Between March 8 and May 1, 2023, four regional banks failed, representing three of US history’s four largest bank failures. While regulators and political figures declared the crisis over, we will likely see ramifications for some time.
With all bank failures, concerns about its impact on real estate investments exist. To better understand what might come next, it’s essential to recognize some contributing factors to the current crisis.
Aside from mismanagement and failed oversight, three common factors fueled the current situation. First is rising interest rates. The Federal Reserve increased rates from near zero to 5 to 5.25% in 14 months. Increased rates meant bank investments in long-term bonds, and Treasuries were underwater, creating unrealized losses. (Bonds values decline as interest rates rise).
Second, a large number of unsecured depositors, or accounts with over $250,0000 in the bank, are not protected by FDIC insurance. Unsecured depositors create the risk of significant and unpredictable cash movement if account holders lose confidence in the bank.
Third is the higher funding costs due to inflation and higher interest rates.
Let’s look at what happened at Silicon Valley Bank to understand how quickly things can change.
Regulators require banks to have a certain level of reserves based on deposits. In early March, Silicon Valley couldn’t meet the reserve and had to sell $21 billion in securities at a loss of $2.1 billion. The company issued a press release on March 8, notifying investors of the sale. Thursday, the stock price plummeted, and within 48 hours, depositors withdrew $142 billion, or 81% of deposits held by the bank. Regulators took over, and the bank folded by the end of the weekend.
For more details, American Banker created a week-by-week accounting of the banking crisis.
These events will likely affect real estate investors for at least the next year. Here are the primary challenges and opportunities:
- Availability of financing: Small and mid-sized banks hold just over 67% of commercial real estate loans. Regional bank failures and increased government oversight mean tighter lending requirements, with some banks pulling back from commercial loans altogether.
It will be more difficult to finance new deals with lenders requiring larger down payments on top of already higher interest rates. Funding challenges will impact purchases, refinances, and new construction.
A large number of non-traditional lenders emerged in the last five years. If the securitized market stabilizes, some lenders may come back into the market. Meanwhile, Fannie Mae and Freddie Mac will fill some of the lending gaps.
Tighter lending standards tend to reduce acquisitions and new construction. New construction and value add projects are the most exposed in the multifamily space. A slowdown in new housing starts will exasperate the current housing shortage, increasing demand for existing multifamily housing units.
- Reduced consumer confidence: Bank failures erode confidence in financial institutions and the economy as a whole. When investors perceive increased risk, they become more cautious and often reduce holdings to limit exposure.
Investors who remain could find quality deals at better prices.
- Ability to capitalize on distressed properties: Higher interest rates and increased operating costs particularly impact real estate loans with variable rates, which includes most multifamily debt.
Refinances required due to bank failures, and maturing loans could struggle to get the financing necessary due to new lending requirements. When refinancing fails, more properties could come to market, allowing investors to buy at attractive rates.
In general, the failure of regional banks does not have a broad economic impact. However, real estate investors must adjust their strategy and projections to capitalize on upcoming opportunities and continue to turn a profit.
