The Collapse of Banks and Its Repercussions on Venture Capital and the Property Technology Industries 2023

When Silicon Valley Bank and Signature Bank collapsed, commercial real estate businesses and venture-capital organizations must consider a decline in residential mortgage rates, a pause (or cut) by the Federal Reserve at its March 22 meeting, and the need for fresh letters of credit.

According to its SEC 10-K filing, SVB has $2.6 billion in CRE private bank loans.

According to its 2022 annual report, Signature has $35.7 billion in multifamily, commercial property, acquisition, development, and construction, and home equity lines of credit.

Institutional Investors Seek Greater CRE Opportunities

Middleburg Communities’ chief economist and director of research, Brad Case, Ph.D., CFA, CAIA, tells GlobeSt.com that Silicon Valley Bank’s collapse “has upset” the Federal Reserve’s plan to raise interest rates to fight inflation, “but they’ll have to resume hikes when the short-term liquidity danger is past.”

“We expect interest rates to start dropping (from the anti-inflation high) towards the end of this year,” he added.

Case says the stock market is overpriced and real estate values have fallen despite high NOI growth.

He predicted that institutional investors will seek better real estate possibilities, lowering cap rates.

30-Year Mortgage Rates May Decrease

Al Otero, portfolio manager at Armada ETF Advisors, tells GlobeSt.com that the collapse of SVB and reports over the weekend that the Fed will undertake a major policy shift to guard against contagion have sent interest rate markets into a tailspin, causing rates across the yield curve to rally and an expectation that the Fed will pause raising the funds rate at its March 21-22 policy session.

“We might see a large fall in mortgage rates moving into the spring sales season, which would be a substantial benefit for the home market,” Otero added.

Monday afternoon Mortgage News Daily quoted 30-year fixed rates at 6.57%.

PropTech Released Last Week

This week, multifamily laundry startup Tumble withdrew its funds from Silicon Valley Bank.

CEO and creator Scott Patterson says it has little visibility.

Patterson said Tumble is in good shape. “Our investors and multifamily network have helped us advance swiftly. I congratulate the Fed and FDIC for quickly backing depositors with the fund set up during the Global Financial Crisis (GFC).

Patterson said Tumble’s diversification worked effectively since startups often diversify banks because to the range of goods supplied.

Patterson said he hopes a larger bank would acquire SVB’s skills, contacts, and risk profile.

He claimed money flows swiftly. Panic exacerbated last week’s events. Every organization will evaluate banks holistically, from interest rates to risk profile.”

VCs Must Rethink One-Bank Relationships

Moderne Ventures, a strategic venture capital firm with $450 AUM, invests in real estate, banking, and insurance technologies. Liza Benson is a partner.

“It would be impossible to find a venture capitalist without a portfolio business that was banked by SVB,” said Benson, whose minority portfolio was banked by SVB.

“The Fed’s weekend steps were required to avert bank runs at regional and technology-focused banks that could have produced a much bigger contagion. The government-insured all deposits, which we appreciate.”

Benson said all venture capital firms are reconsidering putting all cash at one bank.

“Many loan arrangements with banks mandate you just have that one account,” she noted.

“There will be increased volatility and a flight to quality. Moderne will invest in the top real estate technology firms.

‘Push On’ PropTech

ReWyre Co-Founder and CEO Rasheq Zarif told GlobeSt.com that SVB supported and accelerated American innovation. Zarif said it helped several firms succeed.

“SVB is not the sole ingredient to proptech success. Proptech will continue due to a rising need for sustainability and the digitalization of outdated real estate lifecycle processes and systems.

‘This Too’

Proptech venture capitalists think it won’t matter.

Morris DeFeo, Chief of the Corporate Department at New York law firm Herrick, Feinstein, tells GlobeSt.com that the collapse of SVB, the second largest US bank failure and one of the few since the 2008 financial crisis, may temporarily harm IT businesses’ liquidity.

