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🤦‍♂️Silicon Valley Bank's Massive Effect On Real Estate
Steve Nabity
Want To Invest In Real Estate But Don't Know Where To Start?
In the Spring of 2023, we all witnessed the absurd closing of Silicon Valley Bank (SVB) and what many thought would be the start of the collapse of much of the banking sector. Thankfully, that, in many ways, didn’t transpire quite as we feared. And as time has passed, the chances of losing more banks seem to have waned.
In the end, we lost SVB and a few others. Impact minimized.
Or so we thought…
One outcome of the SVB closure that I don’t think anyone predicted was its effect on real estate investing. I know, I can hear you thinking “But SVB served the tech industry. How could it possibly have any effect on real estate investing.” Trust me, it has a bigger impact than we all thought. Let me explain.
In the year leading up to the SVB closing, the Fed had hiked interest rates quickly to fight high inflation. Increased interest rates mean higher borrowing costs, which can put a strain on companies needing a lot of funds (like tech startups). Simultaneously, these increased rates dramatically reduced bond values – the same bonds that banks like SVB invested their customers’ deposits into when rates were more affordable.
Want To Invest In Real Estate But Don't Know Where To Start?
In the year leading up to the SVB closing, the Fed had hiked interest rates quickly to fight high inflation. Increased interest rates mean higher borrowing costs, which can put a strain on companies needing a lot of funds (like tech startups). Simultaneously, these increased rates dramatically reduced bond values – the same bonds that banks like SVB invested their customers’ deposits into when rates were more affordable.
As higher interest rates caused the market for IPOs to shut down, many of SVBs customers started pulling out money to cover their expenses. This triggered SVB to sell a $21 billion bond position at a $1.8 billion loss in an effort to cover their depositor’s withdrawals. This in turn triggered a snowball effect of their stock plummeting and more people racing to the bank to withdraw their funds.
What makes matters worse is that new evidence suggests that Twitter posts from those in the startup community leading up to the collapse intensified the run on SVB.
This leads us to why – in part – banks aren’t foreclosing on distressed real estate assets: they fear that another social media-fueled bank run could happen if they start taking back these assets. The last thing they want is for social media to get wind that they’re having to take over these assets and have it shake their customer’s confidence in their ability to manage their deposits.
Instead, banks are being incredibly lenient and flexible with property owners. We’ve heard multiple examples through the grapevines that banks are far more willing to negotiate with owners than they ever have in the past. This, of course, bodes very well for owners with floating-rate debt, but not as much for investors who were expecting to get a sweetheart deal on their next investment.
Are banks just kicking the can and creating a bigger problem down the road? Will distressed assets actually hit the market later this year?
The answer is that no one knows. Only time will tell how this will shake out.
One thing I do know is that if it does happen, be ready because it’ll come quickly.
