NY Fed: ‘Extend-And-Pretend’ For CRE Loans a Huge Risk
The NY Fed is calling out the ‘extend and pretend’ practice that regional banks are using to delay recognition of troubled CRE loans.
Good morning. The NY Fed is whistleblowing the ‘extend and pretend’ practice that regional banks are using to delay recognition of troubled CRE loans—saying it could lead to financial stability concerns not just in banking, but for the entire US economy.
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Market Snapshot
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*Data as of 10/23/2024 market close.
HEAD IN THE SAND
NY Fed: ‘Extend-And-Pretend’ For CRE Loans Has Expiration Date
Regional US banks are facing a troubling trend known as "extend-and-pretend," which is raising concerns about a systemic delay in acknowledging CRE loan distress. According to the Federal Reserve Bank of New York, if left unaddressed, this practice could lead to broader financial instability in the banking sector.
Maturity wall incoming: Specifically, regional banks are concealing distress by extending loan terms rather than recognizing troubled loans. This has resulted in a looming $400B in near-term CRE loan maturities, increasing the potential for systemic risks. The maturity wall now accounts for 27% of bank capital, significantly higher than the 16% reported in 2020.
Impact on originations: The extend-and-pretend strategy has led to a 4.8% to 5.3% decline in new CRE mortgage originations since 1Q22. Weaker banks using this strategy underestimated default probabilities by 0.9% compared to their well-capitalized counterparts. As troubled loans accumulate, banks are limiting their capacity to issue new loans, hindering growth within the CRE sector.
Case in point: New York Community Bancorp (NYCB) exemplifies the risks associated with extend-and-pretend. NYCB faced challenges after recognizing significant losses in its CRE loan book, leading to net charge-offs of $349 M in Q2, up from $81M. This recognition prompted a $1B capital infusion and leadership changes, revealing the negative impact of not acknowledging CRE loan weakness.
➥ THE TAKEAWAY
Butterfly effect: In short, while ‘extend and pretend’ practices may provide short-term relief—they can and almost inevitably will exacerbate financial risks, potentially leading to insolvency and a wave of property foreclosures. Left unchecked, the impact of delayed disclosures could ripple beyond finance into legal actions, downgrades, and a bottleneck for urban economic growth.
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✍️ Editor’s Picks
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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.
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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.
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Unbalanced: CRE mortgage delinquencies rose in Q3, driven by office and multifamily struggles, while retail, industrial, and hotel sectors saw improvements.
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Broker battle: Council member Chi Ossé's revised Fairness in Apartment Rentals Act may ban tenant-paid broker fees, causing quite a bit of controversy.
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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
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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.
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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.
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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
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Outdoor storage boom: Tampa Bay's industrial outdoor storage sector thrives with a 32% cost per acre growth due to heightened demand, turning Tampa into a top IOS city.
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Queens conquest: Tesla leased 150 KSF at 30-02 Whitestone Expressway, a former shopping center, in College Point, Queens, despite prior expansion limits.
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Dallas triumph: Grandview Partners and TRG Development secured $99.8M in financing for the Core45 industrial park in suburban Dallas.
🏬 RETAIL
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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.
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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
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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.
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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.
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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%).
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