Signature, SVB and First Republic CRE loan books’ fates remain opaque

Government and bank intervention has raised questions over the future of affected real estate debt.

The simultaneous turmoil of Silicon Valley Bank, Signature Bank and First Republic Bank is making immediate waves in the commercial real estate debt landscape and forcing the industry to prepare for any potential residual effects.

The fast-evolving situation kicked off with Silvergate Capital Corporation’s announcement on March 8 that it would wind down and liquidate Silvergate Bank. The turmoil gained speed March 10 with the shutdown of Silicon Valley Bank and its subsequent takeover by the Federal Deposit Insurance Corporation in what is now the second-biggest bank failure in US financial history. By March 12, Signature Bank was being shuttered by the FDIC.

“It was a classic bank panic,” said Marc Norman, associate dean of the Schack Institute of Real Estate at New York University School of Professional Studies. “Unlike 2008, it’s not about the real estate, it’s not about the asset; it’s just the difference in Treasury rates and a real bank run.”

On March 16, a consortium of some of the largest US banks went all-in on a $30 billion joint rescue plan orchestrated alongside the US Federal Reserve for the similarly-troubled First Republic Bank in an attempt to signal confidence in the system at large.

Bank of America, Wells Fargo, Citigroup and JPMorgan Chase contributed approximately $5 billion each; Goldman Sachs and Morgan Stanley each committed about $2.5 billion; and Bank of New York Mellon, PNC Bank, State Street, Truist Bank and US Bank each prepared an estimated $1 billion for the First Republic plan.

Signature received additional FDIC support March 19 by entering a purchase and assumption agreement for substantially all deposits and certain loan portfolios with New York Community Bancorp subsidiary Flagstar Bank. Absent from the deal was Signature’s commercial real estate portfolio alongside its credit card business and cryptocurrency arm Signet.

March 19 also marked the day UBS unveiled its plans to acquire Credit Suisse for 3 billion Swiss francs ($3.25 billion) after the latter Swiss institution needed saving from its own banking crisis.

“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” said UBS chairman Colm Kelleher. The discussions were initiated by the Swiss Federal Department of Finance, FINMA and the Swiss National Bank, notably.

Debt exposures

The flurry of regional bank collapses and rescue activities called immediate attention to each entity’s commercial real estate financial holdings, especially Signature, First Republic and SVB’s in the US. The trio have all been prominent and active regional banks in the commercial real estate lending sphere in recent years, even as some of the largest national banks dialed back activity with the 2022-initiated interest rate increases.

As of 2022’s end, Signature’s commercial real estate loans totaled $33.1 billion per its annual report and were concentrated in multifamily assets, commercial assets and loans linked to acquisition, construction and development financings. SVB maintained $2.6 billion of commercial real estate secured loans in its portfolio as of December 31, 2022, according to company filings.

As part of the FDIC’s March 19 deal involving Signature, the transaction included the purchase of about $38.4 billion of the bank’s assets, including $12.9 billion of loans purchased at a discount of $2.7 billion. The FDIC noted in a coinciding release that approximately $60 billion in loans would remain in the receivership for later disposition by the agency – including the commercial real estate loan portfolio.

First Republic’s 2022 Form 10-K showed the San Francisco bank’s loans totaled $73.4 billion inclusive of its single family, multifamily and commercial real estate lines during the year. An estimated 21 percent – or $15.4 billion – of the existing loans were allocated toward multifamily, commercial real estate and construction generally, per company filings.

Ongoing opacity

A notable part of the regional banks’ turmoil, according to industry sources, is the mid- to long-term uncertainty around what will become of the commercial real estate loans outstanding with each firm.

“This is where we’re going to see some ripple effects down the road,” said Rob Gilman, a partner and co-leader of New York-based accounting firm Anchin, Block & Anchin’s real estate group. “People are concerned about these small regional banks and keeping money in the bank.”

Select commercial real estate financiers – including New York-based KPG Funds, among others – were affected directly as clients of the involved banks.

Gregory Kraut, chief executive and co-founder of the real estate investment platform, tells Real Estate Capital USA he had his personal accounts and KPG’s business accounts at Signature. “Ironically, probably the safest place to keep your money now is Signature Bank,” he said, citing the government intervention to assure client assets would remain intact and accessible.

“No one is accounting for the underlying problem which will eventually come out – if not now, pretty soon – that the majority of these commercial real estate loans are all underwater,” Kraut said.