On March 7, concerns spread quickly about realized losses in Silicon Valley Bank’s (SVB) bond holdings, resulting in accelerating customer withdrawals and money transfers, a bank run that many claim was Twitter-fueled (we’ll cover the impact on tech later).
Concerns with other regional lenders soon escalated, especially amongst banks with a disproportionate amount of uninsured deposits. The ultimate outcome was the second and third largest bank failures in U.S. history with other potential failures staved off through the intervention of major banks and the FDIC.
Amid the crisis, the Federal Reserve increased interest by a quarter percentage, citing concern but indicating hikes may be nearing the end.
So how does this impact commercial real estate, investors, and businesses?
One of the main ways this could manifest is through a reduction in available financing for real estate projects. Banks facing deposit liquidity concern may be less willing to lend to real estate investors, particularly for riskier projects or those in areas with weaker demand.
This reduction in available financing could lead to a slowdown in commercial real estate development, particularly in areas where construction costs are already high. It could also lead to even higher interest rates and a tightening of lending standards, which would make it more difficult for investors to secure financing for new projects. This could make it more difficult for real estate investors to secure financing, particularly those who are looking to invest in riskier projects or who have weaker credit profiles.
Commercial real estate is capital intensive and thrives or perish on debt. When interest rises, cap rates rise and values tend to decrease, in turn lenders become hesitant to provide debt to assets that are depreciating in value. With inflation continuing to increase, NOI on building will take a hit and further reduce values.
This could lead to an increase in distressed properties on the market. If businesses are struggling and unable to make their loan payments, banks may be forced to foreclose on the properties they own as collateral. This could put downward pressure on prices and lead to higher vacancy rates in some areas, particularly if supply exceeds demand.
A prolonged banking crisis could also lead to broader economic instability, which could have a ripple effect on the commercial real estate market. If unemployment rates are high and businesses are distressed (especially those that have already struggled with Covid’s impacts), areas with a large concentration of businesses may begin to struggle more intensely.