Bank Crisis Could Cast Pall Over Commercial Real Estate Market
The market hadn’t fully rebounded from the pandemic. Some worry that another slowdown could add to fears of a recession.
The fallout from the recent banking crisis spurred by the collapse of two banks — and concerns about the health of a third — is bubbling up in the market for commercial real estate lending, as borrowers fear that banks will pull back. That could slow down construction activity and increase the likelihood of a recession, analysts and real estate experts said.
Silicon Valley Bank and Signature Bank imploded in the same week. First Republic Bank teetered for days before its shares partly recovered on Tuesday. Both Signature and First Republic are large lenders to builders and managers of office buildings, rental apartments, shopping complexes and other commercial properties.
First Republic has the ninth-largest loan portfolio in that market in the United States, and Signature had the 10th largest before it collapsed, according Trepp, a commercial real estate data firm.
Midsize and regional banks like Signature and First Republic not only provide the bulk of commercial real estate loans to businesses, they are also part of a far bigger market. Banks typically package the loans they make into complex financial products and sell them to investors, allowing the banks to raise more money to make new loans.
That means that a pullback in lending can also alter the behavior of investors. Commercial real estate contributed $2.3 trillion to the nation’s economy last year, according to an industry association. And because the industry hasn’t fully rebounded from the blow dealt by the pandemic, analysts worry about a fresh slowdown.
“It is a perfect storm right now,” said Varuna Bhattacharyya, a real estate lawyer in New York with Bryan Cave Leighton Paisner who mainly represents banks.
“We were already in a place with a much lower rate of originations,” Ms. Bhattacharyya said, referring to new loan applications that banks process. “It’s hard not to feel a bit of panic and anxiety.”
Ms. Bhattacharyya said lenders would become even more cautious about writing loans for any new construction projects other than the highest-profile “trophy deals.”
The fear among borrowers is that banks will become more conservative about lending. And although the panic appears to have mostly stabilized for now, the specter of bank failure could haunt the decisions of regional banks for months.
For much of last year, commercial real estate lending had begun rebounding from the depths of the Covid-19 lockdowns, when new loan applications almost came to a standstill in the fourth quarter of 2020. By comparison, the annual rate of commercial real estate loan origination by dollar volume grew 18 percent in the fourth quarter of 2022, according to Trepp.
Even before the Federal Deposit Insurance Corporation stepped in to take over Silicon Valley and Signature, a noticeable slowdown in lending to the commercial real estate industry had begun in January.
On an annual basis, the rate of commercial real estate loan growth this year had already been cut in half compared with last year, said Matthew Anderson, a managing director at Trepp. He said some of the slowdown was the result of interest rate increases by the Federal Reserve, which were starting to take a bite out of commercial real estate activity.
And lending has probably tapered off further since the collapses of Silicon Valley and Signature, Mr. Anderson said. “How long and deep the impact will be remains to be seen,” he said.
The universe of commercial real estate includes loans for new construction, mortgages and loans specifically for managing multifamily apartment complexes. The so-called securitized products containing loans that banks make are called commercial mortgage-backed securities — a more than $72 billion market last year. But it’s a different story in 2023, with issuance of those bonds down 78 percent from a year ago.
Daniel Klein, president of Klein Enterprises, a commercial real estate management firm based in Maryland, had been talking to several banks recently about a construction loan for a new project. But just the other day, after the banks collapsed, one of the banks suddenly pulled a term sheet for a loan, he said.
Mr. Klein, whose family-owned business manages about 60 shopping centers, offices and apartment buildings, said that the bank had offered no explanation for its decision, and that he did not know if the trouble in the banking sector had been a cause. He said he expected loan terms from lenders to get more onerous in the coming months, as midsize banks get skittish after the Signature and Silicon Valley Bank collapses.
“Banks in general are being more conservative than they were six or nine months ago,” he said. “But we have been pretty fortunate. We have many long standing community banking relationships.”
