Private Capital's Rise: Reshaping Commercial Real Estate Finance
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Episode Transcript:
In the world of commercial real estate, we've witnessed a significant shift in the lending landscape over the past six months. The aftershocks of Silicon Valley Bank's failure have prompted small and regional banks to step back from commercial property lending, while nonbank lenders are stepping up to fill the void, provided they or their borrowers can meet the requirements.
Now, this change isn't quite on the scale of the Global Financial Crisis, but it's worth noting how it's transforming the way commercial real estate gets its funding, at least for the time being.
"The bad news for borrowers is that a major source of funding, regional banks, will likely need to keep retreating from the sector," says Gavriel Kahane, managing partner of Arkhouse, a private equity investor specializing in opportunistic properties. "The good news is that there is an unprecedented amount of private capital looking to get into real estate lending, and if banks create a vacuum, private lenders will fill it."
Commercial and multifamily mortgage loan originations saw a 53% drop in the second quarter, just after Silicon Valley Bank's closure, according to the Mortgage Bankers Association. Depository institutions, like traditional banks, decreased their lending by a whopping 69% during this period.
Since the SVB and Signature Bank failures, lending totals have only inched up by a minuscule 0.01% to $2.9 trillion in March, according to Federal Reserve data.
Now, it's worth noting that lending growth rates haven't been this sluggish since the early days of the pandemic in 2020. In the years following the Global Financial Crisis, but before the pandemic, lending growth was much more robust.
Yet, it's not just the SVB shockwave that's influencing these changes. The impact of interest rates cannot be underestimated. It's become evident that those with deep pockets, able to muster substantial cash for loans, have an advantage, while others are left grappling with the rising cost of capital.
Charles Krawitz, Chief Capital Markets Officer at Alliant Credit Union, points out the liquidity squeeze: "Liquidity in the financial sector is being constrained as depositories are finding themselves not being able to pay virtually nothing for deposits any longer."
This financial crunch means less money available for lending, making it a challenging landscape for borrowers.
Eric Brody, principal at Anax Real Estate Partners, paints a grim picture, saying that the borrowing situation is now worse than it was six months ago.
However, there's still a glimmer of hope. Brody notes that there are pockets of capital available, albeit at a higher cost. The big question for nonbank lenders is whether they've hit the bottom yet, signaling it's time to strike.
Silicon Valley Bank's absence, especially significant for tech companies in the region, has also shaken the confidence of entrepreneurs and potential borrowers. The loss of a one-stop-shop for various services has left a void in the market, leaving some skeptical about dealing with smaller banks.
A recent American Banker survey found that more than 50% of regional bank customers expressed some concern about their bank's stability following SVB and Signature's collapses, with 20% having "strong concern."
The failures of SVB and Signature have raised concerns about the financial industry's stability in general. A Federal Reserve survey reported that 52% of financial professionals now consider commercial and residential real estate as a "salient risk to financial stability," a significant increase from just 12% in late 2022.
Credit rating agencies Moody's and S&P Global have downgraded several regional banks, citing interest rates and risks in their commercial real estate portfolios as contributing factors.
It's essential to acknowledge that many regional banks are already seen as overexposed to the commercial real estate sector. There are also questions about new regulations that may emerge in the aftermath of SVB's failure, akin to the regulatory changes that followed the Global Financial Crisis.
In August, bank regulators proposed new rules for larger banks to prevent cash flow issues similar to those that affected SVB. Banks with assets exceeding $100 billion would be required to issue $70 billion in long-term debt. SVB, which had about $209 billion in assets at the beginning of 2023, would have fallen under these new regulations.
This is Tyler Cauble, Signing off