How Does the SVB Collapse Impact Commercial Real Estate?
On March 10th, 2023, California regulators closed Silicon Valley Bank (SVB), which was subsequently taken over by the Federal Deposit Insurance Corporation (FDIC) on Friday. This news marked the second-biggest bank failure in U.S. history, putting approximately $209B of asset deposits in limbo. Come Sunday, March 13th, New York regulators closed Signature Bank, the third-largest failure in U.S. banking history. According to the New York State Department of Financial Services, the FDIC took control of $110.36B in assets and $88.59B in deposits at the end of 2022. The announcement of these failures has impacted markets this week and is reminiscent of the sequence of events leading up to the failure of AIG and Lehman’s in 2008.
Unpacking How it Happened
Put simply, a run on the bank caused the failure of Silicon Valley Bank. Due to rising interest rates, the bank declined in value, forcing SVB to sell $21B of bonds at a $1.8B loss to cover deposit withdrawals. As the news of the loss spread, deposit withdrawals from entrepreneurs and venture capitalists accelerated along with bond sales. Spooked by the sudden collapse of Silicon Valley Bank, Signature Bank customers withdrew more than $10 billion in deposits. This run on deposits quickly led to the third-largest bank failure in U.S. history.
These announcements come with the wind-down of crypto-centric Silvergate bank, exposing crypto and tech startups from their highs experienced during the pandemic. While that bank’s demise was long anticipated by many, it ignited the waves of concern that ensured over the last week as many panicked about banks with high levels of uninsured deposits.
Commercial Real Estate & Capital Markets Impact
While much of the attention surrounding SVB’s closure is focused on tech and innovation companies dependent on its loans, its 2022 financial report shows that 15 percent of loans originated were attached to residential and commercial mortgages. The bank reportedly held approximately $2.6B in commercial real estate. The subsequent collapse by Signature Bank focused on providing loans for nine lines of business, with nearly half ($36B) backed by commercial real estate.
The collapse will cause financial conditions to tighten if lenders pull back from the market and lending liquidity is constrained. The one thing that is on everyone’s mind is the CRE industry is already experiencing higher interest rates and lower valuations, and now underwriting is expected to tighten, including credit facilities. The dramatic nature of the implosions is expected to drive further turmoil for real estate investors as debt becomes harder to come by. Many are waiting to see how the Fed will respond with its plan for interest rate hikes to combat inflation.
