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well the collapse of Silicon Valley Bank
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will also have an impact on the real
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estate market developers who tend to use
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Regional banks for their financing of
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their projects may run to into different
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issues here then there's also the
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mortgage side of the story with this
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failure is are we going to see
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tightening standards even more tight
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again and making it harder to be able to
00:00:23
get a mortgage Susan wachter real estate
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Professor here at the Wharton School
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joins us with more on that Susan great
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to talk to you again
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pleasure to be here all right so let me
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start with just kind of your overall
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view as to how you think this is going
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to impact real estate
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well this is a troubling moment for real
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estate real estate depending on the
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sector has been is in a stress mode
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particularly of course the office sector
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and the overall economy looking like
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it's going to go into potential
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recession and then definitely slow down
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uh this is obviously a moment where
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interest rates are key and lending is
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key but banks are now the sector that's
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in most distress as as we speak and the
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um banks are likely to respond to their
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their investors uh distress by lending
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less and this is not a good thing for
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Real Estate the worst case is a credit
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crunch uh with potential consequences
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for the overall economy now I don't know
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if you had seen that um uh svb filed for
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bankruptcy Chapter 11 this morning does
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the filing for the chapter 11 impact
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real estate in the short term
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no this is not a real estate uh specific
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entity it's uh more General and of
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course it's an entity that affects uh
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Silicon Valley
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specifically and tremendously so no but
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there are others out there that of
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course are are potentially at risk and
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that's the concern most for example
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First Republic Bank is very much exposed
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and to real estate and in real estate's
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exposed to First Republic Bank and in
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general the whole Regional sector of
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banks is disproportionately the lender
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to real estate to local Regional real
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estate markets so it's the regional
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banking sector that is at most risk at
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this point and from that uh that channel
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is is what real estate's now facing up
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to yet another down hit so then with
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some of those Banks coming together to
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give support to First Republic is part
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of the reason why because of that
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exposure absolutely the real estate
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market absolutely so it's through real
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estate which is in general most exposed
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to high uh interest rates and tough
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credit markets uh that even the very
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large largest banks will find themselves
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at are at risk not only to to real
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estate but of course but of the overall
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economy real estate has hit hard that's
00:02:55
going to be another another uh real risk
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to a potential uh recession there's
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obviously lots of pieces to the real
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estate market but are is there one side
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of this this scenario that's affected by
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this these issues with these Banks more
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so than other I'm thinking if you're
00:03:13
comparing the commercial side with the
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single or multi-family side yes
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absolutely it's commercial that's
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affected it's commercial across the
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board that's effective but you know
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commercial real estate includes
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multi-family and it includes you know
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all the real estate that that we're that
00:03:29
we deal with day to day and uh it's a
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it's a huge sector to the overall
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economy as well as itself a an asset for
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the banking system so we're in this
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potential Doom Loop of which we've seen
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before but hopefully it's going to be
00:03:46
now stymied and we're going to rescue
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these various rescue missions uh will in
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fact stabilize the banking sector and
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therefore uh will will not lead to the
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worst case for the real estate that is a
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credit crunch can you explain why it is
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that that the commercial real estate
