REIT Values Tumble As Investors Fear Real Estate Fallout From Bank Failures
The extent of the contagion of the second- and third-largest bank failures in U.S. history over the past week is still unknown, but the values of publicly traded real estate owners have already been infected.
The FTSE NAREIT Equity Index, which tracks all U.S. equity REITs, has dropped about 4.6% over the last five days, outpacing the S&P 500's 3% dip over the same period. Investors have had their confidence particularly shaken in office REITs — the FTSE NAREIT Equity Office index dropped more than 12.5% over the five days ending Wednesday. Mortgage REITs are also suffering, down more than 10% during the same period.
Boston Properties, the largest office REIT, saw its stock lose about 14% in value since last Thursday, while Alexandria Real Estate Equities — the top landlord for the life sciences industry, where the late Silicon Valley Bank was particularly active — has lost about 12% of its value.
With the international financial system under stress, office REITs now have an extra challenge to their continued health. Not only will debt be more expensive, it will probably be harder to find, especially for a sector experiencing strong downward pressure on demand.
"This is a time where housing will be incredibly active. Deals will be financed, while other asset classes don't have that advantage," Origin Investments co-CEO David Scherer said. “There's no Fannie or Freddie or HUD for industrial or retail or office.”
Signature Bank's collapse on Sunday sent shockwaves through New York, where it was a prominent lender on multifamily properties. Landlords have been asking their tenants with Signature letters of credit to replace them, The Real Deal reported.
Office REITs with a focus on Manhattan have seen values drop since the banking sector started to quiver. SL Green, New York's largest office owner, is down more than 15%, Vornado is down 12.9% and Empire State Realty Trust has lost 16.6% of its value.
The direct risk to office REITs posed by the collapse of Silicon Valley Bank is relatively limited. For example, Cousins Properties' ninth-largest tenant by rent is SVB, representing about 1.2% of the company's rental portfolio. BXP owns Madison Centre, a building in Seattle where SVB is a tenant. The fate of those leases is unclear, since it depends on how regulators reorganize SVB.
Other woes associated with the failed banks are more granular. Among Alexandria's security deposits, letters of credit issued by SVB total about $108.3M, and the REIT is working with those tenants to replace those letters of credit with another acceptable security deposit, S&P Global reports.
“We can’t speculate and can only speak to the data we have,” Nareit Executive Vice President of Research and Investor Outreach John Worth said in a statement to Bisnow. “While disturbances in the banking sector may not be good for the transaction market, office REITs generally have well-managed and well-structured balance sheets.”
The sector had already been stressed. The CMBS delinquency rate for vehicles with office assets securing their mortgages rose 55 basis points in February after ticking up 25 points in January, according to Trepp.
There have also been a number of office property-associated defaults recently. Pacific Investment Management's Columbia Property Trust defaulted on $1.7B of office building debt, while Brookfield Asset Management defaulted on more than $750M for two Los Angeles skyscrapers.
“Office has been redlined by many lenders for quite some time already, and recent capital market shocks certainly don’t help,” CenterSquare Investment Management Portfolio Manager Alexander Snyder said. “There have been a number of high-profile office loan defaults already, and it would be surprising if more didn’t follow in the coming months.”