With continued elevated levels of inflation and interest rates, and fears of an impending economic recession, the U.S. commercial real estate industry continues to find itself in choppy waters. The recent stunning and swift collapse of Silicon Valley Bank (SVB), and subsequent failures of Signature Bank (SB), and Credit Suisse Group AG (CS) has created a perceived credit crunch now rippling across the global financial system. 

The SVB implosion was caused by a three-year monetary policy that began during the COVID pandemic and included enormous sums of government stimulus and near zero interest rates resulting in a bloated balance sheet that put money to work providing loans and acquiring bonds. When the Federal Reserve (Fed) pivoted its monetary policy to combat rapidly rising inflation, SVB was suddenly holding below-market interest bearing securities that were never marked-to-market. When capital clients began withdrawing deposits on a large scale and at a breakneck pace, SVB began selling assets at losses which in turn triggered a classic bank run and ended with the parent company filing Chapter 11 bankruptcy. On the heels of the SVB collapse, SB also experienced a bank run and was shut down by regulators attempting to quell market fear and perceived potential of contagion within the banking sector.  Furthermore, to strengthen confidence in the U.S. banking system the Fed, the Department of Treasury, and the Federal Deposit Insurance Corporation (FDIC) created a rescue package known as the Bank Term Funding Program (BTFP), essentially guaranteeing insured and uninsured depositors of both failed institutions. Shortly thereafter, 167-year-old CS announced that it had found "material weaknesses" in its financial reporting procedures resulting in the Swiss government brokering an emergency sale of the bank to UBS Group AG. Volatility remains for now; however, investors are largely betting on continued economic growth and reflecting the wide availability of capital despite illiquidity isolated to smaller regional banking institutions.

Relative high debt costs and tightening lending standards are now placing negative pressures on commercial real estate values.  While obviously a risk for existing property owners, investment opportunities will evolve as trillions of dollars of commercial real estate debt matures during the next several years. The bulk of this debt was financed when base interest rates were near zero, and will need to be refinanced in an environment where rates are much higher and in a market with much less liquidity.

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