California, an epicenter of last year’s regional-bank turmoil, is also at the forefront of the industry’s latest trouble spot: commercial real estate.
A customer stands outside of a shuttered Silicon Valley Bank headquarters on March 10, 2023 in Santa Clara, California. The Sacramento, California-based lender has doubled assets to about $5 billion in five years with real estate loans up and down the West Coast. Its portfolio, from Los Angeles apartments to Silicon Valley storage facilities, is designed to withstand market tumult, said Dan Franklin, who oversees the bank’s property lending.
Regulators and investors are closely watching lenders’ commercial real estate holdings as values tumble across the US, particularly for office and apartment buildings. Last week, Michael Barr, the Federal Reserve’s vice chair for supervision, likened the market’s stress to a “slow-moving train.” He said the central bank is particularly focused on lenders that have exposure to office space in areas where significant price declines are expected.
“The financial ecosystem in California is heavily reliant on regional and commercial banks,” said Michael Imerman, faculty director of the master of finance program at the University of California at Irvine’s Paul Merage School of Business. “Small banks cater to a specific clientele and that can lead to an age-old problem: concentration risk.”The Federal Reserve, Federal Deposit Insurance Corp.
Commercial real estate, though, is a diverse industry that includes a wide array of properties, said Kevin Gould, chief executive officer of the California Bankers Association. Loans for downtown office buildings represent a “fraction” of the real estate market within bank portfolios compared with non-bank lenders, he said.
After the failures of SVB and First Republic, California’s Department of Financial Protection and Innovation promised to boost oversight hours and increase scrutiny of large banks. Mark Leyes, a spokesman for the department, declined to comment on that effort but said the regulator is watching the commercial real estate market closely.
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