Buckle Up For A Bumpy Ride After Collapses In Banking
March 23, 2023
Recent bank collapses prompted subdivision bond expert Jeff Smalling, of Merchants Specialty Solutions, to look at likely effects on the real estate industry. Here are 3 potential outcomes to prepare for:
Lending Could Contract
Bank lending to the real estate industry could contract in the fallout from the collapse of Silicon Valley Bank and Signature Bank. “Banks are likely to respond by lending less, and this is not a good thing for real estate,” according to Susan M. Wachter, Wharton School of Business professor of real estate and finance. “Regional banks have a disproportionately high exposure to real estate in their respective regions— the repercussions of a pullback in lending could be severe. However, 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.
Development Starts Could Slow
Any pullback in new bank 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 keep an eye on banks holding too many commercial real estate loans in their portfolios. Moody’s Investors Service has found that at least 27 regional banks already have high concentrations of such loans on their balance sheets.
Fallout For Contractors' Financing
“Contractors can expect tightening from small and regional banks”, said Greg Ross, industry managing partner at Grant Thornton, a Chicago-based accounting firm. “It’s important for construction companies to build cash reserves and maintain a certain level of liquidity. Current strong construction classes like multifamily, warehouse, industrial and storage could see some slowdown due to rising interest rates, investor skepticism and banking tension,” said Ross.
Accordingly, current development plans should contemplate a potentially bumpy ride until economic conditions allow for a more normalized focus on residential and commercial infrastructure needs.
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