”

Axos said on Tuesday in a statement that the allegations from short seller Hindenburg Research contained a series of “inaccuracies”.

The lender said its US$5.2bil commercial real estate specialty lending group “almost exclusively” works through fund relationships, a structure that “provides Axos strong collateral protection even in adverse market scenarios”.

High borrowing costs have walloped real estate valuations, and the uncertainty over when the Federal Reserve may cut rates has exacerbated the challenges.

Some property owners are defaulting while others have opted to walk away from buildings entirely.

That’s left lenders stuck with assets that are tough to sell in a market rife with distress.

“Things are starting to break a little bit in real estate,” said Josh Zegen, co-founder of lender Madison Realty Capital.

“It’ll happen more and more through this year, but you’re starting to see more of that crack.”

How it plays out at each bank remains to be seen.

Maturing loans have been a particular pain point, causing lenders and borrowers to reckon with the valuation changes they might have been able to avoid confronting before then.

And while price drops have been severe in some cases – one Los Angeles office building sold at 52% less than its price five years ago – it varies for each property.

Investors, though, are on the hunt for any clues about each lender’s risks.

“I do think there’s going to be lots of surprises,” said David Aviram, principal at New York investment manager Maverick Real Estate Partners.

For banks, “the question is really whether they’re going to be forced to sell, and what their options are when those loans come due and don’t repay”.

Axos was the latest bank to come under scrutiny when Hindenburg Research, founded by Nate Anderson, released a report on Tuesday targeting the lender’s commercial property exposure and “aggressive” valuation premium.

Hindenburg said it was short Axos’ stock, meaning it stood to profit if its allegations caused the stock to fall.

Axos shares slumped as much as 16%, the most intraday since March 2020, before paring the decline. The stock was down 7.3% to US$48.62.

“The market is starting to correct,” said Tim Coffey, an analyst with Janney Montgomery Scott. “The company hasn’t taken big charge-offs on their portfolio for years.”

Other banks also have sought to assuage concerns.

Following the Citigroup note, Bank OZK released more details on the property loans that were the target of the report, and said that it was “confident” in both projects.

NYCB installed new leadership and received a capital injection from investors including former US Treasury Secretary Steven Mnuchin.

The bank has since struck a deal to sell US$5bil of loans to JPMorgan Chase & Co to help it free up more cash.

The road ahead won’t be easy. As more real estate sales occur, the decline in valuations will be harder to ignore.

And prices for the property categories monitored by data analytics firm Green Street are down across the board over the past year through April, except for one bright spot: the 1% gain in malls. — Bloomberg
Banking,CRELoanRisks,USBankingSector,ShortSellers,CommercialRealEstate,RealEstateDefaults,MaturingDebt,FedRateHikes,DistressedMarket
When it comes to commercial real estate, investors in the US banking sector are on edge.