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Good morning. With increasing commercial property loan defaults, market participants are becoming increasingly concerned about the banking industry’s susceptibility to the commercial real estate sector.

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​⏱️ Read time: ± 5 minutes

How Commercial Real Estate is Emerging as the Next Big Threat to Banking

While the collapse of Silicon Valley and Signature Bank may be giving investors a bad case of the jitters, wait until they see the banking industry’s exposure to the rapidly weakening commercial real estate industry.

Growing trend: CRE has recently seen a string of defaults, including one by an office landlord controlled by Pacific Investment Management Co. for $1.7B and a default by a Brookfield Corp. business (BN) on loans tied to two LA office towers. A San Francisco complex co-owned by former President Donald Trump and Vornado Realty Trust (VNO) is also at risk of default.

Banking exposure: If Silicon Valley Bank’s situation triggers a recession, it could result in a surge of property defaults, which is concerning for lenders who have increased their real estate financing. Since mid-2021, real estate loans and leases on lenders’ books have shot up 16%, or $725B, to a record $5.31T, according to the Federal Reserve.

Risky business: The risk for banks is concentrated mostly at small banks and some large lenders specializing in real estate. In the 2022 stress tests conducted by the Fed, Wells Fargo & Co. (WFC) had the biggest dollar value CRE losses, while M&T Bank Corp. (MTB) and Huntington Bancshares Inc. (HBAN) had the biggest losses in terms of total loan losses and their capital bases.

The good news: Lenders have tightened CRE credit standards, with 57.6% reporting tightening in the most recent Fed survey. However, standards have significantly loosened after the pandemic, which may also cause concern.

➥ THE TAKEAWAY

Is it too late? The recent issues in CRE raise concerns about the possibility of a banking crisis similar to the savings and loan crisis of the late ‘80s and early ‘90s. The current state of the banking system is uncertain, and the recent problems at SVB and Signature Bank indicate things are not always what they seem. Needless to say, a healthy banking system is essential for a healthy U.S. economy.

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📖 Read about the broker who brought Starbucks (SBUX) to NYC in 1994.

🖥️ Watch Marcus & Millichap (MMI) CEO discuss the future and success of necessity retail spaces.

🎧 Listen to Azor Advisory Services CEO discuss retail leases and impulse vs. destination tenants on The FORT with Chris Powers.

• Staying strong: NYC’s industrial market stayed strong in Q4. Net absorption increased 9% YoY while asking rents rose more than 24%.

• A new perspective: When the stocks and bonds that make up a 60/40 portfolio perform poorly, maybe it’s time to take ‘alternative’ private market investing more seriously.

• Consulting an expert: Twitter strip mall savant StripMallGuy details his CRE investing strategy and the appeal of strip malls in an interview with The Real Deal.

• Keeping an eye on things: A number of U.S. senators are maintaining pressure on the DOJ to scrutinize the rent-setting algorithms used by RealPage.

• Staying put: There are roughly 3M U.S. households earning $150K+ while still renting. The biggest obstacle to home ownership? High costs and low supply.

• Not getting away with it: CRE investor Raheel Bhai has pled guilty to a count of wire fraud and forging nearly 75 documents to receive a $149M loan from Benefit Street Partners.

• Goodbye, brick and mortar: Amazon (AMZN) will be closing 8 of its cashier-free ‘Go’ stores across NYC, Seattle, and San Francisco amidst a reevaluation of its brick-and-mortar strategy.

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🤝 Deals & Dealmakers

• Fit for a king: Fort Partners reached a deal for a 30-year lease to invest $57.5M into transforming a 15th-century Italian palace into a boutique hotel in Vatican City.

• Come on over: BlackRock (BLK) started two new private equity funds, setting their sights on wealthy Europeans. They plan on raising $1.1B for their new Long-Term Investment Funds.

• Teacher’s pet: Santa Clara County is proposing the construction of affordable housing for teachers on land owned by Apple (APPL) in Cupertino.

• The place to be: Palm Beach Gardens has been a magnet for high-profile investment and development due to its balance of growth and quality lifestyle.

• M&A of the day: Stockholders in iStar (STAR) and Safehold Inc. (SAFE) have approved the $1.6B merger between the two companies.

• Storage solutions: GreenPoint Partners will partner with Semi-Stow to launch a platform for the outdoor storage of trucks and trailers, setting their sights on a $500M portfolio.

• Affordable housing empire: Standard Communities bought a controlling interest in a portfolio of 3.2K affordable housing units in FL and GA. The deal is the largest in the firm’s history.

• Here comes the neighborhood: Sunset Development has plans to build 3K homes at the 92-acre site which housed the former HQ for Chevron in San Ramon.

📈 Chart of the Day

Silicon Valley Bank’s (SVB) exposure to bonds purchased in the last few years is similar to many banks. It’s no wonder the Fed stepped in to prevent rampant “what-if” scenario speculations.