Another borrowing concern has emerged for private real estate

Regional banks had stepped in to fill the void left by other lenders. Who will replace them if they stop lending, too?

In the week since Silicon Valley Bank and two other regional banks went under, there has been no shortage of executives weighing in on the wider implications of the bank failures. On Wednesday, it was Larry Fink’s turn.

In his annual letter to investors, BlackRock’s chairman said the future of the banking sector remained highly uncertain: “It’s too early to know how widespread the damage is. The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge.”

Also unclear was whether there would be more seizures and shutdowns of US regional banks to come. But there has been a consensus among industry observers that one way or another, regional banks will become a less active presence in real estate lending. As Fink wrote, “it does seem inevitable that some banks will now need to pull back on lending to shore up their balance sheets, and we’re likely to see stricter capital standards for banks.”

This sentiment was echoed this week by Roger Singer, partner at law firm Gibson Dunn & Crutcher, but from a demand perspective: “For a while, people are going to be concerned about whether it’s prudent to be transacting with a smaller bank.”

A void left by regional banks has worrying implications for real estate borrowers. They have, after all, become the largest source of real estate financing as other lender types, including money-center banks and CMBS, have moved to the sidelines. Indeed, they accounted for the largest percentage – 27 percent – of the real estate financing market in 2022, followed by government agencies at 18 percent and national banks at 15 percent, according to preliminary 2022 data from MSCI.  Notably, regional banks, along with non-bank financial institutions, was the only lender group to have increased market share both from the prior year and the 2015-19 five-year average.

Who then will refill the void the regional banks once had stepped in to fill? Robert Gilman, co-leader of the real estate group at accounting advisory firm Anchin, told affiliate title Real Estate Capital USA he was unsure what would replace capital from regional banks, particularly as the money-center banks largely remain on the sidelines.

Predictably, debt funds and other non-bank lenders see the dislocation in the debt market as an opportunity to enter or expand in the space. Indeed, PERE spoke this week with one placement agent raising capital for a manager with a loan origination fund focused on smaller transactions that are typically harder to get financed by banks. He expected it would become even harder for borrowers to obtain financing from local or regional banks going forward because of the expected tightening in regulations. Fink wrote similarly in his annual letter, noting “today’s banking crisis will place greater importance on the role of capital markets,” which will become an ever-larger source of financing for borrowers.

The capital markets, however, will have catching up to do. Banks made up 48 percent of the US financing market in 2022, with government agencies accounting for 18 percent, CMBS for 7 percent and CLOs for 1 percent, according to the preliminary 2022 MSCI data. Alternative lenders, including non-bank financial institutions, insurance companies and private lenders, collectively made up 25 percent.

As Fink observed, questions remain in the wake of the banking crisis of the past week. But for the private real estate industry, what happens to an already shaky financing market if the regional banks exit is undoubtedly one of the biggest uncertainties.