The cloud of uncertainty surrounding financing and commercial real estate only grew larger following Silicon Valley Bank’s recent collapse. The federal government and the Federal Reserve have stepped in to attempt to steady the financial system, but what’s to come for real estate finance is unclear, Bisnow reports.
“There were already two things going against the real estate community — higher interest rates and lower valuations,” said Anchin Block & Anchin Partner Robert Gilman, co-leader of the accounting firm’s real estate group. “Now there’s this, which is going to tighten up underwriting, including for credit facilities.”
Silicon Valley Bank’s collapse along with regulators assuming control of New York’s Signature Bank could make it more difficult for real estate investors to operate as debt will likely become scarcer.
“Real estate capital values, which had already been falling, will be further pressured by an even more tightly constrained credit market,” said CBRE Global Chief Economist Richard Barkham. “This is different than the Global Financial Crisis. However, smaller banks, particularly those with a high proportion of lending to real estate, could be vulnerable. The Federal Reserve has not stated how it would assist banks with impaired real estate assets, but we expect that support will be forthcoming.”
A main reason for concern is both banks had a lot of real estate loans on their ledgers, Bisnow reports. SVB had $2.68 billion of CRE loans at the end of last year. Meanwhile, CRE comprised almost half of Signature Bank’s loans (almost $36 billion).
Another issue is regional banks would often step in when other lenders moved off of CRE activity last year. Those small financial institutions might not be as willing to back real estate loans in the near future.
“Super-regional, regional and community banks, they are going to be much more reluctant to make loans right now,” Origin Investments co-CEO David Scherer told Bisnow. “I think you’re gonna see a lot less lending, certainly for the next quarter as this is digested. I don’t think in a week everything’s forgotten because it won’t be forgotten. The banks, all of them now see how precarious the situation really is.”
Banks won’t be the only financial source to shy away from CRE lending following the SVB collapse, Seth Weissman, president of real estate private equity fund Urban Standard Capital, told Bisnow. Weissman said his firm has received several requests in a three-day window from borrowers who are working with regional banks but are now concerned about future collapses and losing the funding they thought was secure.
“People are very nervous,” he said. “They are unclear if those loans are going to close. What we have just heard from borrowers, they are not getting a clear answer. They need to know what is happening and figure out Plan B.”
How SVB collapse could impact proptech
Smart laundry operator Tumble actually began to pull its money out of SVB prior to things going south, GlobeSt.com reports. The start-up, which serves the multi-family industry, had limited exposure, according to CEO and founder Scott Patterson.
“Tumble is in a strong position,” he said. “We’ve had great support from our investors and our multifamily network, who all helped us move quickly. It was the right call to fully back depositors using the fund set up after the Global Financial Crisis (GFC) and I applaud the Fed and Federal Deposit Insurance Corporation (FDIC)’s fast action to protect depositors.”
Startup companies often diversify banks, which worked well for Tumble given SVB’s troubles, according to Patterson. However, he’s hopeful that a larger bank will take on the positives SVB had to offer, such as the talent and risk profile.
“One of the biggest takeaways is that money moves extremely quickly,” he told GlobeSt.com. “At the same time, panic magnified the consequences of last week’s events. Evaluating banks holistically, from interest rates to overall risk profile, will undoubtedly be at the forefront of every company’s strategy.”
Meanwhile, Rasheq Zarif, co-founder and COO of proptech platform and marketplace ReWyre, shared Patterson’s optimism that the sector will withstand SVB’s collapse.
“Many startups would not be where they are today without the support (SVB) provided,” Zarif told GlobeSt.com. “Those who think this spells disaster for the proptech sector are mistaken – SVB is not the only ingredient to continued industry success. Proptech will push on, helped by a clear and growing need for more sustainability, as well as the digitization of outmoded processes and systems across the real estate lifecycle.”
The Federal Reserve taking action to secure all bank deposits helped shield proptech companies from the impact of SVB’s collapse, Chad Gallagher, co-Founder and chief investment & growth officer at Home365, told GlobeSt.com.
“Before that announcement, there would have been an impact to the entire tech ecosystem including proptech companies as much-needed cash would have vanished and the major VC funds would provide cash to fund these proptech companies have taken a major hit,” he said. “Given the Fed jumped in to secure all deposits (both under and over $250,000), we would expect little to no impact on the proptech community overall.”
Gallagher also noted he believes proptech companies could reach profitability faster as they take fewer chances on loss-generating activities.
“Profitability is not a bad thing though; it ultimately makes the ecosystem more secure for the long-term,” he said.
The SVB collapse could spell trouble for banking, CRE going forward
The proptech sector may be alright following SVB’s fall, but it could be another story for the banking and CRE industries, according to Bloomberg Opinion Executive Editor Robert Burgess.
“If the saga at Silicon Valley Bank hastens the arrival of the next recession, expect to see many more properties go into default sooner rather than later,” he said. “This is bad news for lenders because they have ramped up their financing of real estate.”
Burgess noted that total real estate loans and leases on lenders’ books have increased since mid-2021 by 16 percent—more than $725 billion to a record $5.31 trillion, according to the Federal Reserve. Additionally, last year’s 11.2 percent increase equaled the prior four years combined and was the highest since 2006. Another reason for concern is that CRE loans comprise approximately 24 percent of all bank loans, which is the highest since the financial crisis, according to BNY Mellon strategist John Velis.
Meanwhile, CRE property values have fallen. Prices dropped 3.5 percent last quarter, according to the National Council of Real Estate Fiduciaries’ index. The decline was the largest since 2009, and only the second time there was a quarterly drop since then. Office properties was one of the biggest reasons for the price drop.
Now, banks are doing what they can to minimize their risk, according to Evans. M&T Bank has recently decreased its exposure to projects under construction. The bank also noted that stress in the hotel sector had diminished, but assisted living facilities and offices could become problem areas now.
Lenders have also started to raise their standards when it comes to providing credit for CRE. The Fed’s latest quarterly loan officer survey revealed that 57.6 percent of respondents said they tightened their standards.
“It’s fair to ask whether what’s happening now in commercial real estate could be setting the banking industry up for a repeat of the savings and loan crisis of the late 1980s and early 1990s, when a mass souring of property loans and investments led to a recession,” Evans said. “It’s too soon to answer, but what we’ve learned from that and other episodes since is that you can’t have a healthy economy without a healthy banking system. The crisis at Silicon Valley Bank suggests that perhaps the banking system isn’t as healthy as we thought.”