Sunday Summary: The Terrible, Horrible, No Good, Very Bad Week
We were thinking a lot about the great Lloyd Bridges (1913-1998) last week and his performance as the decisive, fast-talking air traffic controller in Airplane! who keeps his head together thanks to a seemingly endless supply of vices. (Looks like I picked the wrong week to quit smoking, drinking, dropping amphetamines and sniffing glue, he says as he tries to land a plane with no pilot. Maybe he could have just kept the first one until his particular crisis had passed.)
Because, truth be told, we were reaching for the Elmer’s over the course of the last nine days.
Just a few days earlier we were beating our breast about the flood of recent defaults from some of the top names in the industry. And while the crying is not over by any means (on Wednesday another Blackstone (BX) loan for $325 million went into special servicing) we didn’t know how good we had it.
On Friday, March 10, with scarcely any warning, Silicon Valley Bank collapsed in what was essentially a classic run on deposits. It was the largest bank failure since the Global Financial Crisis, and potentially so damaging that the federal government couldn’t even wait until the weekend was over to step in and try to find a home for SVB’s assets. But even that proved too late.
By Monday morning the contagion had spread and regulators shut down Signature Bank, which was one of the biggest CRE lenders in New York. (Its head, Joseph Fingerman, ranked 45 on Commercial Observer’s list of the 50 most powerful names in finance.)
The Federal Deposit Insurance Corporation and other regulators began scrutinizing at least 20 regional banks — and, even if the feds weren’t worried about them, their customers certainly were.
Almost immediately, private lenders began fielding calls from panicky borrowers with loans scheduled to close on deals from regional banks that borrowers were now looking for backup financing on.
“Post-Dodd Frank, with all the regulatory changes, there has been a trend towards private capital markets, and this will only accelerate that,” said Seth Weissman, one such lender at Urban Standard Capital. “The veneer of stability has definitely worn quite thin, and, especially for transitional loans where the duration may only be 12, 24 or 36 months, more and more people are gravitating toward the private markets, and I think that will continue.”
One bank that raised obvious concerns was the San Francisco-based First Republic Bank (FRCB), which was heavily patronized by tech and venture capital firms — the same client profile as SVB. During trading last Monday, the bank’s stock dipped by as much as 62 percent before making up some ground. By the middle of the week the bank needed a rescue package from rivals such as JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, and the federal government.
But this wasn’t a U.S. problem any more. Credit Suisse needed a bailout to the tune of $54 billion from Switzerland’s central bank to stave off collapse.
“We don’t even bank with SVB, but I’m angry right now,” Sonny Tai, the CEO at Actuate, a Manhattan-based security analytics proptech startup, said on LinkedIn. “Imagine being a founder or an early employee and having your company that you’ve poured years of your life building killed by a bank run because panicked venture capitalists went and created a stampede by telling their portfolio companies to pull their deposits.”
Meanwhile, over in Europe…
SVB, Signature Bank (SBNY), First Republic and all the rest were nervously being buzzed about across the pond where tens of thousands of real estate professionals from hundreds of companies crowded into the Palais des Festivals in Cannes for the MIPIM conference, even if SVB wasn’t on the official agenda.
As for said agenda, ESG was very much on it. And, if SVB made you nervous, well, you might have to take a Valium when you heard some predictions of the future.
“Every single building out there — home, office, factory — it can’t withstand climate change,” warned writer and economic theorist Jeremy Rifkin during the conference’s keynote. “We have to retrofit every single building in the world so that it can be zero emission and that it can withstand all of the climate disasters that are coming.”
How to finance some of the more costly retrofits is the big question. But one of the more heartening things we heard in that respect is that the New World is expected to punch its weight with its Old World counterparts in the near future.
“I think the U.S. will overtake [Europe] when you finally realize what a huge opportunity this is,” Peter Cosmetatos, the CEO of the Commercial Real Estate Finance Council Europe, said on a panel titled “Financing ESG”. “Because the U.S. just has the capital markets, it has the innovation, and it has the technology. We need the head start in Europe.” (Speaking of innovation, apparently, there’s a lot more European creative thinking in proptech than we were previously aware of. Aaron Block was on hand to explain it.)
Retrofitting is the name of the game in respects well beyond ESG. (While it’s not related to MIPIM, CO has an interesting look at One Wall Street, which could serve as a test case for developers who want to convert from office to residential.) One of the more interesting theories that we heard about America’s fading office stock was that it wasn’t COVID that destroyed it. The office sector was already in a great deal of trouble, but we just didn’t know it.
“A lot of what looked like office demand in the sector — not just in the United States but all around the world — was WeWork leasing,” said Bradley Weismiller of Brookfield Asset Management on a panel about the future of office. “That was making it appear to be much more balanced.” (Neumann!)
Premium Class A office is still attractive to investors like, say, Commerz Real (a branch of Commerzbank (CRZBY)) whose CEO Henning Koch was on hand at Cannes and sat down for an interesting conversation with CO. But, for the most part, attendees were more interested in niche asset classes that no longer seem niche, like cold storage, data centers and outdoor industrial centers.
“In the past, [investors] were like, ‘I just don’t understand it, that’s not institutional, I won’t go into it,’ ” said Shawn Lese, the chief investment officer and head of funds management for Nuveen. But now, investors are seeking those classes out.
Hooray for Hollywood!
As battered as the market felt over the past week, we were surprised that some real eye-catching dollar figures were injected into CRE — including in an area that we would have previously classified as niche: film studios.
Fox Corporation announced that it was pouring $1.5 billion into significantly expanding the Fox Studio Lot in Century City, which would add about 1.6 million square feet to the already sprawling property.
Werwaiss Properties managed to snag a $131 million construction loan for its Long Island City tower at 23-10 42nd Road from Corebridge Financial and PCCP.
Oh, and Shake Shack took a 3,380-square-foot lease at Penn Station. Now, that’s something to get happy about!
Relax. Have some coffee.
As you shake off the hangover (oh, yeah — Happy St. Patrick’s Day weekend), if you stop at your local Starbucks, you should pay homage to the superbroker that got it there. (At least if you live in Manhattan.)
We’re talking, of course, about TSCG’s David Firestein, who’s been working with the java purveyor for three decades. He sat down with CO (at the Empire State Building’s Starbucks, naturally) and discussed coffee and retail leasing.
Next week will be better.