Investors in the US banking industry are nervous when it comes to commercial real estate.

Bank holding company Axos Financial (AX.US) shares plummeted on Tuesday after a short selling agency targeted the bank's “obvious” real estate loan problem. In May of this year, Citibank thoroughly investigated real estate debts such as the San Diego Waterfront Complex, which hit Ozark Bank (OZK.US). Earlier this year, the New York Community Bank (NYCB.US) went into crisis because the bank had to set aside more real estate loan loss reserves.

Concerns about the real estate market are creeping through the banking system. It's unclear when the pressure will ease, as deposit-taking institutions prepare to deal with $441 billion in real estate debt due this year.

Nicole Schmidt, managing partner at investment bank Oberon Securities, said: “The industry operates on the mentality of the crowd.” So when “the information comes to light, people subconsciously sell the entire category. This is the cockroach theory: if there were one cockroach, then there would be thousands.”

Axos said in a statement on Tuesday that the allegations from the short selling agency Hindenburg Research (Hindenburg Research) contained a series of “inaccuracies.” Axos said its $5.2 billion commercial real estate specialist loan division operates “almost entirely” through fund relationships, and this structure “provides strong collateral protection for Axos even in unfavorable market conditions.”

High borrowing costs have hit real estate valuations, and the uncertainty of the Federal Reserve's interest rate cut has exacerbated this challenge. Some owners have breached their contracts, while others have chosen to abandon these buildings altogether. This has left lenders in trouble because these assets are difficult to sell in a sluggish market.

“The real estate industry is starting to have some problems,” said Josh Zegen, co-founder of lender Madison Realty Capital. “This will happen more and more this year, but you're starting to see more cracks.”

Comparing Axos' commercial real estate debt exposure with peers

It remains to be seen how each bank is doing. Loan maturing is a particular headache, and lenders and borrowers have to consider changes in valuations. Although in some cases, housing prices have dropped significantly — the price of an office building in Los Angeles is 52% lower than it was five years ago — the price of each property is different.

Investors are looking for any clues about the bank's risks, though.

David Aviram, head of New York investment management firm Maverick Real Estate Partners, said, “I really think there will be a lot of surprises.” For banks, “the real question is whether they'll be forced to sell and what options they have when these loans are due and can't be repaid.”

The road ahead is rugged

On Tuesday, Hindenburg Research published a report on Axos' commercial real estate exposure and “excessive” valuation premiums, making Axos the latest bank to receive close attention. Hindenburg said it shorted Axos shares, which meant that if its accusations caused Axos shares to fall, then Hindenburg would profit.

Axos' stock price once plummeted 16%, the biggest one-day decline since March 2020, then the decline narrowed.

“The market is beginning to adjust,” said Janney Montgomery Scott analyst Tim Coffey. “The company hasn't written down a significant amount of its portfolio in years.”

Other banks are also trying to allay concerns. Following Citi's release of the report, Ozark Bank released more details on the real estate loans covered by the report and expressed “confidence” in both projects. New York Community Bank has appointed new leadership and received capital injections from investors including former US Treasury Secretary Steven Mnuchin. The bank has since reached an agreement to sell a $5 billion loan to J.P. Morgan to help free up more cash.

The road ahead is not an easy one. As more properties are sold off, falling valuations will be harder to ignore. The various real estate prices monitored by the data analysis company Green Street have declined across the board in the past year ending April of this year. There is only one highlight: shopping center prices have risen 1%.