Could The Silicon Valley Bank Collapse Contaminate The Real Estate Market?

Last Friday, the world gasped as one of the tech industry’s most prominent banking institutions, Silicon Valley Bank (SVB), collapsed under $175 billion in uninsured deposits. This monumental financial failure has only been surpassed in scope by the folding of Washington Mutual, which swiftly led to the financial crisis of 2008. And while we recently learned the government has stepped in to service SVB’s debt, many markets are holding their breaths.

In terms of the real estate market, this kind of collapse evokes extreme cases of PTSD. In fact, the same kind of monetary recklessness that tanked SVB led to a global housing crash in 2008. Only instead of dealing in mortgage-backed securities like Lehman Brothers and Bear Stearns, SVB dealt in trash treasury bonds.

The fallout from this failure is already affecting other institutions. In fact, just days after SVB collapsed, New York’s Signature Bank went under. Unfortunately, we can only speculate what all this will amount to in terms of the real estate market but we did some digging and spoke with an expert to gain some perspective.

The Long And Short of Silicon Valley Bank

SVB is perhaps the largest commercial bank serving today’s tech and start-up economy. With a reported $212 billion in assets in the fourth quarter of 2022, this bank was a behemoth among the world’s wealthy tech sector. They invested in businesses, serviced payroll, and helped many venture-backed startups capitalize on growth opportunities. Unfortunately, they were also in the business of investing in treasury bonds.

Following the pandemic, treasury bonds were super attractive as interest rates were at all-time lows. To increase profits, SVB purchased a ton of these bonds in 2021 and 2022. Then, the Fed began its notorious campaign to increase interest rates. As interest rates went up, treasury bond values dipped lower and lower.

Eventually, SVB had to offload these bonds. It got out that the bank took a $1.8 billion hit on the sale of some of those securities and the panic was on. Businesses lost faith in SVB and a bank run ensued. SVB did not have the capital to cover their depositors’ requests, so the government stepped in and shut them down.

An Insider Perspective

A veteran business owner in the Silicon Valley stratum, Dallas native Sam Sawyer has kept a close eye on this collapse. Sawyer is the founder and CEO of Pinnacle Realty Advisors and has a unique perspective from both the real estate and prop-tech markets.

“The crazy thing to me is the amount of companies that used this bank,” Sawyer said. “We thankfully weren’t affiliated, but it’s amazing how many of my friends and their business across San Francisco and even Austin had ties there.”

With the sheer number of businesses involved with SVB, it’s difficult to know how far these impacts will reach.

“I think it’s good that the White House is going to protect the depositors,” Sawyer said. “However, there’s going to be a lot of unknowns with many businesses. SVB has a few billion dollars worth of loans in real estate, both commercial and residential, so who knows what will happen with those? Also, a lot of the big prop-tech companies use that bank for credit facilities to finance properties or other needs. It’s definitely sending a shock through the industry. I can see many companies rethinking how they do business. Also, there will probably be a lot higher risk aversion going forward.“

Sawyer is especially concerned because of how connected everything is with banking today.

“I know it’s fine today,” said Sawyer. “But I do think there will be consequences in some form or another.”

As for the real estate market itself, he remains optimistic.

“I was reading yesterday that SVB has something like $5 billion in outstanding loans on actual real estate properties,” said Sawyer. “I’m sure someone will buy some of those loans. I don’t worry about this really, really impacting real estate. Since the majority of their customers were commercial, I don’t see this having a huge impact on consumers or mortgages.”

This collapse could even have other positive implications for the broader real estate market. Since this was caused in part by the Fed’s super-aggressive interest rate increases, Sawyer believes the collapse could give the central bank pause.

“There’s so much shock in the system right now,” said Sawyer. “If they keep raising rates, it will make people even more uneasy. So, you may see rate increases slow down. That could actually be a good thing for the real estate market.”

The Lesson

No matter what happens from here, this historic financial failure should serve as a reminder that even the biggest institutions aren’t immune from bad business decisions. If we learned anything from 2008, it’s that the “too big to fail” philosophy only benefits a very small number of people.