If Regional Banks Continue To Fail, Commercial Real Estate Investors Can Plan On Fewer And More Expensive Loans

The overriding consensus is that the country's regional bank liquidity crisis, though presently stabilized, is far from over. Regional banks are losing deposits to the big banks while attempting to shore up their loan issues, much of which is being blamed on the commercial real estate (CRE) sector. 

But who will be there for future CRE loans if regional banks begin to disappear from the landscape?

After the failures of regional entities Silicon Valley Bank (SVB) and Signature Bank, among others, American Banker wrote this week that the regional liquidity crisis “for some small, mid-size and regional banks could take years to resolve, leading to further upheaval and consolidation in the banking sector.”

CRE loan-weighted banks are believed to be most at risk, with software and CRE advisory service company Altus Group reporting that smaller bank lenders account for 67% of all CRE lending, up from approximately 56% five years ago.

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So what happens when the regional or small bank CRE loan options become few and far between? 

“It’s going to be a great opportunity for stronger regional banks,” Altus Director of Research Omar Eltorai told Benzinga, adding that with fewer banks to offer loans, interest rates will continue to climb. “I foresee a far less competitive market for financing, and the borrowers are going to feel it.” 

Small and regional banks, because of mergers and acquisitions and some failings, have shrunk nationally from 18,000 in the late 1980s to less than 5,000 today, and that number could grow smaller by the end of the year. 

“We are not through with bank failures,” Berkshire Hathaway Chairman Warren Buffett told CNBC. “Dumb decisions” by bank managers shouldn’t be “panicking the whole citizenry of the United States about something they don’t need to be panicked about.” 

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Eltorai says those following the status of regional banks should not have been surprised. By looking at loans and overall liquidity, he said most people could have predicted this was coming long before the SVB fail. 

“Even if you had asked me before February, I would have said, absolutely, we can expect regional and community banks were going to start closing.” 

With the expected failure of more local and regional banks to come, some are worried about the loss of institutions invested in their areas. 

“The big national banks are operating in the global capital markets,” banking expert Robert Hockett, a professor at Cornell Law School, told The New York Times. “A lot of their assets are based on speculation. They’re not fueling economic growth. They’re not funding new companies. Or farms. You need patient capital for that, and capital at the Big Four (banks) is not patient.”

Eltorai is also concerned that the regional CRE loans are being viewed with a broad brush and are not necessarily the evil they’re being painted as. 

“It’s unrealistic to believe that all of these assets are bad. I think the market tends to overreact to the ups and the down,” he said. “I don’t think there is a really strong case to be made that all of these assets are impaired. But fear and panic lead to actions that compound and add pressure to these banks. It becomes a vicious cycle.” 

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