New York City mayoral candidate Zohran Mamdani's primary win has banks with high exposures to rent-regulated real estate on edge.
Mamdani, who has vowed to freeze rents on rent-stabilized apartments if he's elected mayor, won over New Yorkers during the Democratic primary as their city's housing market grows more expensive and competitive.
The primary results won't be official until a ranked-choice runoff on July 1, but Mamdani is likely to face Republican candidate Curtis Sliwa and current Mayor Eric Adams, who is running as an independent, in November's general election. Sliwa lost to Adams, who was the Democratic candidate, in the last election.
Lenders that have already been making a beeline out of the business may see the prospect of a Mamdani mayorship as motivation to accelerate those efforts, said Piper Sandler analyst Mark Fitzgibbon.
The 2019 Law That Triggered the Retreat
Banks with major loan concentrations in the New York rent-regulated market have been trying to shrink those portfolios since 2019, when the state passed a law, designed to protect tenants, that limited their revenue streams by capping rent increases and eliminating eviction plans.
Economic factors, such as the rapid rise of interest rates and inflation, amplified the pain. Commercial borrowers may struggle to afford loans that mature in a rate environment twice as high as when they were made. A total rent freeze would be "another kick in the shins to the industry," Fitzgibbon said.
Still, rent-regulated real estate in New York has historically been a safe asset class, with minimal losses and conservative underwriting, he said.
"Could it result in some delinquencies? I think so," Fitzgibbon said. "But I think, more significantly, it probably accelerates the desire by a lot of these banks to shrink their portfolios even more on the multifamily space, which is bad for the city."
Last year, Flagstar Financial
In the last two weeks, as polling showed a stronger outlook for Mamdani, Flagstar's stock has dropped some 10%. On Wednesday, the $97 billion-asset bank's share price fell nearly 7% during parts of the day. But Peter Winter, an analyst at D.A. Davidson, wrote in a note that the sell-off was "overdone," due to Flagstar's strong capital position.
Flagstar did not respond to a request for comment.
CEO Joseph Otting, who was brought on last year to stop the bank's spiral and assess its credit situation, said earlier this year that Flagstar's
"We're not seeing the stress that we personally anticipated to see in that portfolio when we actually went through loan by loan and then kind of built up what we thought the risk was in the portfolio," Otting said.
There have still been some cracks. In May, New York real estate magnate Joel Wiener, who specializes in rent-regulated properties, put thousands of properties into bankruptcy after Flagstar — the primary lender — began foreclosure proceedings,
In the filing, Ephraim Diamond, Wiener's chief restructuring officer for the properties, said while rental income cash flows had previously covered the debt service, those revenues became insufficient due to interest rates that "sky-rocketed," along with the 2019 law enactment and rising inflation.
The first year of Otting's tenure as the New York lender's CEO brought substantial change, but the job isn't done. His goal: to build a powerhouse, profitable regional bank.
What Comes Next for Banks in NYC?
Even so, some of the elements putting pressure on the market could be on the upswing, Fitzgibbon said, especially since any potential Mamdani policy wouldn't take effect until at least 2026.
If the Federal Reserve reduces interest rates this year, refinancing loans made during the low-rate era could be less drastic. Additionally, if inflation evens out, building owners could get a better handle on their costs.
There are signs that the industry has been adjusting to the 2019 legislation. According to
Otting said net operating income across Flagstar properties increased 6% in 2023.
The proportion of distressed properties also declined in 2023 for the first time since 2016, per the report.
Otting said earlier this year that the cash flows of Flagstar's borrowers seemed to be improving, and building owners were willing to put in more money to keep their loans current. He added that the shocking rise in expenses from a few years ago — as much as 30% to 40% increases for insurance, maintenance and labor costs — had started to stabilize.
Flushing Financial, a $9 billion-asset bank based on Long Island, has also made its business in lending backed by rent-regulated real estate, which makes up 22% of its total loan portfolio. The bank has said in earnings presentations that borrowers have more than 50% equity in these properties, which also show minimal signs of eroding credit quality.
Flushing Financial declined to comment.
Still, a lot could happen between now and November. Former Gov. Andrew Cuomo lost to Mamdani in the Democratic primary but is rumored to be considering running as an independent in the general election.