“However, it is highly unlikely to make any meaningful damage unless it were to expand to the banking industry much more extensively, which seems very improbable,” DeFeo added. Few banks have tech-focused risk exposure like SVB.

“I have no doubt that some tech company shareholders and board members are reaching out to management with varied degrees of apprehension, but this too will pass.”

Requesting Secondary Banking Partners

The regional financial crisis will affect all US venture-backed firms, according to Alpaca VC founder and managing partner Ryan Freedman.

We are helping our founders meet payroll and other short-term liquidity needs while encouraging them to find a strategic secondary banking partner.

Freedman said commercial banking will change.

“Bank balances will be retained for working capital and cash will be managed with effective treasury management using custodial money markets, treasuries, and short-term paper,” he stated. This competence is rarely considered in early-stage organizations, but it will become a basic operational procedure for all companies.

Need Fresh Credit Letters

Tony Natsis, senior partner of Allen Matkins and leader of the global real estate group, tells GlobeSt.com that SVB is the principal bank for deposits, lines of credit, and letters of credit for many smaller tech and life science tenants.

“As such, the freezing of those deposits and instruments by the FDIC, and the possibility that the FDIC will not honor lines of credit and letters of credit (although they announced last night that they would honor deposits) has put those entities in the very awkward situation that they may not be able to make payroll and that their letters of credit that they issued in connection with lease transactions for the landlords may no longer be valid,” Natsis said.

“And they will have to replace those letters of credit with letters from a new banking arrangement, which would demand extra liquid collateral that they may or may not have.

“It’s a major operational and lease and occupancy issue for those entities.”

No Rent Money?

Natsis said landlords may not have enough money to pay basic rent.

He said it may force a landlord’s lender to become engaged in a building’s immediate cash flow and create a loan default since the landlord can’t pay debt service. So, tenants, tenants’ workers, landlords, and lenders may suffer.

Natsis said that “undoubtedly,” such companies will seek to bank with more traditional mega banks that stand an almost non-existent chance of failure due to their banking philosophy and platform and because the FDIC would never take them over because it would have a massively profound effect on the US economy in many ways.

“Also, landlords and their lenders will, surely, not take letters of credit from institutions they cannot underwrite very well and/or are not megabanks,” Natsis added.

‘Faster to Profitability’ Proptech Firms

Home365 Co-Founder and Chief Investment & Growth Officer Chad Gallagher told GlobeSt.com, “The SVB collapse impact for proptech firms was reduced when the Fed rushed in to safeguard ALL deposits. Before that announcement, the tech ecosystem, including proptech companies, would have suffered from the loss of much-needed cash and the major VC funds that funded them.

Because the Fed rushed in to safeguard all deposits (both under and over $250,000), we foresee minimal to no impact on the PropTech community overall.”

Gallagher believes proptech businesses will move quicker toward profitability and make less losses after the SVB crash.

“Profitability is not a negative thing though; it ultimately makes the ecosystem more safe for the long-term,” he remarked.

Relationship Dependence

Dealpath CEO and Co-Founder Mike Sroka tells GlobeSt.com that Silicon Valley Bank’s failure has highlighted the risks of investing in short-term deposits in fixed-rate securities and how digital bank runs may happen at scale.

“It serves as a strong reminder of the high importance of dealing with vendors who are well financed, supported by industry leaders, with trustworthy and varied banking partners, and who have solid business momentum,” Sroka added.

Regional Banks Matter

JLL president of financial services Bobby Magnano tells GlobeSt.com that JLL is studying its effects on commercial real estate and the financial services business.

“As we turn to maintain business continuity in support of our clients during this interruption, we are conscious of the customers and small companies across the country who have been affected this week,” Magnano added.

Regional banks enhance our economy by giving diversity and value to clients and financing to smaller firms, notwithstanding the current turbulence. We hope the mechanisms will contain the crisis and give remedies. We’ll keep you posted.”