Silicon Valley Bank fallout spells additional trouble for commercial real estate industry
Silicon Valley Bank fallout spells additional trouble for commercial real estate industry
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Those interviewed by The Business Journals indicate a range of implications should be considered for commercial landlords, developers and investors, groups that’ve already faced challenges in recent months as the cost of financing has continued to rise and demand for space has weakened.
The failure of SVB on March 10 — followed this week by New York-based Signature Bank and Silvergate Bank out of San Diego — came after it used short-term deposits to buy long-term bonds, when interest rates were at record lows before the Federal Reserve’s more recent, and aggressive, interest-rate hikes to tame inflation.
But SVB customers — many of whom were in tech and innovation, a sector of the economy that’s recently been under stress — increasingly sought to withdraw funds from the bank. To cover deposits, SVB sold bonds, the values on which had dropped significantly, thanks to higher interest rates. That triggered a run that culminated in federal regulators taking over the bank late last week, after the bank wasn’t able to raise cash needed to cover the outflows.
Long-term investment products purchased by SVB included mortgage-backed securities, which are bundles of real estate loans and other debt.
The most obvious implication for commercial real estate: lending access will become more difficult.
Banks will be relooking at real estate deals they’ve been in negotiations on — something that had already been happening for several months, thanks to inflation and higher interest rates. But the bank failures will exacerbate that scrutiny, said Seth Weissman, a partner at Jeffer Mangels Butler & Mitchell LLP in Los Angeles who specializes in real estate law.
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