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market seems so comfortable working with
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the regional banking sector absolutely a
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lot of their financing it's efficient it
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makes tremendous sense because uh real
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estate well of course now it's National
00:04:15
Global Capital flows is really regional
00:04:18
and local so for efficient lending the
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lenders need to have a good eye on the
00:04:24
prospects for their sectors the future
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the sectors their Capital needs their
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risk and the regional banks have done a
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tremendous job at this and they're
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extremely important for that ecosystem
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of efficient lending efficient
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production of real estate it makes a lot
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of sense if indeed the regional banks
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are at risk it's not only a short-term
00:04:46
credit crunch risk which is serious but
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it's also a longer run risk to the
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ecosystem of lending this is a very
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large country and it needs to have this
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Regional eyes on and I guess part of the
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also the reason why is I guess the
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expectation that you're going to see a
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lot of investors going for safer options
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right now and that may leave real estate
00:05:06
out you know out in the cold absolutely
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we're joined by Susan Walker who's real
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estate Professor here at the Wharton
00:05:13
School one of the other things I saw in
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terms of you know the last few days is
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when you look at the potential impact on
00:05:19
real estate you also have to look at
00:05:21
certain areas of the country and
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especially because there's also a tie-in
00:05:25
to Tech with this that places like
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Seattle and San Francisco may be areas
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where a lot of this impact is felt even
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more so absolutely so they've been hit
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this they've hit twice they've been hit
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by the overall slowdown and the overall
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economy slow down interest rate
00:05:43
increases but of course Tech implosion
00:05:45
is hitting these markets but now on top
00:05:48
of that the second uh the second step
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down and it's a big one is they're
00:05:53
lending sources are are about to close
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down uh however that said svb and
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signature are are you know they will
00:06:02
they will go on in some way or form
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they'll be uh purchased not in the
00:06:08
current form but they will be there will
00:06:09
be be landing into these markets but
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nonetheless this is not a good thing for
00:06:15
a market that's already very hard hit
00:06:17
the West Coast market and I guess the
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the other side of it is it was an
00:06:21
interesting kind of landscape for
00:06:23
commercial real estate to begin with
00:06:25
when you think about uh the impact of
00:06:27
coming out of the pandemic and how
00:06:28
companies in some cases are kind of
00:06:30
reassessing what their mix of office
00:06:32
space is going to be and the question by
00:06:34
Builders as to how much they want to
00:06:37
invest in potential future projects as
00:06:39
well yes well the office apocalypse is
00:06:42
absolutely the case for the west coast
00:06:44
East Coast smaller markets you know
00:06:47
office markets do have a future but the
00:06:49
West Coast San Francisco markets are
00:06:51
really hard hit and this makes it worse
00:06:54
we saw mortgage rates actually tick
00:06:56
lower uh this week as well what kind of
00:06:59
uh what kind of scenario are we looking
00:07:01
at there well it's a bit of a glimmer of
00:07:03
a silver lining is there a yeah
00:07:08
so a bit of a silver lining there a bit
00:07:10
of a glimmer of course if the economy
00:07:13
goes into recession mortgage rates
00:07:15
absolutely will go down and that's
00:07:17
usually the beginning of a healing
00:07:19
process where buyers can come back into
00:07:21
the market but in this case we not only
00:07:23
need to have mortgages kicked down by
00:07:25
one percent or so we need the underlying
00:07:28
inflation rate to resolve and that's a
00:07:30
bigger issue how much do you think this
00:07:33
is is all going to be impacting the
00:07:34
decisions that the Federal Reserve is
00:07:36
going to have to make around interest
00:07:37
rates here in the next week or so and
00:07:39
then obviously the downstream impact on
00:07:42
the real estate market absolutely front
00:07:44
of mine absolutely the financial
00:07:45
stability you know the FED actually has
00:07:47
three missions uh unemployment is a
00:07:50
secondary Mission but and of course
00:07:53
stability is the monetary spill
00:07:55
inflation is the first but there is the
00:07:58
overall Financial stability and right
00:08:00
now that's at what is at most risk and
00:08:02
they'll definitely have eyes on at the
00:08:04
same time the resolve for bringing
00:08:07
inflation down uh sending that message
00:08:11
will also be key to the Fed so what are
00:08:14
you most watching or what are you
00:08:15
watching most closely in terms of real
00:08:17
estate here in the short term well most
00:08:19
most closely actually is the banking
00:08:21
sector which is now the critical factor
00:08:24
for real estate markets and the fact
00:08:26
that these large 11 Banks the largest 11
00:08:29
Banks came together to in few huge
00:08:32
capital of 30 billion into First
00:08:35
Republic is an extremely good sign very
00:08:37
very good move because it recirculates
00:08:40
capital which is Flowing right now to
00:08:42
the big Banks and in the end we'll help
00:08:44
the big Banks as terms of the regional
00:08:45
Banks which of course are where the real
00:08:48
estate uh goes first for for loan so yes
00:08:52
there are other sources of lending and
00:08:55
the real estate sector overall we need
00:08:56
to watch its economy and its outcome and
00:08:59
that of course will depend on the
00:09:01
overall economy these are all
00:09:03
interrelated issues scale of one to ten
00:09:06
where's your level of concern about all
00:09:10
of this impact on real estate right now
00:09:13
well of course it does depend on the
00:09:14
sector
00:09:15
and we're saying how office is
00:09:17
definitely in the crosshairs a single
00:09:20
family and multi-family will be the
00:09:22
first to recover if we go into a
00:09:24
Slowdown and the good news is that the
00:09:26
single family mortgage Market actually
00:09:28
is in safe hands and it's stable
00:09:31
so that is you know where I my my focus
00:09:35
is on because of course that's uh that's
00:09:38
Middle America that's all of our
00:09:40
uh resources going forward in terms of
00:09:43
our
00:09:44
kids children new people trying to get
00:09:47
homes Etc
00:09:48
uh that fortunately is a stable
00:09:51
component of the economy at this moment
00:09:53
if I may say so stable but still rates
00:09:57
are too high
