Source: Globest —
A drop in home mortgage rates, a pause (or even cut) by the Federal Reserve at its March 22 meeting, and the need to obtain new letters of credit are among the matters to ponder as commercial real estate companies and venture-capital groups sort through the fallout of the collapse of Silicon Valley Bank and Signature Bank.
SVB has approximately $2.6 billion of CRE private bank loans on its books, according to its latest 10-K filing with the Securities and Exchange Commission.
At the end of 2022, Signature had by far the larger portfolio at $35.7 billion, according its 2022 annual report, including multifamily, commercial property, acquisition, development, and construction, and home equity lines of credit.
Institutional Investors to Look for Better CRE Opportunities
Brad Case, PhD, CFA, CAIA, chief economist & director of research for Middleburg Communities, tells GlobeSt.com that the collapse of Silicon Valley Bank “has upset” the Federal Reserve’s plan for interest rate hikes to combat inflation, “but they’ll have to resume hikes when the short-term liquidity danger is past.
“We believe the fight against inflation will be won by the end of the summer, so we expect interest rates to start declining (from the anti-inflation peak) by the end of this year,” he said.
The stock market remains overvalued whereas real estate values have taken a hit even though NOI growth remains strong, according to Case.
“Because of that, we expect institutional investors to look for better opportunities in real estate, which should cause downward pressure on cap rates,” he said.
30-Year Mortgage Rates Could Fall
Al Otero, portfolio manager at Armada ETF Advisors, tells GlobeSt.com that the collapse of SVB coupled with reports over the weekend that the Fed will undertake a major policy shift to guard against the risk of contagion has put interest rate markets into a tailspin, causing a rally in rates across the yield curve and an expectation that the Fed will now pause raising the funds rate at its March 21-22 policy session.
“The implications are that we could see a material reduction in mortgage rates going into the spring sales season, which would be a substantial positive for the housing market,” Otero said.
Mortgage News Daily listed 30-year fixed rates at 6.57% on Monday afternoon.
This PropTech Got Out Last Week
Smart laundry operator Tumble, a start-up that serves the multifamily industry, was a Silicon Valley Bank customer before pulling its money out last week.
It has limited exposure, according to Scott Patterson, its CEO and founder.
“Tumble is in a strong position,” Patterson said. “We’ve had great support from our investors and our multifamily network, who all helped us move quickly. It was the right call to fully back depositors using the fund set up after the Global Financial Crisis (GFC) and I applaud the Fed and Federal Deposit Insurance Corporation (FDIC)’s fast action to protect depositors.
As a startup, it is common practice to diversify banks (mostly because of the variety of products offered) and this diversification worked well for Tumble in this situation, Patterson said.
As for the long-term effects of losing a partner in our ecosystem like SVB, Patterson said he would hope that a larger bank takes the opportunity to swoop up the talent, relationships, and risk profile that was the majority of SVB.
“One of the biggest takeaways is that money moves extremely quickly,” he said. “At the same time, panic magnified the consequences of last week’s events. Evaluating banks holistically, from interest rates to overall risk profile, will undoubtedly be at the forefront of every company’s strategy.”
VCs Must Rethink One-Bank Relationships
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