You've probably been hearing about the recent bank failures, both domestically and internationally, and like many others, you might be wondering…
"What does this mean for the real estate market? Should I get out now while I still have a chance?”
And today, I want to share my perspective on this issue in a short and easy-to-read blog post.
Let’s jump right in!
The Silver Lining From Silicon Valley Bank’s Collapse
First, let's establish one thing: bank failures inevitably create volatility. There's no way around that. But let's also appreciate what the Federal Reserve and the government have done RIGHT in the face of this crisis.
For instance, the Fed's decision to allow banks to borrow against their securities, even as their value fell, was a game-changing move that offered a much-needed liquidity boost.
I mean, imagine if this provision had been in place before Silicon Valley Bank had to sell its securities, taking a $2 billion loss that triggered a bank run.
That loss was the result of a desperate need for liquidity, something that would have NEVER been a problem if they could have borrowed from the Fed.
But now that provision is in place, I don’t think we’ll run into an issue like that again moving forward… which is a major sigh of relief. So, yes, bank failures have caused distress, but this one has shown us how much the Fed knows they have to act quickly.
FDIC's Assurance and the Fight Against Inflation
And then there's the FDIC…
In an impactful move, the FDIC assured depositors that despite the $250,000 insurance limit, their deposits were 100% safe and would not be lost. This statement not only calmed people’s fears but also almost completely eliminated the risk of more bank runs.
Now, let's shift our focus to the Federal Reserve's role in fighting inflation by raising interest rates. This move is essentially about managing demand (because they don’t have tools to control supply).
Higher interest rates lead to reduced asset values in some sectors like office buildings (and even multifamily), and, by extension, lesser buying power for people. So this reduction in buying power, in theory, should help to curb inflation!
How Tighter Credit Standards are Helping
The banking world, in response to the failures, has begun tightening credit standards, making borrowing more of a challenge. While this might seem unfavorable at first glance, it's actually helping to control demand, indirectly assisting the Fed in its fight against inflation as well!
Looking Ahead: What's Next for Banks and Multifamily Real Estate?
In my view, the banking crisis is largely behind us. Of course, we need to keep an eye on smaller banks that have a significant portfolio of office loans. Because it looks like the office space market is due for an adjustment… which could put these banks under stress.
Similarly, some multifamily deals could go sideways if they're not able to refinance due to insufficient cash flow to make higher interest payments.
So, what am I getting at here?
Stability.
In the end, what matters most to us as investors is a stable environment. Stability allows us to plan, to go under contract, and to secure loans without the fear of dramatic shifts in interest rates while we are trying to close a deal.
Wrapping Up: Staying Optimistic Amid Challenges
In conclusion, yes, the recent bank failures have caused ripples in the financial and real estate markets. However, they've also instigated changes that, in the long run, could lead to a more stable and disciplined lending environment.
So let's not lose sight of the opportunities this could present for us as multifamily investors. This is the time to stay informed, stay vigilant, and, above all, stay optimistic about the future of multifamily real estate.
After all, every crisis brings with it the seed of new opportunities, and this banking crisis is no different.
