Bank lending to the real estate industry could contract in the fallout from the collapse of Silicon Valley Bank and Signature Bank, according to Susan M. Wachter, Wharton professor of real estate and finance. Immediately, worries are running high over both the state of residential and commercial real estate loans advanced by the two failed banks, and the office space the two banks would vacate as they wind down operations. Those concerns were contained in the case of First Republic Bank, which also looked precarious until last Thursday when it secured a pledge of $30 billion in deposits from a group of 11 banks that included Bank of America and Citigroup.
“Banks are likely to respond to their investors’ distress by lending less, and this is not a good thing for real estate,” Wachter said last week on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the full podcast above). But with banks like First Republic being rescued and SVB’s depositors being made whole, the worst outcome — an economy-wide credit crunch — could be avoided, she says. On Tuesday, bank shares rose when Treasury Secretary Janet Yellen said that the government would take additional steps to shore up smaller banks if necessary.
Bank investors have grown anxious about real estate lending for two big reasons. First, as Wachter noted, regional banks have a disproportionately high exposure to real estate in their respective regions — the repercussions of a pullback in lending could be severe. Secondly, commercial real estate lending has turned unattractive with rising vacancies in the office space sector triggered by layoffs in the tech industry.
According to Wachter, if the economy goes into a recession, mortgage rates will fall. “That’s usually the beginning of a healing process, where buyers can come back into the market,” she said. But for that to happen, “we also need the underlying inflation rate to resolve, and that’s a bigger issue.”
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