Regional banks are a critical part of the commercial real estate ecosystem because their bankers invest a lot of time into forging relationships with real estate developers and managers, said Michael E. Lefkowitz, a real estate lawyer with Rosenberg & Estis in New York. Large banks do not tend to provide that kind of “high-level service” to middle-market real estate firms.
Some of the concerns of real estate lenders eased a bit when the F.D.I.C. announced on Sunday that it had sold substantially all of the remaining deposits at Signature Bank to a subsidiary of a peer, New York Community Bancorp, which is also a major commercial real estate lender. The banking regulator took over Signature on March 12 after business customers — including real estate firms and crypto investors — began pulling money out of the bank.
Before its collapse, Signature was one of the biggest commercial real estate lenders in the New York metropolitan area.
In buying some of Signature’s assets, New York Community Bancorp picked up about $34 billion in customer deposits, down from the $88 billion that Signature had before the bank run, an indication of just how many customers fled the bank before regulators stepped in on March 12 to stem the bleeding.
Even with the sale of banking deposits to New York Community Bancorp, there are worries about whether other banks will fill the void left by the collapse of Signature.
New York Community Bancorp acquired about $12.9 billion in loans from Signature, the F.D.I.C. said, but most were business loans to health care companies and not part of Signature’s large commercial real estate portfolio. That means the F.D.I.C. still needs to find a buyer for Signature’s core commercial real estate loan portfolio.
A spokesman for the F.D.I.C. said that the organization “has not characterize the types of loans left behind” and that they would be “disposed at a later date.”
“I think this means that Signature’s commercial real estate portfolio is still up in the air,” Mr. Anderson of Trepp said.
An indicator that Trepp uses to measure the risk of default to loans held by banks on office complexes found that those facing the most distress were in San Francisco — where First Republic is based.
Banks are likely to cut back on lending to preserve capital in order to strengthen their balance sheets in anticipation of further Federal Reserve interest rate increases and renewed calls for regulators to get more aggressive in monitoring risk taking by banks. Any pullback in new lending could affect the start of commercial developments and push the economy closer to a recession.
As bank regulators work to stabilize the financial system, they will also need to keep an eye on banks holding too many commercial real estate loans in their portfolios — something that can create its own set of problems in a slowing economy.
A report late last year by Moody’s Investors Service, the credit rating agency, found that 27 regional banks already had high concentrations of such loans on their balance sheets. The report said the issue could become problematic for banks if the economy fell into a recession.
BCFSA rules on real estate agent’s $50K loan to client
A real estate agent who lent a client $50,000 so she could afford to make a deposit on a property in Richmond, B.C., committed professional misconduct by doing so, according to a provincial regulator.
The B.C. Financial Services Authority, which investigates real-estate-related complaints from members of the public, has concluded that Wei “Vicky” Wang’s loan constituted a conflict of interest, and that Wang had committed misconduct by failing to avoid the conflict and by failing to advise her client of it.
The BCFSA’s chief hearing officer Andrew Pendray issued his decision on the matter earlier this month. It was published online Wednesday.
In it, Pendray wrote that the evidence before him supported the conclusion that the $50,000 Wang provided was a loan, and thus a conflict, despite Wang’s arguments to the contrary.
Pendray’s decision came after hearings on the BCFSA’s fifth amended notice to Wang about the complaints against her from her former client.
All of the iterations of the notice centred on the client’s purchase of two homes – one in Richmond and one in Vancouver. Both addresses are redacted throughout the decision, as are the names of the client, her husband and other witnesses.
The loan related to the Richmond purchase, for which a contract of purchase and sale was executed on June 9, 2016, with a completion date scheduled for Oct. 4 of that year, according to the decision.
The agreed purchase price was $1,688,000, with a deposit of $90,000 – slightly more than five per cent of the total price.
Pendray’s decision indicates that Wang’s brokerage provided the BCFSA with two “receipt of funds records” relating to the deposit, one for $40,000 from the client’s account and one for $50,000 from Wang’s account.
