Green Street’s Director of Research Cedrik Lachance provided his take on how the recent collapse of banking institutions will impact commercial real estate in the U.S. and Europe.  

Cedrik, the past few weeks have been calamitous for U.S. banks. How will the collapse of Silicon Valley Bank in California and Signature Bank in New York City impact commercial real estate lending and property values in 2023?

Cedrik Lachance: It's a good question and one that many people have been asking. Here's how we think about the big picture with respect to this particular question. First, we do have some challenges in financial institutions, both in the U.S. and in Europe. Those challenges are likely to perpetuate themselves as investors try to figure out where assets that are a little bit more challenged are located on the balance sheet of these financial institutions. The reality is, of course, as we all know, there's been very high availability of credit, and very high availability of additional money for consumers. Therefore, inflation picked up, which led the central banks to take important measures in terms of increasing rates. Those higher rates have resulted in lower asset values. These lower asset values are what's creating the headache, of course, for the variety of capital providers, some of the banks in particular.

Now, when do we observe or what should occur really going forward? Well, we have four particular thoughts on this. One is the availability of risk capital should diminish over the next year. There is going to be much more selection made on the part of capital providers when it comes to lending or directly investing in various real estate sectors, for example.

Two, having a sturdy balance sheet that has minimal requirements for additional capital will certainly be positive. When you look at the public market, the companies that have more than average leverage or needs for capital in the near-term have tended to underperform over the last week versus companies that have a little bit more flexibility to their financial plans. The third element is to really think about economic sensitivity. Because again, looking at the public market and the reaction of the public market, what is observable is that sectors that are economically sensitive have tended to underperform, and sectors that are a little bit more stable, countercyclical, if you will, have tended to outperform.

So, if you think about Lodging or Retail, those sectors have performed somewhat poorly over the last week. By contrast, sectors that have much more durability of cash flows, such as net-leased or ground-leased assets, where there’s more demand for the product (such as Towers or Data Centers), that has performed substantially better.

The final piece to all this is getting used to volatility, of course. There will be significant volatility as we consider the value of assets on financial institutions' balance sheets, and as we think about the refinancing risks that occur throughout public and private real estate markets. As a result, companies or investors that own quality assets, that have minimal near-term refinancing risks, and that are in less economically sensitive sectors, should do well in 2023.