Should Your Board Prepare For A Potential Commercial Real Estate Crisis?

To prepare for shareholder concerns about analyst projections of potential bank failures and their implications on your company, consider the following.

New York Community Bancorp’s sharp stock price decline this week is an early indication that corporate board members may need to thoroughly examine whether their company has any potential exposure to banks (or other investments) that could be affected by a commercial real estate crisis. Industry analysts are warning that a commercial property meltdown is coming, and banks that hold a significant level of commercial real estate loans may be at risk of default. As we saw last year, bank defaults can disrupt companies in numerous ways, and corporate boards should have mitigation strategies in place to help their company navigate any disruptions if necessary.

New York Community Bancorp recorded unexpected commercial real estate losses this month, leading the company to set aside more money for credit losses and cut its dividend to strengthen its balance sheet to satisfy regulators. The stock price tanked by 22%. Shareholders sued the company, alleging fraud because the company gave an “unrealistically positive assessment” of its financial prospects. Ratings agencies have downgraded the company’s credit rating as well, leading to more shareholder angst. Now the board of New York Community Bancorp must develop a strategy to convince shareholders that the adjustments they’ve made since recording those losses are part of a convincing growth strategy for the company’s future. Also, the board must clearly outline how it intends to deal with any possibility of additional commercial real estate losses so that the bank won’t slip into default.

As more information about the potential commercial real estate crisis is reported, stocks of banking institutions have taken a hit, especially regional banks. Since many non-banking companies use banks that could be affected, such a crisis could impact other industries. To prepare to address shareholder concerns about analyst projections of potential bank failures (particularly regional bank failures connected to commercial real estate exposure) and their implications on their company this year and next, boards may want to consider:

• Conduct an analysis of the company’s exposure to commercial real estate. Based on analyst reports, commercial real estate assets may lose value in the near future, so companies with large real estate portfolios may want to determine if any potential problems can be mitigated. 

• Conduct an analysis of the health of financial institutions your company uses. Any time there is any hint of a banking crisis, it is critical to know if your banking institution could withstand a shock. Determining the exposure your bank has to commercial real estate and engaging them to find out what they are prepared to do if a commercial real estate crisis does occur will help you develop business strategies to deal with multiple scenarios. You will also be able to assure investors that you did as much as possible to guard against a crisis situation.

• Conduct an analysis of the exposure your suppliers may have to commercial real estate. If your company can withstand a commercial real estate crisis but your key suppliers can’t, your company will have a major problem on its hands. Communicate your concerns to your suppliers and help them prepare for such a crisis in a way that will make sure your company is not adversely affected. Determine if the banks they use are at risk of default. Be prepared to find alternative suppliers as well.

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