Do bank failures equal a commercial real estate liquidity crisis?
Over the last few weeks, the news of SVB and Signature Bank being taken over by the Fed, and continued speculation and concern about First Republic have dominated headlines and discussions throughout the financial and real estate sectors. The Fed’s action stemmed the type of quick financial panic that occurred frequently and repeatedly prior to its existence, but many questions remain. Of particular relevance for NYC property owners is how big a void has been created in the marketplace for NYC real estate debt.
So far, the situation in commercial real estate lending mirrors the anecdotal saying about the difference between a recession vs a depression: it depends on the particulars of your situation. Though there have been pullbacks by many lenders, there are also large flows of new funds into that void, and as of early April 2023 Avison Young can report and are demonstrating that there is liquidity for every type of New York City real estate transaction across all deal sizes, property types, and locations. For example, in February-March 2023 Avison Young’s New York City office has closed loans, received formal committee approvals, and received new term sheets on existing office, parking, retail, and multifamily buildings, as well as for acquisition, predevelopment, and construction of luxury condos – as well as closing the sale of multifamily properties and development sites in Manhattan, Queens and Brooklyn.
Are we suggesting the current concerns are overblown and the situation is easy? Absolutely not. Can every property receive the financing it wants? Certainly no. There has been a meaningful pullback by many lenders, creating difficult challenges for many borrowers. Community banks continue to see deposit outflows with some depositors continuing to transfer funds to larger banks despite the newly strengthened (implicit or explicit) FDIC guarantees, CMBS volatility is the highest in recent years, and even the largest banks are feeling stress from regulatory and other constraints resulting from inflation and other challenges.
What is the result, and what can borrower/owners do?
Although The Fed has signaled that the FDIC will likely step up to backstop any bank that faces a run that could set off a true financial panic, there are future implications for CRE lending. Rapid increases in interest rates put pressure on loan sizing because of Debt Service Coverage Ratios constraints, and a big question for the sales market is what effect smaller loan sizing will have on purchaser’s valuations – with many forecasting cap rate expansions. In fact, the ability to execute new financings is in many cases reliant upon a borrowers’ willingness (or ability) to pay down their existing loans, or to provide recourseto secure refinancings at existing balances – two outcomes rarely seen since the Great Financial Crisis.
What can borrowers or owners do? The good news is that despite the many headlines claiming a “liquidity crisis” for commercial real estate, there is still substantial liquidity in the market. Even if the community banks continue to step back, numerous other sources including regional and national banks, insurance companies, investment funds and (depending on the week) the CMBS market are there to fill the void.
The cost of borrowing is up, and the sizing of loans is down – two facts which hurt all borrowers. The difference between whether this environment looks like a recession, or a depression, often plays out in the question of whether a borrower and their brokerage concentrated their activities on only a few local banks that are now pulling back or maintained a broad set of relationships which can now be called on for the creativity to solve current challenges. It is important to remember that although Signature Bankand New York Community Bank were major players, a wide mix of other lenders with both household and lesser-recognized names provide enormous amounts of the total available capital for NYC real estate loans.
The key in this environment – for both financing and sales transactions – is to cast a wide net. Those borrowers who had only a short list of “go-to” relationship lenders could benefit greatly by expanding their horizons by working with an intermediary that has strong relationships with both traditional and non-traditional capital sources, and especially a firm that has both financing and investment sales capabilities.
Avison Young’s Tri-State Debt & Equity Finance Team is currently in the New York City market with over $2 billion of mandates and, as noted above, through creative solutions and a wide breadth of capital relationships, has generated multiple offers on each assignment from a variety of different capital sources. For owners who would prefer to explore the sales market, Avison Young’s Tri-State Investment Sales Team has a wide group of active buyers including some who are differentiating themselves by buying properties all-cash, isolating themselves from the challenges facing leveraged owners/buyers.
This was certainly the case for a corner Broadway property that Avison Young sold in SoHo to an all-cash Swiss buyer. 1031 buyers have also been a great resource who can come in heavy with equity. The simple reality when selling, now more than ever, is to go broad as the first few calls to “logical” buyers, may not yield the proceeds needed to make a sale.