The record for the $50,000 transaction included the note “loaning to the buyer temporarily,” according to the decision, and both Wang and the client acknowledged that Wang provided $50,000 toward the purchase of the Richmond property.
The real estate agent argued that the $50,000 she provided to her client should not be considered a loan because it wasn’t provided with the expectation of repayment with interest.
“When asked what she would call the $50,000 towards the (Richmond property) deposit, if it were not described as a loan, Ms. Wang indicated that she did not know, though she subsequently suggested that one could consider it to be a gift,” Pendray wrote in his decision.
“Ms. Wang stated that she and the client were friends, and that she had not thought much of providing the $50,000 at the time.”
Despite Wang’s suggestion that the money could be considered a gift, Pendray noted that she made efforts to secure repayment of it.
The money was wired back to Wang on June 29, 2016, after she and her client had exchanged WeChat messages about how and when she would be paid back, according to the decision.
In her defence, the decision indicates, Wang declined to say she had been repaid, insisting that the money had been “returned” in the same way one would return a car after borrowing it.
She also argued that the entire hearing had been unfair to her, submitting three times that it ought to be adjourned because the BCFSA had revised its allegations against her five times.
Pendray rejected all of these arguments, writing that Wang has “long known the nature of the allegations against her” and that there was “no unfairness in proceeding with the hearing.”
He concluded that both Wang and her client understood the $50,000 to be a loan, not a gift, and that Wang expected to be repaid.
“Even if I was to accept Ms. Wang’s submission that in order for the $50,000 to be considered a loan, it is necessary that the loan have been provided in exchange for future repayment plus something more, the facts of this case lead me to the conclusion that there was, in this case, something more,” Pendray wrote.
The chief hearing officer noted that Wang received a commission of $22,538.78 for her role in the transaction. She could not have received that amount, he concluded, if the client had backed out of the purchase for lack of funds.
“In order to receive that commission, the purchase of that property had to complete,” Pendray wrote. “In order for the purchase to ever have had the chance to reach completion, the deposit on the property, as required by the contract of purchase and sale, would have had to have been paid.”
Having concluded that Wang provided the client with a loan, Pendray determined that doing so was a conflict of interest under the provincial Real Estate Services Act, and that Wang had committed misconduct.
He ordered Wang and the BCFSA to make submissions on what sanctions Wang should face for her behaviour, with specific penalties to be determined at a later date.
Luxe $9m South Yarra sanctuary for sale with six-car basement garage
A winning collaboration by some of the best in the business has produced this luxurious modern sanctuary in a prized lifestyle location.
High-end builder Agushi teamed with celebrated Workroom architects and Nathan Burkett Landscape Architects on the private inner-city residence.
The four-bedroom, five-bathroom house at 12 Rockley Rd, South Yarra has hit the market with a $9m-$9.5m asking price.
Largely crafted from concrete – which even features on the sculptural curved staircase that links the home’s three levels – and marble, it delivers sophisticated interiors with carefully framed garden views.
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When at home, a mirrored lift, infinity pool with in-floor cleaning and a six-car basement garage provide the ultimate in convenience.
But it is the state-of-the-art automation that paves the way for a lock-up-and-leave lifestyle.
The technology has been a game-changer for vendor and interior designer Georgie Coombe-Tennant and her husband, Mark.
It has transformed the way they live, doing away with the need for front door keys and allowing them to turn on the oven remotely, let the postie in the gate while sitting on a ski lift or turn on the sprinkler from Europe.
“We had always had old traditional homes and renovated them, and we just felt like it was time for something modern,” Mrs Coombe-Tennant said.
“We saw Bear (Agushi’s) work and my expression for his work is that everything is so resolved.
“He has not left a single detail out of it. If you think of something you would need in a home it’s there.”
She has delighted in decorating the home, which she said offers loads of space despite having a townhouse feel.
