Michelle ThompsonWall Street is experiencing a sense of déjà vu as concerns about another regional banking crisis loom large. Nearly a year has passed since the collapse of three US regional lenders, prompting financial institutions and regulators to take swift action to contain the crisis. Now, investors are apprehensive that they might be heading back into familiar territory.
However, while the previous crisis centered on interest rate risk, the current one is centered on the $20 trillion commercial real estate market.
Here’s what’s happening: After experiencing decades of expansion driven by low interest rates and readily available credit, commercial real estate is facing challenges. The valuations of office and retail properties have been declining since the onset of the pandemic, as shifts in living and working patterns, along with changes in shopping behavior, have taken their toll. Additionally, the Federal Reserve’s efforts to combat inflation by raising interest rates have further impacted this credit-dependent industry.
This presents a significant concern for regional banks. US banks collectively hold approximately $2.7 trillion in commercial real estate loans, with around 80% of that held by smaller regional banks that are not classified as “too big to fail” by the US government.
A considerable portion of this debt is nearing maturity, and in a challenging market environment, regional banks may encounter difficulties in recovering these loans. Data from Trepp indicates that more than $2.2 trillion in commercial real estate loans are set to mature between now and the end of 2027.
Fears were amplified recently when New York Community Bancorp (NYCB) reported an unexpected loss of $252 million in the last quarter, compared to a $172 million profit in the fourth quarter of 2022. The company also reported $552 million in loan losses, a substantial increase from $62 million in the previous quarter. This surge was partly attributed to anticipated losses on commercial real estate loans.
The stock price of NYCB plummeted nearly 20% over the past five trading sessions and declined an additional 11.2% on Tuesday morning, contributing to a 5.2% drop in the US Regional Bank index over the same period. Concerns have also spread internationally, with Japan’s Aozora Bank citing bad loans tied to US offices as a factor in its projected annual loss.
Furthermore, Deutsche Bank announced that it allocated €123 million during the last quarter to absorb potential defaults on its US commercial real estate loans, significantly higher than the amount set aside in the same period in 2022.
Some companies are resorting to selling their prime properties at heavily discounted prices. For example, the Canadian Public Pension Investment Board sold a 29% stake in an office block in midtown Manhattan to Boston Properties for just $1, despite having initially invested $71 million in the building.
The Financial Stability Oversight Council, which includes Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, and US Securities and Exchange Commission Chair Gary Gensler, highlighted commercial real estate as a significant potential financial risk in a report released last December.
Yellen is scheduled to testify before the House Financial Services Committee about the aftermath of last year’s regional banking crisis, underscoring the ongoing concerns surrounding this issue.
On March 16, 2023, Treasury Secretary Janet Yellen appeared before the Senate Finance Committee in Washington, DC, to provide testimony regarding the Biden Administration’s federal budget proposal.
Indeed, Treasury Secretary Janet Yellen faces a daunting task, as she must navigate the delicate balance of reassuring lawmakers and the American public about the safety of the banking system while acknowledging the tangible risks posed by a potential crisis driven by commercial real estate.
Federal Reserve Chair Jerome Powell also addressed this concern during an appearance on CBS’ “60 Minutes” on Sunday evening. He acknowledged the challenges faced by smaller and regional banks with significant exposures in these areas and indicated ongoing efforts to assist them. Powell emphasized that while the issue may persist for years, it doesn’t resemble the magnitude of past crises like the global financial crisis.
However, Powell cautioned that some banks may inevitably face closure or consolidation due to these challenges, particularly smaller institutions.
McDonald’s has stated that the ongoing turmoil in the Middle East is negatively impacting its business operations.
McDonald’s has attributed a decline in its business performance to escalating tensions in the Middle East. Despite reporting overall sales and earnings growth in the last quarter, the company fell short of Wall Street’s expectations for the first time in four years. The impact of the regional tensions on sales in the Middle East has prompted McDonald’s to closely monitor the situation.
Although the Middle East market constitutes a relatively small portion of McDonald’s overall business, the company mainly operates through licensing agreements with independent entities in the region. McDonald’s has provided some financial assistance to franchisees, such as royalty relief or deferred cash collection, amid the challenging circumstances.
While McDonald’s indicated that the financial assistance provided for franchisees affected by the Middle East conflict was minimal, the tensions have taken a toll on the licensed markets business, of which most Middle Eastern companies are a part. This segment saw a modest growth of just 0.7% in the last quarter, significantly lower than the over 4% growth observed in the United States and other international markets. Notably, a year ago, the licensed markets business was the company’s top-performing unit, experiencing over 16% sales growth.
Landlines are on the verge of becoming obsolete.
A transition away from traditional telephone landlines is imminent, prompting more users to contemplate discontinuing their service. AT&T recently filed for a waiver in California to cease servicing traditional landlines, joining Verizon in expressing intentions to transition fully to newer infrastructure in the coming years.
This shift reflects a broader trend among phone service providers worldwide to phase out older copper wire-based telephone systems, known as Plain Old Telephone Service (POTS), in favor of faster and more advanced technologies incompatible with landlines. This transition involves transitioning to fiber optics and ethernet access while retiring outdated equipment, a process also underway in countries like France and the UK.
For consumers, this means deciding whether to retain their landlines or potentially face higher costs due to complex and expensive solutions from phone companies. Moreover, alternatives may not match the reliability of traditional landlines, and the switch to newer equipment could present significant logistical challenges.
An AT&T spokesperson emphasized a declining demand for telephone services over copper networks, highlighting the company’s focus on upgrading to more advanced technologies like fiber and wireless in response to consumer preferences. They clarified that AT&T is not canceling landline service in California, ensuring that customers will maintain access to voice service if the waiver application is approved by the California Public Utilities Commission.
