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