Bids are coming due on the biggest commercial-real estate transaction of its kind, at a crucial moment for property markets.
When the Federal Deposit Insurance Corp. in March seized $33.2 billion of assets from New York’s Signature Bank after it failed, the banking regulator also inherited a tangled web of about $15 billion of loans mostly on rent-stabilized or rent-controlled buildings in New York City. Some in the industry have taken to calling those loans “toxic.”
Now, the FDIC is set to wrap up a protracted sale of the lender’s remaining commercial real-estate assets, the same pool that New York Community Bancorp
declined to buy in March when its subsidiary, Flagstar Bank, purchased only some of Signature Bank loans, its deposits and bank branches.
Bids for the portfolio are due on Nov. 1, with any successful asset sales likely to provide a fresh gauge of property values in a largely frozen market and insights on how regulators plan to shed problem assets without deepening the affordability crisis in U.S. housing.
Here are five things to know about the FDIC’s sale process.
Rent stabilized, rent controlled
Signature Bank went big lending to landlords focused on reaping windfalls from New York City’s notoriously contentious rent-stabilized and rent-controlled market. It’s footprint in the city was estimated to span almost 3,000 buildings, representing nearly 80,000 homes, according to New York City Comptroller Brad Lander.
A letter Lander sent to the FDIC and the New York State Department of Financial Services in March after Signature Bank failed suggested that, “these notes are understood by the industry to be problematic, as advocates have made clear for years.”
Lander also urged regulators to require that any prospective buyer comply with New York’s beefed up rent-stabilization laws and rules designed to thwart predatory lending practices.
An investigation by The City, a nonprofit New York City newsroom, found tenants at some well-managed buildings in the Signature Bank portfolio, but also “hundreds of vulnerable properties” where tenants are suffering and values have “plummeted.”
How FDIC asset sales work
The FDIC has been selling assets from failed banks to private investors for decades. Its 1990s sales following the Savings and Loan crisis helped create the fortunes of several prominent real estate tycoons, from Starwood Capital Group’s Barry Sternlicht to Equity Residential’s Sam Zell, who died in May.
However, the FDIC also created a new joint-venture template in the wake of the 2007-2009 global financial crisis, which often awards winning bidders cheap financing and a management fee. The hitch is the agency also tends to keep a majority ownership stake in the portfolio, and a degree of control.
That process “can lift all boats,” said Thomas Galli, a lawyer at Duane Morris, who has represented a string of winning private-equity bidders of past FDIC portfolio sales. “No client has ever complained about the management fee,” he said, pegging it at roughly 30 to 100 basis points of a pool’s loan balance.
The FDIC incentives also can drive up bid prices, limit downside for the agency and ideally prevent the kind of fire sales that dominated the 90s. Galli expects bidding to be “frothy” for higher-quality parts of the portfolio, but said he also has received surprisingly few inquiries about bidding on the rent-stabilized assets.
Who is bidding?
The $33 billion Signature Bank portfolio is the biggest known sale of its kind from the FDIC. It’s largest exposure is multifamily loans, but the portfolio also includes debt on office, retail and other commercial properties.
The assets have been arranged into 14 pools, six of which will include an offer of leverage, or financing, with two pools being limited to bank bidders, according to the FDIC. With several pools expected to reach nearly $6 billion in size, clubs of deep-pocketed private-equity firms are likely to team up on joint bids.
Marathon Asset Management’s Bruce Richards told Bloomberg in September his firm plans to bid on the portfolio. A portfolio manger at the firm declined to comment in a follow up with MarketWatch. Multifamily lender Greystone also has been looking at ways to help refinance Signature Bank’s rent-regulated loans, according to the Commercial Observer. Greystone didn’t respond to a request for comment on if it plans to bid on the portfolio too.
Prices are falling
While the FDIC is looking to maximize its recovery on Signature Bank’s assets, it also oversees banks awash in unrealized losses after a decade of buying relatively “safe” securities at low yields and making low-rate property loans on buildings that lost value when interest rates quickly shot up since 2022.
The regulator pegged unrealized losses on banks’ securities holdings at $515.5 billion in the first quarter, a roughly 16.5% drop from the quarter before. But stress from banks’ commercial real-estate loans also has been a big focus, with prices already having dropped 9% in September from a year ago, according to the RCA CPPI National all-property index.
The Federal Reserve’s rate hikes to fight inflation have been a key culprit in the value declines, along with the resilience of remote office work. Goldman Sachs
said it marked down or impaired the office portion of its commercial real-estate investments by about 50% this year, but adjusted other property types by about 15%, during a recent third-quarter earnings call.
No sale an option
Real-estate brokerage firm Newmark is overseeing the Signature Bank portfolio sales, but the FDIC also can opt to delay or pull assets from the market if bid levels come in too low.
The FDIC declined to comment for this article, instead pointing to a public statement in September indicating it will retain a majority stake in the rent-stabilized and rent-controlled properties through a joint-venture with any winning bidder, who will manage the portfolio, and be subject to an operating agreement and “stringent monitoring.”
It also said the FDIC has a mandate to help preserve the availability and affordability of housing for moderate and low-income people. The New York Department of Finance declined to comment.