Real estate investors face funding uncertainty after Silicon Valley Bank and Signature Bank collapse
The collapse of Silicon Valley Bank (SVB) has sent shockwaves through the commercial real estate (CRE) industry, creating a cloud of uncertainty around financing. The collapse, coupled with regulators taking control of New York's Signature Bank, could make it more difficult for real estate investors to operate as debt becomes scarcer.
According to CBRE Global Chief Economist Richard Barkham, the collapse of SVB and Signature Bank could further pressure real estate capital values, which had already been falling. The credit market is likely to become even more tightly constrained, leading to tighter underwriting for credit facilities.
The collapse of both banks is of particular concern because they had a significant amount of real estate loans on their ledgers. At the end of last year, SVB had $2.68 billion of CRE loans, while CRE comprised nearly half of Signature Bank's loans, amounting to almost $36 billion.
Regional banks often step in when other lenders move off of CRE activity, but smaller financial institutions might not be as willing to back real estate loans in the near future. Super-regional, regional, and community banks are likely to be much more reluctant to make loans, at least for the next quarter, as they digest the situation. As a result, obtaining financing for real estate projects could become increasingly difficult.
The uncertainty surrounding real estate financing is leading some borrowers to seek alternative sources of funding. According to Seth Weissman, president of real estate private equity fund Urban Standard Capital, his firm has received several requests from borrowers who are working with regional banks but are now concerned about future collapses and losing the funding they thought was secure. This uncertainty is leading to nervousness among borrowers who need to know what is happening and figure out a Plan B.
The collapse of SVB is also having an impact on the PropTech industry. Startups often diversify banks, which worked well for Tumble, a smart laundry operator that serves the multifamily industry. Tumble began pulling its money out of SVB prior to the bank's collapse, limiting its exposure. While the collapse of SVB is a blow to the PropTech industry, some are optimistic that the sector will withstand the impact.
Rasheq Zarif, co-founder and COO of PropTech platform and marketplace ReWyre, believes that the sector will continue to push on, helped by a growing need for more sustainability, as well as the digitization of outmoded processes and systems across the real estate lifecycle. While SVB provided critical support to many startups, it is not the only ingredient to continued industry success.
Chad Gallagher, co-founder and chief investment & growth officer at Home365, believes that PropTech companies will be shielded from the impact of SVB's collapse, thanks to the Federal Reserve's action to secure all bank deposits. Gallagher notes that before the announcement, there would have been an impact on the entire tech ecosystem, including PropTech companies, as much-needed cash would have vanished, and major VC funds that provide cash to fund these companies would have taken a significant hit. However, given the Fed's intervention, little to no impact on the PropTech community overall is expected.
While the PropTech industry may weather the storm, the same cannot be said for the banking and CRE industries. The collapse of SVB and Signature Bank could make obtaining financing for real estate projects increasingly difficult, leading to more cautious lending practices and tighter underwriting. The uncertainty around real estate financing could also lead to an increase in nervousness among borrowers and concerns about the security of funding sources.
In conclusion, the collapse of SVB has created a cloud of uncertainty around financing in the commercial real estate industry.
