The Domino Effect: How the Collapse of Silicon Valley Bank (SVB) is Shaking the Real Estate Market

On Friday, March 10th, 2023, Silicon Valley Bank (SVB) collapsed, making it “the second-biggest bank failure in U.S. history.” The failure comes just two days after Silvergate Capital, “one of the crypto market’s top banks,” announced it would liquidate assets and wind down the bank. While Silvergate’s failure is somewhat unsurprising given what’s transpired in crypto markets over the past year or so, SVB’s collapse is a massive wake-up call for real estate investors.

SVB, as well as Silvergate, took in a flood of deposits during the pandemic as stimulus funds entered the economy and the tech industry thrived since the client base for these two banks is heavily weighted toward the tech industry. As the crypto winter and tech wreck progressed, client deposits dropped as the fortunes of these two markets reversed. Unfortunately, the bond holdings for the two banks had declined in value significantly as the Fed raised interest rates. The two banks ultimately were forced to sell bonds at a loss to cover deposit withdrawals. As news of the losses spread, deposit withdrawals accelerated and so did the bond selling. This sort of negative feedback loop is called a bank run, and it’s catastrophic, especially when it’s at an institution the size of SVB that had $200 billion in deposits as of March 2022 and saw its deposit base swell 86% over the course of 2021.

So, what lessons can real estate investors learn from this?

First, the collapse of SVB highlights the importance of diversification. Investing in a single bank or financial institution can be risky, especially if that institution has a concentrated client base. Real estate investors should spread their investments across multiple banks and financial institutions to minimize their exposure to any one bank's failure.

Second, it’s essential to consider a bank's bond holdings when evaluating its financial stability. Real estate investors should look beyond a bank's deposit base and also examine its bond holdings. The collapse of SVB shows that even a bank with a large deposit base can quickly collapse if its bond holdings decline in value.

Third, investors should stay informed about economic and market trends that could impact the financial stability of the banks and financial institutions where they hold deposits or have investments. The collapse of SVB and Silvergate was partially due to the reversal of fortunes in the tech industry and crypto markets. Real estate investors should keep a close eye on these sectors and other industries that could impact the financial stability of banks and financial institutions.

Finally, in times of financial turmoil, it’s essential to remain calm and avoid making hasty investment decisions. The failure of SVB is a stark reminder that even the most stable institutions can collapse unexpectedly. Real estate investors should resist the urge to panic and instead focus on making informed and strategic investment decisions.

In conclusion, the collapse of Silicon Valley Bank serves as a cautionary tale for real estate investors. By diversifying investments across multiple financial institutions, examining a bank's bond holdings, staying informed about economic and market trends, and remaining calm in times of financial turmoil, investors can minimize their risk and maximize their returns.