The unforeseen collapse of California-based Silicon Valley Bank has not only largely impacted the global financial industry but has caused a rippling effect throughout the economy. This event sent additional sectors like tech, venture capital, and commercial real estate into deep waters after businesses across various industries were caught on their heels with the news of the second-biggest bank failure in history. While events like these could prove catastrophic to the socio-economic state of the world, it is most important to study the effects such events have on different parts of our economy; therefore, allowing us to prevent history from repeating itself and combat it if it does. Let’s explore some of the underlying damages SVB’s failure has had on important counterparts within commercial real estate, and how these damages could directly affect important industry metrics and activities.
To begin, we can expect to see the initial shock within commercial real estate be reflected in vacancy rates throughout the markets SVB operates heaviest in. Among 55 office locations nationwide, SVB was headquartered at a 160,000-square-foot, 7-building campus in Santa Clara, California totaling a net occupancy cost of $101 million last year. What is to be done with all this space is still up in the air. In the best-case scenario, SVB will find a buyer who is not already based out of California and needs this space to continue to operate efficiently. On the contrary, if SVB is acquired by a company that has an established footprint within the California markets, or finds no buyer at all, this space could go vacant and back on the market leaving SVB with no further obligation to pay out the lease, a privilege grantable by the FDIC. In this more likely scenario, vacancy in the central California markets would continue to rise past the already high 12.5% rate potentially causing a correction in rental rates and a slow in investment, leading us to the next major effect within commercial real estate.
Not only is the failure of Silicon Valley Bank hurting consumer confidence within the financial systems, but it is also forcing banks to more carefully analyze how they will continue to make returns on deposits and fuel outside investment. In the case of SVB, 15% of their loans were attached to commercial real estate and residential mortgages, setting them up for many of the problems they have faced as of late. While this seems like a standard play for banks to make returns on deposits, the timing is what proved to be so detrimental for SVB. At the time these loans were created in 2020 and 2021 debt was as close to free as we have seen in recent history. When the bank run began to hit SVB, they were forced to sell these debt obligations, in a market where rates have more than doubled since origination, at a massive discount to pay out their fleeing depositors. As one could guess, this was quite the eye-opener for many banks who have since begun to tighten up on where they extend credit. In an interview conducted on CNBC, CEO Willy Walker of Walker and Dunlop exclaims that “every regional and local bank are now assessing their loan assets and liabilities and will be more discerning about extending credit to commercial real estate which will suck liquidity out of the system.” In an already illiquid marketplace, this could prove to make deal-making even more difficult within the CRE environment. By prohibiting investors from locking in rates that will allow them to realize positive gains on their acquisitions and making the timeline for securing debt even longer for owner-operators, we can likely expect deal-making to pump the breaks even further.