On March 10th, 2023, California regulators shut down Silicon Valley Bank (SVB) and the responsibility of overseeing $209B in asset deposits was passed to the Federal Deposit Insurance Corporation (FDIC). Three days later, New York regulators closed Signature Bank, leading to the FDIC taking control of a reported $110.36B in assets and $88.59B in deposits at the end of last year. This significant bank failure has already left a mark on markets and resembles what preceded the downfall of AIG (American International Group) and Lehman Brothers in 2008, leaving many investors nervous about what is coming in the months ahead. Understanding the SVB collapse and commercial real estate fallout, and reviewing our passive investing education resources, can help investors stay grounded.
SVB Collapse and Commercial Real Estate: How the Collapse Happened
Put simply, the failure of SVB was caused by a run on the bank. Due to increasing interest rates, SVB took a major hit in value and had to sell off $21B of bonds at a $1.8B loss to meet the demands of withdrawers. As this news spread, venture capitalists and entrepreneurs began to pull their deposits from Signature Bank as well, resulting in more than $10B being taken out within an incredibly short amount of time, leading to the third-largest bank collapse in American history.
The announcement of SVB’s collapse came as Silvergate Bank wound down, exposing crypto startups from their highs during the pandemic. The demise of Silvergate Bank was long anticipated by many, but it sparked a wave of concern as many panicked about banks with high levels of uninsured deposits.
SVB Collapse and Commercial Real Estate: Impact on Capital Markets
While much of the attention surrounding SVB’s closure was 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. Signature Bank had approximately $2.6B in commercial real estate (across nine business lines).
The collapse has prompted many to consider the financial implications of the commercial real estate (CRE) industry, including higher interest rates and possibly lower property valuations. As we move forward, it could be expected that lenders will become more cautious with their lending, resulting in reduced liquidity in the space. Underwriting standards could also tighten, making it harder for some real estate operators to obtain debt financing. All eyes are on the Federal Reserve as they continue increasing interest rates to offset inflationary pressures, with this last raise being a modest 25 basis points (25 basis points (or bps) equal .25%).
How Can You Mitigate Risk as an Investor
While many investors may feel two steps removed from the wake of SVB’s collapse, there are a few things that investors should think about when it comes to mitigating risk in this part of the market cycle:
1. Diversify your portfolio.
Do not put all your eggs in one basket. Invest in a variety of property types and locations to spread out your risk. This is why, personally, I diversify over multifamily, self-storage, and car wash opportunities (just to name a few strategies).
2. Research properties thoroughly before investing.
Make sure you understand the location, demographics, economics, and lending situation of any property you are considering investing in.
3. Be patient and disciplined with your investment decisions.
Do not let emotions or short-term market fluctuations guide your investment decisions. Stick to your long-term investing plan and be patient.
4. Work with experienced professionals.
Find a reputable and experienced team of professionals who have a track record for performing, put their investors first, and have a wealth of business, finance, and real estate experience to help you navigate this current market.
The Silver Lining for Investors
The collapse of SVB has impacted commercial real estate, and it is likely to be felt for some time. However, while there may be negative effects in the short term, there are also opportunities that can come from this (or any) crisis. As a passive real estate investor, I am optimistic about how operators can take advantage of lower prices and more attractive loan terms in the months ahead, as lenders look to fill the gap left by SVB’s withdrawal. Though unfortunate, SVB’s collapse will continue to shape multifamily real estate for years to come.