Dear valued existing investors and future investors,
It’s time again once again for CPI Capital’s weekly news briefing about multifamily related issues. This regular update contains a mixture of updates, commentary and informative related articles relating to the lucrative world of passive real estate investment.
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One of the biggest news items of the last week or so has been the demise of the Silicon Valley Bank (SVB). There have been concerns about possible contagion to other financial entities, with a possible knock-on effect to CRE and multifamily syndicated investment properties.
But, before we go further, as per my Co-Founder’s (Ava Benesocky) recent message, we wish to reiterate that CPI Capital has NO exposure to SVB and have never maintained any banking relationships with this bank.
Anyway, for those who don’t know, Silicon Valley Bank was a Californian based provider of financial services to technology and life science companies, investors and entrepreneurs. Its clients included some of the most innovative and fast-growing companies in the technology industry, such as Apple, Google and Amazon.
So, let’s take a more detailed look at the situation.
What happened with Silicon Valley Bank and what sort of loans did it handle?
The recent closure of Silicon Valley Bank (SVB) represents one of the largest bank failures in US banking history. The banking entity was a lender favoured by start-up companies but was closed after a surprise wave of deposit outflows.
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According to its latest 10-K filing with the Securities and Exchange Commission, SVB had approximately $2.6B of CRE loans on its books with some 35% of its commercial backed loans on multi-family properties and offices (around 21%). It also had $8.3 billion worth of loans secured by personal residence mortgages and about $138 million linked to home equity credit lines.
In addition, it held an investment securities portfolio containing $1.3B in qualified affordable housing projects, $14.4B in agency-issued commercial mortgage-backed securities and non-marketable and other equity securities worth $2.7B.
In late 2021, Silicon Valley Bank completed a $900M acquisition of Boston Private, a wealth management, trust and banking services provider with significant real estate investments, as part of its overarching mission to target innovation sectors including technology, life sciences and healthcare, and venture capital.
What are some of the CRE implications following the collapse of SVB?
Whilst the collapse of Silicon Valley Bank may have a significant impact on the technology industry and the broader economy, it could also have ripple effects on other sectors, including CRE investments.
CRE investments are a popular way for investors to diversify their portfolios and generate income. These investments typically include office buildings, retail spaces, warehouses and other commercial properties such as syndicated multifamily apartments.
Let’s, therefore, have a brief view of some of the possible implications for CRE:
- Office occupancy and usage: the collapse of SVB could lead to a decline in the technology industry, as many of the bank’s clients will struggle to secure financing and access to capital. In turn, this could lead to a decline in demand for commercial real estate, as companies scale back their operations and reduce their office space requirements;
- Retail and hospitality sector: the fallout from SVB could trigger a broader economic downturn, leading to a reduction in consumer spending and a decline in demand for retail and hospitality spaces. This could lead to a decline in the value of CRE investments, as vacancies increase and rents decline;
- Multifamily and BTR: the multifamily sector may well be relatively immune to the repercussions following the SVB collapse as, in any case, people still need somewhere to live. In fact, the multifamily sector may even benefit as some potential buyers switch to being renters plus, as another example, the number of retirees (a major demand driver for multifamily) will continue to steadily increase;
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- Financing for real estate: SVB was a major lender to technology companies and real estate developers and the bank’s absence as a lender may lead to a tightening of credit markets, making it harder for investors to secure financing for their projects. This could lead to a decline in new commercial real estate development and a slowdown in certain sectors of the industry. Whilst SVB primarily lent to venture capital and private equity firms, about 15% of its loans were to residential mortgages and commercial real estate and these loans will need to change hands;
- Interest rates: the Fed may undertake a major policy shift to guard against the risk of contagion and decide to pause or even reduce home mortgage interest rates at its March 21 st -22 nd meeting, although it is still likely to need to resume hikes when the short-term liquidity danger is past. Any short-term rate reduction would be a substantial positive for the property development and overall housing market. Indeed, more institutional investors may begin to look for better opportunities in real estate, which could cause downward pressure on cap rates.
CPI Capital is aware that any significant economic event has the potential to impact various aspects of the broader economy and commercial real estate investments, but is fully cognisant of potential risks and always makes informed investment decisions.
Yet, in the case of SVB, liquidity is not the only factor in the continued success of the multifamily and BTR CRE sectors. Due to underlying strong demand and a relative supply shortage, to name but two things, even though access to liquidity may be affected for a limited time, multifamily will continue to yield attractive investment returns for passive investors.
In addition to the above, CPI Capital believes that the Fed will do its utmost to prevent any contagion and associated fallout, and the current crisis will accordingly pass.
CIO, Co-Founder CPI Capital