While last week’s swift collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank was not caused by Commercial Real Estate (CRE) market issues, their failures will affect bank lending standards. This will negatively impact CRE lending and borrowers – at least in the short term.
Until lending markets stabilize, Enact Partners expects many regional and community banks and credit unions to become more risk averse and reluctant to lend for business purposes. Borrowers, especially those in the middle of securing financing for a new CRE project or hoping to get one underway, are nervous – and understandably so. We’ve heard reports of some banks pulling out of loans at the eleventh hour, right before closing, leaving borrowers stranded.
Rest assured, Enact Partners continues to lend. Unlike banks and Wall Street-backed institutional private lenders, we do not change our ways due to macroeconomic trends and the actions of the Federal Reserve. Our funds come from individual investors, not deposit customers, so we are not exposed like these three banks were. We rely on the borrower and the project, not the market or the Fed, to inform our lending decisions.
Silvergate Bank, Silicon Valley Bank, and Signature Bank were seemingly brought down by their heavy reliance on the cryptocurrency and technology startup sectors. Their customers, spooked by the recent FTX failure and alleged fraud, pulled their deposits out of these crypto/tech-heavy banks quickly, triggering an old fashioned bank run.
Unlike the bank run depicted in the 1946 classic Christmas movie, It’s a Wonderful Life, where George Bailey opined as customers of his savings and loan rushed to pull out their deposits in person—“You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others”—bank runs these days actually move much more quickly. Customers can pull millions out of their accounts in just minutes using their cell phones. For example, the Silicon Valley Bank collapse took just two days!
Accounting firm KPMG signed audits giving both Silicon Valley Bank and Signature Bank a clean bill of health only two weeks before they were both obliterated. The failures were not a result of the banks’ business fundamentals, but rather a liquidity crisis triggered by the swift removal of customer deposits.
Will Other’s Follow?
While Enact Partners can’t predict the future, large banks do not appear in danger of collapse. Like it or not, they are deemed “too big to fail” (for the good of the economy) and would almost certainly be bailed out by the Federal Government if they got into real trouble. It’s happened before.
However, smaller regional banks and credit unions do not have such protections. They are not too big to fail and are at higher risk of similar bank runs.
How Does this Affect CRE Borrowers?
Smaller institutions like regional banks and credit unions are also the ones that typically lend to the types of borrowers that private lenders, like Enact Partners, cater to. Connect the dots and it’s easy to see that if these regional bank lenders run into liquidity issues, they risk spooking customers and triggering a collapse of their own. As a result, this class of lenders is going to be very careful not to signal weakness to the market. They will likely tighten up already very stringent underwriting standards. The last thing they want is to fund risky loans that show the potential to, or actually do, go into a non-performing (think foreclosure) status.
The Federal Reserve may even dictate tighter lending standards in the aftermath of these recent bank failures. Already, this past weekend the Fed announced it is taking unprecedented action to shore up the banking sector through a new program designed to boost the capacity of banks to safeguard deposits.
We don’t think this will be enough to keep smaller institutions from tightening up. Some banks will stop lending altogether.
How Enact Partners Can Help
Enact Partners finds it very likely that the banks smaller real estate developers relied on as recently as last week will quickly tighten their purse strings in the coming days (if they haven’t already). As a private fund, though, Enact Partners does not have similar concerns.
Enact Partners is a Main Street lender, not a Wall Street lender. Despite recent trends, we continue to lend on projects with solid fundamentals—whether for land acquisition, construction, value-add, or bridge loans. Given our extensive experience in real estate, land development, and construction, we are confident in our ability to provide borrowers and builders the capital they need to acquire and develop property.
Contact Us About Your Borrowing Needs
(760) 516-7776 | [email protected] | www.enactpartners.com