Bank crisis could impact market
The fallout from the recent banking crisis spurred by the collapse of two banks — and concerns about the health of a third — is bubbling up in the market for commercial real estate lending, as borrowers fear that banks will pull back. That could slow down construction activity and increase the likelihood of a recession, analysts and real estate experts said.
Silicon Valley Bank and Signature Bank imploded in the same week. First Republic Bank teetered for days before its shares partly recovered on Tuesday. Both Signature and First Republic are large lenders to builders and managers of office buildings, rental apartments, shopping complexes and other commercial properties.
First Republic has the ninthlargest loan portfolio in that market in the United States, and Signature had the 10th largest before it collapsed, according Trepp, a commercial real estate data firm.
Midsize and regional banks like Signature and First Republic not only provide the bulk of commercial real estate loans to businesses, they are also part of a far bigger market. Banks typically package the loans they make into complex financial products and sell them to investors, allowing the banks to raise more money to make new loans.
That means that a pullback in lending also can alter the behavior of investors. Commercial real estate contributed $2.3 trillion to the nation’s economy last year, according to an industry association. And because the industry hasn’t fully rebounded from the blow dealt by the pandemic, analysts worry about a fresh slowdown.
“It is a perfect storm right now,” said Varuna Bhattacharyya, a real estate lawyer in New York with Bryan Cave Leighton Paisner who mainly represents banks.
“We were already in a place with a much lower rate of originations,” Bhattacharyya said, referring to new loan applications that banks process. “It’s hard not to feel a bit of panic and anxiety.”
Bhattacharyya said lenders would become even more cautious about writing loans for any new construction projects other than the highest-profile “trophy deals.”
The fear among borrowers is that banks will become more conservative about lending. And although the panic appears mostly to have stabilized for now, the specter of bank failure could haunt the decisions of regional banks for months.
For much of last year, commercial real estate lending had begun rebounding from the depths of the COVID-19 lockdowns, when new loan applications almost came to a standstill in the fourth quarter of 2020. By comparison, the annual rate of commercial real estate loan origination by dollar volume grew 18% in the fourth quarter of 2022, according to Trepp.
Even before the Federal Deposit Insurance Corp. stepped in to take over Silicon Valley and Signature, a noticeable slowdown in lending to the commercial real estate industry had begun in January.
On an annual basis, the rate of commercial real estate loan growth this year had been cut in half compared with last year, said Matthew Anderson, a managing director at Trepp. He said some of the slowdown was the result of interest rate increases by the Federal Reserve, which were starting to take a bite out of commercial real estate activity.
And lending has probably tapered off further since the collapses of Silicon Valley and Signature, Anderson said. “How long and deep the impact will be remains to be seen,” he said.
The universe of commercial real estate includes loans for new construction, mortgages and loans specifically for managing multifamily apartment complexes. The so- called securitized products containing loans that banks make are called commercial mortgage-backed securities — a more than $72 billion market last year. But it’s a different story in 2023, with issuance of those bonds down 78% from a year ago.
Daniel Klein, president of Klein Enterprises, a commercial real estate management firm based in Maryland, had been
talking to several banks recently about a construction loan for a new project.
But just the other day, after the banks collapsed, one of the banks suddenly pulled a term sheet for a loan, he said.
Klein, whose family- owned business manages about 60 shopping centers, offices and apartment buildings, said that the bank had offered no explanation for its decision and that he did not know if the trouble in the banking sector had been a cause. He said he expected loan terms from lenders to get more onerous in the coming months, as midsize banks get skittish after the Signature and Silicon Valley Bank collapses.
“Banks in general are being more conservative than they were six or nine months ago,” he said. “But we have been pretty fortunate. We have many longstanding community banking relationships.”
Some of the concerns of real estate lenders eased a bit when the FDIC announced Sunday that it had sold substantially all of the remaining deposits at Signature Bank to a subsidiary of a peer, New York Community Bancorp, which is also a major commercial real estate lender. The banking regulator took over Signature on March 12 after business customers — including real estate firms and crypto investors — began pulling money out of the bank.
Before its collapse, Signature was one of the biggest commercial real estate lenders in the New York metropolitan area.
In buying some of Signature’s assets, New York Community Bancorp picked up about $ 34 billion in customer deposits, down from the $88 billion that Signature had before the bank run, an indication of just how many customers fled the bank before regulators stepped in on
March 12 to stem the bleeding.
Even with the sale of banking deposits to New York Community Bancorp, there are worries about whether other banks will fill the void left by the collapse of Signature.
New York Community Bancorp acquired about $12.9 billion in loans from Signature, the FDIC said, but most were business loans to health care companies and not part of Signature’s large commercial real estate portfolio. That means the FDIC still needs to find a buyer for Signature’s core commercial real estate loan portfolio.
A spokesman for the FDIC said that the organization “has not characterized the types of loans left behind” and that they would be “disposed at a later date.”
“I think this means that Signature’s commercial real estate portfolio is still up in the air,” Anderson of Trepp said.