Navigating Institutional Instability in the Real Estate Sector: Strategies to Prosper and Succeed
On Friday, March 10, 2023, the Federal Deposit Insurance Corporation (FDIC) shut down Silicon Valley Bank (SVB), an event that was followed quickly by the closing of Signature Bank. And while the U.S. government did provide bailout funding on deposit side, leaders need to take a deep dive to consider the impact, and more importantly, position themselves to better navigate the next crisis.
The events’ effects spanned across all industries, though commercial real estate leaders saw various impacts unique to their operations. The reality is, when you have substantial wealth on paper tied up in real estate, the ability to convert to cash will likely take some time. So, in order to maximize liquidity during times of uncertainty, it’s key to have a proactive business mindset when positioning your real estate portfolio for future success amid crises.
Here are a few strategies and best practices real estate leaders can employ to secure their portfolios during times of institutional instability.
Understand Your Finances
It sounds obvious, but you need to know and understand all your finances. The events of the last week should make it clear how critical this is and not to be taken for granted.
Regardless of whether your portfolio is commercial real estate, residential properties, apartments, multi-family complexes, or a mix of them all, understand the equity component and their loan-to-value ratios. Along with your existing debts and lines of credit, this will provide an understanding of how much flexibility the owners have. Additionally, this provides a safety net to generate additional liquidity. Knowing this will be critical to your decision trees for the future.
Diversify Your Lending/Banking Relationships
A key learning point from this situation is the importance of spreading and developing multiple lending relationships. This increases your ability to pivot and remain flexible amid uncontrollable hurdles. Generally, lenders require most, if not all, of the customer’s deposits to be at their bank; though, if you have a strong-enough balance sheet, you can certainly ask for a variance to this requirement.
Rarely do we expect the bank to be empathetic, but if they are going to meet this requirement, ask them to give comfort in their future security and health as an institution. The irony is that, amongst other issues, SVB and Signature suffered from non-diversified concentrations in tech and cryptocurrency.
Chaos Can Lead to Opportunity
Even with rising interest rates, there is still concern that credit markets are tightening up and while this is true to a certain extent, there are plenty of lenders looking for new opportunities. It is critical to know where to look for and how to create these options.
When it comes to sourcing capital, consider both traditional FDIC lenders as well as non-bank lenders. These non-traditional lenders, while oftentimes more expensive, can offer significantly more flexibility in both speed and terms. It is not always about the cheapest rates, especially if your properties are in excellent locations. Stable cash flows and good property values are excellent recipes to attract additional capital.
Also, even if your properties are not necessarily A+ assets with all the uncertainties, there is more money in the system than ever before. While entities appear more conservative, they still need to deploy capital.
Have a Short-Term Cash Flow Forecast in Place and an Annual Budget
Back to the point about understanding your financial situation thoroughly: Have a timely and relevant cash flow forecast available, one that has been updated for the changes in your climate and your industry. This tool also helps you manage property expenses, time payments and maximize cash flow and opportunities.
Same thought and concept for your annual budget: Updating the budget enables the real estate leaders and property owners to account for potential pressure points. Running a sensitivity analysis to project ranges of highs and lows, maximums and minimums enables the stakeholders to plan for the best time to make the investment and shore up the cash position and capital structure.
Don’t Be Afraid to Ask for Help
Regardless of your industry or prior success, and despite your best efforts, it is impossible to predict or completely plan for results like we’ve seen over the last week. Be informed on current events, apply each situation to your unique operations, and learn from experience. Research your institution's position and understand your stability.
Pardon the cliché, one day you are basking in success and stability and then one of the largest real estate lenders is taken over by the FDIC. Would you be prepared if this happened to your institution? If not, you need to be. Consider your alternatives and always have your team of accountants, council, advisors, etc. ready and briefed on your situation.
What’s Next and Where to Go from Here?
Finally, understand you are not alone in this, and success rarely occurs on an island. Develop a backup plan and alternatives and test your portfolio and cash availability to determine if you have flexibility for future exposure. No matter how you’re impacted, reacting quickly (and being proactive) is crucial. Call on your advisors as a resource for questions and strategies to navigate this in the short and long term.
Navigating Banking Uncertainty
At EisnerAmper, we recognize our responsibility to keep you informed on opportunities and pitfalls during times of uncertainty, and to provide you with the knowledge to make the right decisions for your business.
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