Signature Loan Sale Likely to Lower Commercial-Property Values
The bank’s assets are expected to sell on average 15% to 40% below their original face amount
The sale of Signature Bank’s $33 billion in commercial-property loans and other assets is expected to attract bids as much as 40% below face value, offering new evidence of how much property prices have eroded.
Regulators closed Signature Bank in March after a run on its deposits, marking the fourth-largest bank failure in U.S. history. Now, the Federal Deposit Insurance Corp. is auctioning off thousands of Signature loans backed by apartment buildings and other commercial properties primarily in the New York region.
Bids are due Thursday on what is the biggest and most closely watched commercial-property sale of the year. Loans are expected to sell on average 15% to 40% below their original face amount, according to prospective bidders.
Those discounts will likely affect values of New York commercial property for a number of years. The market will get an initial data point from the coming loan sale and again when the loans are resolved, either through a payoff, a loan sale or a foreclosure, said D. Michael Van Konynenburg, president of real-estate investment-banking firm Eastdil Secured.
Signature’s loan sale will provide the ailing commercial real-estate market with one of the clearest benchmarks for how badly values have been eroded by the jump in interest rates and the weak return-to-office rate.
Most of Signature’s loans are performing. Nevertheless, the FDIC and Newmark Group, the real-estate firm running the sale, are going to have to sell them at discounts partly because they were made when interest rates were a lot lower than today. An investor would want a discount to buy a loan paying a 6% interest rate if comparable debt issued today is paying 9%.
Some of the loans are for lackluster midblock office buildings in Manhattan, which are suffering high vacancy rates because of the work-from-home trend of the pandemic. Buyers of the loans also will likely face problems down the road when borrowers have to refinance mortgages made when rates were lower.
About half of the offering consists of pools of loans backed by apartment buildings with rents regulated by a city board. Annual rent increases at these buildings are typically kept to very low levels.
Many of these buildings rapidly have declined in value since 2019, when the New York State Legislature ended special exceptions that had allowed landlords to increase rents in excess of the city board’s level.
Investors once spent billions bidding up the price of rent-regulated buildings because they knew they could achieve higher rents through those exceptions. “Now, anybody who bought with that expectation, those expectations are not going to be met anymore,” said Zachary Rothken, a real-estate attorney at Rosenberg & Estis.
Just how far values have fallen on these properties is difficult to pinpoint, but at some buildings where all apartments are regulated, values have fallen as much as 70%, according to the Community Housing Improvement Program, a landlord trade group that cited building-sales data and discussions with brokers.
The FDIC has said it plans to retain a 95% stake in the pools with a rent-regulated loan portfolio, partly because of its statutory obligation to preserve affordability for low- and moderate-income renters.