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And just like that, two critical sources of financing for Greater Boston development projects – not to mention up and coming startups – bit the dust.
The tremors from the collapse of Silicon Valley Bank and the near (as of this writing) collapse of First Republic in March triggered a wave of banking sector turmoil that has prompted many more area lenders to pull in their horns and cool financing for real estate projects.
And developers, faced with tougher credit standards, higher interest rates and a tightening up of loan availability, are pushing off plans to start construction, either because they can’t get the money they need or can’t get it on the terms that justify the risk.
“A year ago, [developers] would have been going as fast as they could to get a shovel in the ground,” said James Kirby, president and CEO of Commercial Construction Consulting in Boston. “Now they are just holding off until the time is right, and that will be many months from now.”
Chain Reaction
While both banks were based in California, Silicon Valley and First Republic had built up large bases of business in the Boston area.
Silicon Valley Bank, which was taken over by the feds in March, had built up a sizeable loan portfolio of clients in the life sciences and medical device sector and helped provide crucial dollars to startups and other up and coming companies.
SVB was also a significant source of financing of affordable housing projects in the Boston area as well, having taken on a big lending portfolio in this sector after its acquisition of Boston Private Bank & Trust. First Citizens, the North Carolina regional bank that ate what remained of SVB, has made encouraging statements, but its intentions in this department are still a mystery despite prodding from nearly the entire Massachusetts congressional delegation.
However, SVB’s sudden demise after fatal errors by top management in hedging interest rate risk not only resulted in the demise of a major player in the local lending market, but it triggered a chain reaction that came close to taking down First Republic, another lender that has had a significant presence in the local development scene.
First Republic lost $100 billion in deposits during the first quarter in the wake of the collapse of the now notorious Silicon Valley Bank. In fact, First Republic would very likely have joined SVB in the graveyard of defunct financial institutions but for the $30 billion rescue effort mounted by banking giants like State Street and JPMorgan Chase
Now the bank is clearly in survival mode, with plans to jettison office space and lay off as much as 25 percent of its employees in the months ahead.
Last week’s bank earnings reports confirm: It’s going to be a long wait before development projects will be able to find ready financing again. iStock image
Big Local Players Benched
In the wake of these twin disasters, other small- and mid-sized banks, like Cambridge Trust, Eastern Bank and Providence-based Citizens Financial Group, have also seen a drop in deposits while also paring back their exposure to the commercial real estate market.
Total deposits fell at Cambridge Trust by $158.6 million in the first quarter, or 3.3 percent, while Citizens saw a $4.6 billion/, or 2.6 percent, drop in deposits.
Citizens also boosted to $274 million its stockpile designed to cover for bad loans in its $4.1 billion portfolio of office market loans.
Most dramatic of all, Eastern Bank said late Thursday it saw deposits fall roughly 2 percent, or $432 million, while also recording a $194.1 million loss after selling securities in order to raise cash.
Needless to say, all three banks will clearly be taking a more cautious approach to financing new development projects, and, if anything, will be looking to cut back on their real estate market exposure.
“You are right in thinking the recent banking crisis has further tightened the credit available for commercial real estate,” said Aaron Jodka, director of research for U.S. capital markets at Colliers.
Megabanks Not Eager to Jump In
Meanwhile, the nation’s largest banks – think of Bank of America and Wells Fargo – have seen their deposits swell as wealthier customers and companies have moved accounts away from medium and smaller banks perceived as riskier in the wake of the SVB mess.
Scott Van Voorhis
But these megabanks, which were already cautious about commercial real estate lending pre-SVB, are hardly going to be rushing into the sector now as the spike in interest rates and stalling growth raise fears of a recession later this year, according to Jodka.
As for developers, they are increasingly pushing off groundbreakings and playing for time. While money is still available, financing terms have become increasingly unattractive, with development firms forced to put down more than 40 percent or even 45 percent equity – up from 30 percent last year, he said.
That, in turn, is making it harder for deals to “pencil out,” with some developers “slow playing it to see how the environment shakes out,” Jodka said.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