“I found the home is so easy decorate and furnish because you have got this beautiful blank canvas and you can put any amount of colour or neutrality into in,” she said.
As well as three living areas and four bedrooms, the two-year-old home has the luxury of two home offices with desks crafted of the same grey Damastas marble that features in the lavish kitchen and bathrooms.
The main open-plan living zone screams entertainer thanks to a series of full height sliding doors linking it to a covered outdoor dining space with a built-in barbecue, a conversation pit and north-facing sun deck.
A second ground floor lounge room provides another breakout space, perfect for curling up beside the fire.
Despite its proximity to Chapel St and Toorak Village, Mrs Coombe-Tennant said the home felt secluded.
“I guess with South Yarra people are always worried about noise and things like that but it’s very, very quiet, it’s really secretive. No one knows it’s here,” she said.
“Once we are in that front door you don’t hear a single sound, but you have got everything on your doorstep.”
RT Edgar Toorak director Sarah Case added that it was rare to find homes of this calibre created specifically for a lock-up-and-leave lifestyle.
“This home has every luxury we’ve come to expect from Agushi, who’s renowned solid concrete construction, superior quality, generous spaces and meticulous attention to detail, while providing for a modern way of living with a lift to all levels, stunning pool and six-car garage,” Ms Case said.
“From the magnificent marble kitchen to the beautiful bedrooms and the poolside outdoor spaces, every aspect has been thoughtfully designed to meet the needs of even the most discerning buyer.”
Mr Agushi said he prided himself on building homes with “over specced” insulation, glazing, solar panels and smart home integration.
Expressions of interest close on June 15 at 5pm.
According the latest Proptrack Home Price Index, national home prices continued to stabilise in April after rising for the fourth consecutive month, rising 0.14 per cent.
LACKIE: Busy Spring in Toronto Real Estate
This has been a busy, bustling spring for the Toronto real estate market.
There are people who will say it’s all an illusion. A perfectly coordinated dance between snake oil selling realtors and their greedy clients, all unified in pumping a market currently back on its heels as means of personal enrichment.
How does that saying go — never let the truth get in the way of a good story?
They will say it makes no sense that the market should have any signs of life at all given the rollercoaster of the last 18 months (slash, the three years since COVID, if we’re being honest) and that with rates high and staying there, and prices still high and mostly staying there, we are looking at the furthest thing from a healthy marketplace.
And perhaps it’s all relative — things feel particularly energized because in comparison to last fall, we are actually seeing some action out there.
Houses in dodgy pockets fetching upwards of 20 offers, buyers seemingly undeterred by the needles on the street just steps away from the front door.
Cute houses in great pockets drawing multiple offers and landing peak-of-2022 prices.
Sellers who may have wondered if the time-was-now realizing they didn’t want to miss their moment.
There are many utterly baffled that the market has held. That prices have held. That the pain of 2022 didn’t reset the playing field.
They are adamant that any attempt to explain it by pointing to how grossly insufficient our inventory levels are is really just distortion and manipulation. The idea somehow being that people can be scammed into engaging and thus what we are really looking at is a mirage.
They think our problems will be solved if buyers simply stay home. Refuse to show up to houses that are underlisted. Refuse to engage in multiple offers. Refuse to pay a dollar more than list price. Refuse to pay realtor fees. Refuse to participate.
Legislate agents into listing at market value. Legally obligate sellers to accept any offer that meets the price they chose to list at. Cap realtor fees. The list goes on.
Absent from all of this is the reality very much apparent on the ground: for all of the noise and anger, Toronto has not enough houses and more than enough willing participants who are capable of driving a marketplace.
By this time next week, we will have stats to support that the spring market is very much here and with it I expect we will note a sharp increase in transactions and a notable bump to average sale prices.
Is it a seasonal blip that will fizzle out as temperatures rise? Entirely possible. But even just a return to some seasonal rhythms in our marketplace would be a welcome return to normalcy.
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