What Signature Bank's Demise Means for NYC

Good morning. In the postmortem of Signature Bank’s failure, it seems the real estate investing community played a role. CBRE has completed its 2022 Cap Rate Survey and industry leaders provided their perspective on what 2023–2024 could hold. Meanwhile, soaring rents have led to more short-term leases and new concerns over housing affordability in major U.S. metros.

​⏱️ Read time: ± 6 minutes

Real-Estate Investor Run on Signature Bank Helped Fuel Its Demise

According to NY building owners and state regulators, a rush by real estate investors to withdraw funds from Signature Bank contributed to the bank’s seizure.

Blood in the water: One such investor was Marx Realty, which withdrew millions tied to an office building from Signature accounts. CEO Craig Deitelzweig cited the bank’s faltering stock price and crypto exposure as cause for alarm. For some investors, finding a place to park withdrawn funds was also a challenge. In the case of lawyer Peter Zinkovetsky, clients seeking to stash money into escrow accounts were unable to do so as his escrow accounts were also with Signature.

Built on real estate: Signature built its business by lending to NYC developers and owners of commercial real estate. According to the FDIC, of its $110.4B in assets in 2022, real estate loans accounted for nearly a third at $35.7B. Signature was also issuing the third-highest number of CRE mortgages against NYC buildings since January 2020. Only Wells Fargo (WFC) and JPMorgan Chase & Co. (JPM) lent more CRE money in NYC.

Who was hurt? Many of the parties who borrowed from Signature also held deposits with the bank. These ranged from money managers like Brookfield Asset Management (BAM) to smaller local operators. In a press release, Signature disclosed that over 80% of deposits were from midsize companies. Rent payments for office and apartment buildings were also frequently deposited with the bank.

➥ THE TAKEAWAY

Picking up the pieces: After Signature was shuttered, the FDIC created a new entity, Signature Bridge Bank. Regulators and the Treasury Dept. ensured they will guarantee all deposits with the bank. That being said, the real estate industry—and the markets as a whole—are still nervous as some landlords like Marx continue to move money out of even regional and community banks.

Cap Rate Expansion, Tighter Lending Standards, and Increased Distress in the Market

The rise in interest rates has led to higher short-term rates and a need for lower asset valuations to maintain IRR. Market uncertainty has also caused hesitation from buyers and sellers. However, the end of the rate-hiking cycle is expected to bring a decrease in cap rate expansion, according to CBRE’s H2 2022 Cap Rate Survey.

A ‘Need’ to find equilibrium: Jeff Holzmann, COO of RREAF Holdings, says that rising Fed interest rates are increasing financing costs and causing lower property valuations and higher cap rates. He believes that the impact of interest rates is mostly behind us, and cap rates will adjust about one quarter after rates stabilize at a lower level. However, external factors such as a war in Europe, a pandemic, or political unrest can still affect the equation.

The preferred narrative: Noel Liston of Core Industrial Realty agrees with CBRE's cap rate report, stating that capital costs and rates will stabilize in H1 2023. He thinks the Fed will ease or eliminate rate hikes in H2 2023 due to pandemic-related factors causing inflation to ease. However, the impact of capital costs on real estate markets is uncertain, and timing is crucial. Despite this, Liston believes the economy is solid, inflation is receding, and a new normal is coming in 2023.

➥ THE TAKEAWAY

Adjusting and adapting: Karlin Conklin, COO and co-president of Investors Global Management Group, shared an important insight: “Falling property values and slower rent growth is a major departure from what we’ve seen in recent years. Investors and operators need to shift to a new paradigm.” Conklin believes that net operating income will be driven by strong asset management as the “double-digit rent growth narrative is out.”

Rent Surge Creates Short-Term Lease Concerns

Concerns about housing affordability have resurfaced as record growth in apartment rents across major U.S. metros has prompted owners to cater more to travelers than long-term tenants.

Short-term squeeze: Cities both large and small have passed regulations in the past two years to control where short-term rentals can operate as they struggle with affordable housing concerns. Communities see the growth of short-term rentals slashing the supply of long-term options, pushing up rent for what’s left.

The Covid clamp-down: Pre-pandemic listings on AirBnB and VRBO grew to 663K across the 50 largest U.S. markets, according to data from AirDNA. During the pandemic, that figure dipped to a low of 418K listing in February 2021. This means landlords either converted to long-term leases or didn’t list them at all. Some of those listings also transitioned to medium-term rentals targeting traveling nurses. AirDNA reported that listings have once again hit 600K since.

Tightening the Sun Belt: Rent growth hit a record rate of 11% last March. Sun Belt markets led the pack, soaring above the national average. But that white-hot growth has mostly slowed down due to a record-breaking construction pipeline. In markets like Florida, however, construction isn’t adding enough units to slow rent growth. Orlando has the largest short-term market with more than 40K listings.

➥ THE TAKEAWAY

Getting crowded: In Orange County, FL, rents increased so much that the government attempted to implement rent controls. The measure was approved by voters despite court rulings against it. According to data from CoStar, short-term rentals equal 20% of Orlando’s 200K apartments, while rent growth slowed to 4.2% as 8,229 apartments hit the market. Current construction could increase stock by 11.6%. Even then, renters would still pay an 8% premium on rent.

📈 Chart of the Day

New Nareit data show that REIT fundamentals remained solid during Q4 2022, with year-over-year increases in funds from operations & net operating income, as they continue to navigate rising interest rates & high inflation.

• More than transitory: Housing costs added 0.5% to the overall core inflation rate in February due to consumer price growth.

• Full plate: Grocery stores remain compelling as Hines pays $112M for a NY shopping center anchored by Whole Foods.

• Salvaging the situation: Blackstone (BX), KKR (KKR), and Apollo Global (APO) are interested in acquiring SVB-held loans.

• Lights, camera, action! The city of Mansfield, TX started a $70M project to develop 72 acres of land into production studios.

• Tussling with traffic: In some Sunbelt metros, more traffic jams are a growing pain for residents and may hamper growth.

• Crawling back: A report from retail traffic tracker Springboard shows that U.S. downtown traffic is up 22.4% since last year.

• Locked-in: Homeowners who secured mortgages at 3% rates aren’t selling and are even becoming landlords.

• Take the toys home: Tesla (TSLA) walked away from $6.4M in funding to install 164 superchargers in CA.

• Apocalyptic: Ken Griffin believes regulators protecting SVB depositors is like capitalism “breaking down before our eyes.”

• REIT rebound: REIT activity improved last month as U.S. REITs raised $5.76B (a 7.4% MoM increase) while down 17.9% YoY.

• Scores of storage: H.I.G. Realty Partners acquired a 2.3 MSF, 55-property industrial outdoor storage portfolio.

• Office obstacle: A $325M CMBS loan on Blackstone’s Las Vegas Hughes Center entered special servicing.

💼 Talent Collective

In partnership with Bullpen

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🤝 Deals & Dealmakers

📖 Read on to learn about how Japanese billionaire Masatoshi Ito, who passed away at the age of 98, transformed the 7-Eleven chain of convenience stores into the global empire it is today.

🎧Listen to this episode of The Deconstruct with Michael Soto, research director at Savills, who discusses major LA office owners and operators foreclosing on properties in droves.