The recent collapse of the California-based Silicon Valley Bank sounded the alarm for investors across America– especially those based in the commercial real estate market. Shortly after, Americans saw the First Republic Bank and Signature Bank implode, both known for lending to builders, office building managers, and other commercial properties.
According to The New York Times, these specific banks were big players in the market as banks typically “package loans they into complex financial products and sell them to investors, allowing the banks to raise more money to make new loans.”
When these banks pull back on their lending, it influences how investors and commercial developers proceed with projects. Altering this pattern has major ramifications as $2.3 trillion in the American economy comes from commercial real estate ventures. Borrowers may become more conservative when they loan their money while commercial projects will become a standstill – halting profits and jobs in the construction industry.
Why The Pullback Matters
This pullback isn’t only impacting First Republic or Signature, smaller banks across the U.S. will have to constrain their loans – potentially limiting economic growth overall for Americans. This is especially devastating as the commercial real estate sector is tackling other hurdles such as inflation.
This pullback isn’t only impacting First Republic or Signature, smaller banks across the U.S. will have to constrain their loans – potentially limiting economic growth overall for Americans. This is especially devastating as the commercial real estate sector is tackling other hurdles such as inflation, the growth of remote workers, raising interest rates, and lingering effects from the pandemic.
Unfortunately, this isn’t a new pattern. Loan officers started to report tightened of lending at the end of 2022 as regular consumers and tech startups were in greater need of cash, as reported by AXIOS. The recent failure of Silicon Valley Bank will only expedite the process of real estate loans. As lending restricts, it will have an impact on regular consumers and the real estate market as a whole, so commercial real estate developers will have to wait with bated breath to measure the response from these consumers and how we can adapt to their needs and still create our projects.