So, here is a cheery headline for your Wednesday morning. From today’s Wall Street Journal: Real Estate Doom Loop Threatens America’s Banks. A key quote: “Bank’s exposure is even bigger than commonly reported. The banks are in danger of setting off a doom loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more loses.”
https://www.wsj.com/real-estate/commercial-real-estate-regional-banks-9f8f591d
I was surprised that the article didn’t really discuss tougher capital requirements for banks that are coming as a result of the regional banking crisis earlier this year. In simple terms if a banker can metaphorically keep a dollar in the bank because regulators want the bank to have more robust capital on hand or the bank can put that dollar on the street in a loan, the bank may be compelled to keep that dollar in the vault.
My advice to developers, CDFIs and others is to have explicit conversations with your bankers. This is a dynamic situation and will hit different banks differently. Keep in mind that banks are under other pressures like needing to pay more to depositors to prevent flight. Maybe your capital sources are all good but consider having an explicit conversation with your reliable bankers and listen closely for what they are hearing and feeling. What are their credit committees saying? If we are facing a credit crunch that could grow more severe and lenders become less willing to lend, it would be better to plan now.
Please call me (510-541-6150) if you’d like to discuss further.