It's Been A Year Since Silicon Valley Bank Went Bust. Here's What's Changed For CRE — And What Hasn't

In the year since Silicon Valley Bank failed, the country’s banks have pared back loan origination to commercial real estate in the hopes of reducing their vulnerability to the problematic asset class. 

But extensions and modifications on existing loans have actually increased banks’ exposure to CRE in the last year as financial regulators warn of future losses, especially for smaller banks.

“Banks would love to get rid of some of those loans, but they're forced to stay in longer than they would like,” John Toohig, head of whole loan trading for Raymond James, told Bisnow.

The near-classic run on Silicon Valley Bank that resulted in the bank’s closure by regulators March 10, 2023, was followed by the failure of Signature Bank on March 12. In a three-day period, two of the country’s largest banks ceased operations, touching off a short but intense panic in the U.S. financial system that harkened back to the dark days of 2008. 

The federal government and the Federal Reserve managed to stabilize the wider financial system and stave off a crisis. But the banking system was shaken, and the conditions in property markets that had contributed to the banks’ problem were worsening. Interest rates kept climbing, and under-occupied office buildings held back their owners’ ability to service debt.

Banks responded by putting the brakes on CRE lending as their tolerance for risk fell through the floor. CRE loan originations were down 25% during the fourth quarter of 2023 compared with a year earlier, according to Mortgage Bankers Association data. 

“Credit standards across the board are tighter now than they were a year ago,” Toohig said. “I typically make the statement that they're frozen.”

Still, commercial real estate loans on the books of U.S. banks totaled $2.86T in January 2024, according to the Federal Reserve, up 3.2% from $2.77T in January 2023. 

The share of CRE loans held by smaller banks — the Fed defines those as banks not in the top 25 by assets, which, using the 25 largest U.S. banks as of December as a yardstick, means those with around $150B in assets or less — remained elevated throughout 2023. Those banks held $1.89T in CRE loans in January 2023, or more than 68% of the total. A year later smaller-bank CRE loan holdings were $1.99T, up to 69.5% of the total, according to Fed data.

Those figures reflect a kind of forced extend-and-pretend dynamic, according to Origin Investments co-CEO David Scherer.

“Their legacy loans aren't paying off through refinance or sale,” Scherer said. “It's circular. Banks need legacy loans repaid, but they only can be repaid if borrowers have access to more credit, which they don't.”

Legacy loans are simply loans that banks have carried on their books for a longer period of time as opposed to newer originations. 

Beyond pure risk aversion, banks also needed to contend with new realities, including a shifting regulatory environment and the need for larger pools of liquidity to hedge against trouble.

“Regulatory changes or guidance may have influenced small banks' lending practices, impacting their willingness or ability to originate new CRE loans while still maintaining existing holdings,” Yardi Matrix Manager of Business Intelligence Doug Ressler told Bisnow by email.

Banks also recognized the nuances between commercial property types that would allow them to keep lending in some situations while dialing back in others. Most property types and capital sources have experienced an annual decline, according to the MBA, but those drops are much steeper for more troubled asset classes. 

Office-associated originations essentially collapsed, down 68% for the year in Q4 2023, while multifamily was down 27% and industrial only 7%. However, banks have bet on hotels as the travel industry rebounds, with originations up 81% over the same period.

Some banks with concentrated office loans in troubled markets may face credit availability constraints for borrowers, Ressler said, noting that delinquencies on commercial mortgages backed by U.S. office properties hit 5.8% in December, the highest in nearly seven years, per Axios data.

“The poster child for the current moment is New York Community Bancorp, whose stock's been in free-fall since its January 31 earnings,” Ressler wrote on March 5.

Since then, NYCB has secured $1B in new equity and swapped out its CEO. But the bank’s troubles seem almost like a window one year into the past. NYCB’s situation, however, is tied to its 2023 failures, as the bank spent $2.7B on assets formerly held by the defunct Signature Bank. That connection, plus new rules NYCB had to follow as a result of its growth, created the perfect storm for rough seas.

“The circumstances that led NYCB to the point where it needed a billion-dollar equity infusion to shore up its finances are somewhat unique,” Ressler wrote to Bisnow on March 6, after news of the $1B lifeline broke. “NYCB had grown in recent years after acquiring Flagstar Bank and many of the assets of Signature Bank after it failed last year. The acquisitions pushed its assets over the $100B threshold, which subjected it to new regulations that required it to set aside more capital to cover for potential losses.”

Aside from diversifying away from troubled asset types, banks are adjusting their standards for granting loans to protect their balance sheets.

“The small banks have slowed their growth in some categories, and we have some clients who are precisely in that boat in terms of origination but are continuing to make loans to strong sponsors and those with cash-flowing assets that can handle a higher interest rate environment,” Thompson Coburn partner Simran Bindra said.

“The loan quality of what is being written is stronger, with the emphasis by the bank not on simply the opportunity to do a transaction and tout portfolio size, but rather making a renewed emphasis on loan quality,” Bindra said.

In a similar vein, banks are lending to preferred customers at lower loan-to-values, Scherer said.

“I've seen lending out at 50% LTV, maybe 55% or if you're lucky, 57%,” Scherer said. “In 2021 and '22, it was routinely 70% to 80% from debt funds, large banks and regional banks. Now you have to either fill in with equity or preferred equity, and preferred equity wants 12% to 15% returns. Equity wants what equity wants, right?”

Banks making loans now are “hyper-focused” on having a deposit relationship as well, Bindra said, which wasn't always the case for some years before SVB. The focus used to be on getting loans on the books and generating income from the spread and fees as long as they remain there.

“Post-SVB, deposits are king,” Bindra said, citing a recent incident he witnessed when a bank canceled a $4M line of credit with a customer who entered a borrowing relationship with another lender and thus moved its deposits.

“The minute they said they were moving the deposits, the old bank was like, ‘Yeah, we're not really interested in having a line of credit with you,’” he said. “The perfect loan for a bank now is, say, a $5M line of credit to a borrower who has made $5M worth of deposits.”

Banks’ pullback has also opened a new lane for nonbank lenders to step in even further, something that is likely to continue, experts say.

Private funds, for example, are much more active, according to Northwind Group Managing Partner Ran Eliasaf, whose expertise includes forming closed-end real estate debt funds.

“People say banks are on the sidelines, and it's true,” Eliasaf said, regarding the pace of CRE lending. “We're seeing many banks that are simply not lending.”

But the higher costs of nonbank financing will make the road to profitability a more difficult one for borrowers, according to Anchin partner Robert Gilman, co-leader of the accounting firm's real estate group.

“So you may find a fund or other lender at very high interest rates,” Gilman said. “Making money in a piece of real estate that you've owned for a long time is going to be very difficult.”