Investors may be missing out on these commercial real estate opportunities | Wilnesh News
The threat posed by the coming wave of maturing commercial real estate loans has been well communicated to investors, but the metrics they use to protect themselves from the risk may be flawed. Many investors have been shying away from bank stocks with high concentrations of commercial real estate (CRE) exposure. However, the measure may ignore banks with higher loan risk on their books despite having lower commercial real estate concentrations. As a result, investors may want to take a closer look at the types of loans a bank holds. In doing so, they may find that some of the larger banks are in a more precarious position than their concentration in commercial real estate would suggest. About 30% of outstanding CRE debt is due between 2024 and 2026, according to data provider Trepp. When debt matures and owners seek to refinance, borrowers will face higher debt payments as interest rates rise, and the economy may become unsustainable, especially given that the value of many office properties has declined. The owner may think it’s easier to hand the keys back and walk away. Heightened concerns about default risk are clearly weighing on bank stocks, which are already grappling with headwinds from rising interest rates. In fact, there’s a gap between the KBW Bank Index (up about 4% year to date) and the SPDR S&P Regional Banking ETF (KRE) (down 12% year to date) and the S&P 500 Index (up nearly 14%). The risks are greater now than they were during the regional banking crisis in the spring of 2023, analyst Erika Najarian wrote in a research note on Thursday. Currently, problem loans have been contained. About 1.23% of all outstanding CRE loans are considered risky, according to CoStar, but the trend may be moving in the wrong direction. The Federal Deposit Insurance Corporation said that the amount of overdue or non-accrual real estate loans at the end of the first quarter was $35 billion, an increase of 9% from the fourth quarter of 2023 and an increase of 59% from the same period last year, reaching the highest level in 11 years. Investors have been punishing regional bank stocks, especially when the bank’s commercial real estate exposure exceeds 300% of its total equity. The Federal Reserve believes this benchmark is too high. Stephens analyst Matt Breese said many of the Northeastern and Mid-Atlantic banks he covers have CRE concentrations in excess of 300% but trade at a discount to total book value. But commercial real estate concentration shouldn’t be the only factor investors consider. Overdue Loans Stephens analysts pointed out that the FDIC’s first-quarter banking industry overview showed an acceleration in the growth of overdue loans at banks with more than $250 billion in assets, although some of these banks have the lowest CRE concentrations. The problem loan rate for this group in the first quarter was 4.48%. That’s well above the 1.47% rate at regional banks and 0.69% at community banks, analysts said. This trend may reflect the fact that some of the larger banks own large, high-profile office properties in major metropolitan areas. The properties have been hit particularly hard by downtown areas hit hard by the pandemic and by companies looking to shrink their real estate needs in the era of hybrid work. The Federal Reserve Bank of Kansas City also noted this in a report, saying that the risk of default on office properties increases with property size. It is estimated that a property with more than 500,000 square feet has a default risk of 22%, while a building with less than 150,000 square feet may have a default risk of less than 5%. In other words, community banks may be less risky than commercial real estate exposure information suggests. No single metric can be easily isolated, Brice said, but investors can consider a bank’s average loan size and which asset classes face interest rates and some other negative impacts. “I think you start to carve out smaller pieces of the pie,” he said in an interview. Among Breese’s coverage, his top picks are NBT Bancorp, Webster Financial and Valley National Bancorp. While the latter two banks have some exposure to New York City real estate, both banks benefit from strong management teams, he said. (The New York real estate market is dealing with the impact of declining office values and the dynamics of rent-controlled multifamily housing.) Still, even these stocks may have a tough time as long as interest rates remain high and concerns about commercial real estate persist. Shares of Connecticut-based Webster have fallen more than 22% this year, while New Jersey-based Valley National has fallen 40%. NBT is down about 16% year to date, but has performed slightly better. NBTB NBT Bancorp shares are riding high so far this year. Breese views NBT as both a defensive and offensive play due to its deep funding and low CRE concentration of 203%. It also faces a compelling opportunity as a bank based in upstate New York, where semiconductor manufacturing is seeing significant investment from companies such as Micron Technology. UBS’s Najarian said the bank scans stocks that are rate-sensitive and have the greatest exposure to commercial real estate, and Providence, Rhode Island-based Citizens Financial Group has “the most compelling independents.” story””. She cited traction from factors such as private banking and reduced headwinds from swaps as two catalysts. Piper Sandler analyst R. Scott Siefers said sentiment may be improving for the big banks. In early June, he explained that large banks had fewer pending “wildcards” and improved fundamentals, such as a chance of a turnaround in net interest income even with higher interest rates, and a rebound in investment banking. Sievers also likes Citizens Financial and Cleveland-based KeyCorp. He has an overweight rating on both stocks. Citizens is up less than 3% year to date, while KeyCorp. shares are down nearly 7% over the same period. “While generalists appear to remain mostly disengaged, pure financial investors have seen increased interest,” Sievers wrote.
