Snapshots

Regional banks cut office lending after bank failures

May 03, 2023

Contributors:

In the 12 months preceding March 2023, regional and community banks had grown to comprise their largest share of office lending on record, reaching more than 30% of origination volume, but the failures of Silicon Valley Bank and Signature Bank in mid-March caused an immediate pullback in lending volume from those groups—in the six weeks since the failures were announced, regional banks have immediately pulled back lending activity and their share of office lending is returning to cyclical averages.

Several factors drove increased office lending from smaller banks over the course of the last cycle: reduced regulatory burdens on smaller banks after 2018 unlocked liquidity, banks generally sought to diversify revenue streams including increased allocation to commercial real estate, and buyers were able to leverage regional banks local market intelligence to facilitate smaller-scale transactions with more tailored financing solutions.

The extended nature of real estate sales, with transactions often taking several months or longer to close, emphasizes how sharply regional banks have slowed their lending activity to register an immediate impact in lending data. However, most regional banks are continuing to issue loans to existing clients for healthy office assets, albeit at wider spreads.

High-quality trophy product and best-of-best locations are seeing the earliest recovery in the office market

Top markets have removed 5% of office stock since 2020, though redevelopment intensity varies geographically

Net effective office rents have increased since the pandemic in most major CBDs