The simple answer is a resounding- YES!
The failure of Silicon Valley Bank (SVB) and other regional lenders may have a jarring effect on the multifamily market in general. In short, it will likely raise interest rates on commercial real estate loans. As interest rates rise, price or yield will fall. What I mean by this is that when the rates go up, money gets more expensive. When that happens you will make less profit/cash flow per deal or you will pay less for that deal (price decline).
My point is that I predict prices or profit (from real estate) to decline in the near future, and this will be hyper accelerated by the recent collapse of a few regional lenders. To understand the reason for this we need to look back a few years.
Inflation was rising at record levels and most regional banks were having large amounts of depositor’s money flowing into their accounts. This created an interesting situation. They had more money than they could lend so the banks invested the extra cash into government bonds and commercial mortgage-backed securities (CMBS). These are long term investment vehicles that pay a set rate of return. The key here is that they pay a SET rate of return based on the market interest rate that was applicable when the security was created.
This is not a problem if the current market interest rates don’t rise much more than the rate that is being paid out on the securities. If the current market interest rates rise above the rate set on the original security (bond, mortgage, CMBS, etc.) the value of the security will fall. The value falls because a new investor could just invest in a new security paying the new market rate. This means the value of the old security falls. Not a problem unless you are forced to sell.
The two most recent bank failures (SVB and Signature Bank) both had large amounts of these securities on their balance sheets. As the rates rose the values of those assets fell. This would only create a loss on paper… unless the bank has to sell the asset for cash when the value is down. Then the loss becomes real. That’s what happened to the failed regional lenders.
These institutions were forced to sell their assets at a loss to generate real cash to give their depositor who demanded their deposits be returned “en masse”. That’s a bank run.
The way this may affect the apartment investing industry will be due to a lack of investment liquidity at the local and regional lending level. Its simple supply and demand. If the lenders don’t have the cash (or desire) to lend on real estate… the rates for those types of loans will go up. If rates go up… price or cash flow drops. Which will it be?
