What The Historic Collapses Of SVB, Signature Bank Mean For Commercial Real Estate Investors
Until late last week, the biggest concern for most commercial real estate investors was the prospect of a higher-than-expected interest rate hike. That changed in the blink of an eye when two of the 30 largest U.S. banks collapsed in a 72-hour window, triggering extraordinary steps by the federal government and the Federal Reserve to stabilize the financial system.
Now, there is an epic new cloud of uncertainty for real estate finance as lenders try to contain the fallout of the second- and third-largest bank failures in American history.
“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.”
After Silicon Valley Bank collapsed on Friday and New York's Signature Bank was taken over by regulators Sunday evening, the federal government announced that it would guarantee all depositors at the banks would be able to access their money. The vast majority of deposits at both banks were higher than the FDIC's insured maximum of $250K.
The Federal Reserve announced that it was launching the Bank Term Funding Program, allowing banks to lend from the government by posting their loans as collateral, rather than have to sell assets to raise capital — SVB's announcement that it would have to sell to raise capital triggered the ultimately fatal bank run.
The federal government's actions — and the tech- and crypto-heavy balance sheets of SVB and Signature positioning them as outliers — has helped to ensure confidence in the system, industry players told Bisnow.
“Everything that happened over the weekend is like a baby version of the Great Financial Crisis,” Palladius Capital Management Senior Managing Director Manish Shah said. “But the panic was worse then, and the response by the federal government wasn't as organized.”
But the dramatic nature of the implosions is expected to drive further turmoil for real estate investors as debt becomes even harder to come by.
"Real estate capital values, which had already been falling, will be further pressured by an even more tightly constrained credit market," CBRE Global Chief Economist Richard Barkham said in a statement. "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."
Both failed banks had a significant amount of real estate loans on their books. SVB had $2.6B of CRE loans at the end of 2022, while nearly half of Signature's loans — nearly $36B — were backed by commercial real estate.
“Despite the current volatility, regional banks play an incredibly important role in strengthening our economy by offering diversity and value to customers in addition to providing access to lending for smaller businesses,” JLL President of Financial Services Bobby Magnano told Bisnow in a statement, adding that JLL is studying the banking fallout's implications for CRE. “We hope that the systems in place work to contain the situation and provide solutions moving forward.”
As other lenders pulled back on commercial real estate activity last year, regional banks stepped in to fill the void, Bisnow previously reported. Those days are likely over for now.
"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 said. "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."
These failures will likely accelerate the prevalence of alternative lenders in commercial real estate deals as banks step even further away from risky deals, said Seth Weissman, the president of real estate private equity fund Urban Standard Capital.
In the last 72 hours, he said, his company has fielded several requests from borrowers working with regional banks who are worried about more collapses and looking to replace funding they thought they had locked down.
“People are very nervous,” Weissman 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.”
While the federal government's decision to protect SVB and Signature's customers has helped keep the market somewhat stable, they have injected new uncertainty into what had already been a confusing market.
"Where I think the concern now is going to be is, 'What is next?'" Anchin's Gilman said. "Where am I going to get my next loan from if I have to refinance or go out and acquire property?"
The recent tumult will also make lenders more circumspect when it comes to their borrowers' finances, said Alliant Credit Union Chief Capital Markets Officer & Head of Commercial Lending Charles Krawitz.
“The situation is going to make lenders think, 'I sure hope my borrowers don't have money that they might not be able to access,'" Krawitz said.
Many are watching to see what the FDIC decides to do with the assets they took over from the banks. JPMorgan Chase, Bank of America, Wells Fargo and the other money-center banks are being eyed as potential buyers, and the FDIC is looking to conduct an asset auction after no takers emerged over the weekend, The Wall Street Journal reports.
Some regional banks have projected confidence about their ability to carry on business, touting their diversified customer base and strong liquidity. Eastern Union CEO Abe Bergman said he doesn't anticipate a liquidity crisis.
"Maybe lender A will have to slow down one month, but lender B will pick up the volume," he said. "So we're going to see plenty of liquidity in the real estate market. We had some closings today, so it's business as usual to a surprising degree.”
Much of the industry's attention is now focused on the Federal Reserve's next meeting March 21 and 22, when until last week many had predicted a 50-basis-point rate increase after another stronger-than-expected jobs report. The silver lining of the situation for many is hope that the Fed will now take a less aggressive path.
CBRE's Barkham said the firm is still predicting a 25-point increase next week, but "the recent easing of core inflation allows the Fed some flexibility to temporarily hold, or even reduce, interest rates to protect the financial system."
“What's really gonna happen with monetary policy, if anything?” said Martha Peyton, Aegon Asset Management's managing director of real assets applied research. “The Fed might forestall further interest rate increases, and maybe even pump liquidity into the system, if things are bad enough.”