The failure of Silicon Valley Bank (SVB) last week could bring added challenges to senior living capital markets, and make an increasingly difficult lending environment even tougher throughout the remainder of the year.
The SVB failure is the second largest bank failure in U.S. history, with the bank primarily serving tech investors and venture capital debt. The closure, which sent seismic shockwaves across the financial sector last Friday, will only add to the problems weighing down lending and securing capital for senior housing, according to National Investment Center for Seniors Housing & Care (NIC) Chief Economist Beth Mace.
While the financial contagion effect, where market disturbances spread to companies and across international markets, doesn’t appear to be taking hold as of market-close on Monday, Mace said the failure of SVB may cause banks to become more cautious in lending money, in turn making it harder to start new community projects or renovations.
“Lending was already very tight,” Mace told Senior Housing News. “This won’t help the situation … and it’s a bit of a shock to the banking system.”
Since the pandemic, senior living operators have faced rising costs due to inflation; higher price points for financing debt for construction and new development; and rising interest rates not seen since the 1980s by the Fed to curb ballooning inflation and to slow down the overall pace of the economy.
The consumer price index (CPI) report will be issued on Tuesday, and Mace said the report could help inform whether the Fed takes action to once again raise interest rates.
“I would be surprised if they increase rates at the next meeting, which is in the next 10 to 12 days,” Mace said. “I think they will pause for a little bit, but then probably continue on that path.”
Against this backdrop looms the possibility of an economic recession. While it’s hard to predict when a recession might hit, Mace speculated that a recession might surface late in the year or further down the road in 2024.
“The impact of the higher interest rates is already being felt today,” Mace said. “The impact leading up to a [recession] is not to be dismissed.”
Operators, capital providers react
While SVB does not appear to have major investments in the senior living industry, 15% of its loans were from commercial real estate and residential mortgages, according to SVB’s 2022 financial report, representing $2.6 billion in commercial real estate loans and $8.3 billion in residential mortgages.
With an outsized percentage of tech investment on its balance sheet, there are serious questions about how SVB’s failure could dampen tech innovation, including in the health care arena.
The failure of SVB could force other banks to step in to start offering supplementary financing, otherwise at-risk companies are likely going to have to shift capital raising to additional equity and equity-like financing options, according to Chicago-based investment bank Ziegler’s Director of Principal Investments and Fund Management Team Katie Schmitz.
“I think venture capital investment follows opportunity, and nothing about what happened to SVB changes the issues in the health care system, the declining caregiver ratio, shift to value-based care or any of the other challenges in this space,” Schmitz said in an email to Skilled Nursing News, a Senior Housing News sister publication.
As for overall capital availability to the sector, the SVB situation will probably add more pressure to tight credit markets.
While federal regulations require banks to carry a certain level of reserves at all times, Bethesda, Maryland-based Walker & Dunlop Managing Director Mark Myers speculated that the SVB fallout could cause banks to get more conservative, thus hurting operators seeking capital.
“If banks start to say we have to retain our capital, we can’t lend it out, or we’ve got to increase our reserves in case depositors demand their funds, there could be less money being lent by the banks,” Myers told Skilled Nursing News, a Senior Housing News sister publication.
The sudden downturn for SVB has also shed light on the “volatility” of technology and cryptocurrency markets, Myers continued, and these could be issues that other banks must confront. Another issue spotlighted by SVB: the falling value of banks’ bond portfolios as interest rates rise.
But this could result in a silver lining, if the Federal Reserve decides to ratchet up interest rates more slowly.
“I think a positive that could come out of it is if the Fed saw this happen and decided to back off on these interest rate increases, which are hurting us as a whole,” he said.
Real estate loans in senior housing, commercial office and retail could remain under pressure as loan portfolio maturities come due, and to the extent that lease ups and construction loans are structured as variable rate loans, said Cogir Management USA CEO David Eskenazy.
Cogir USA, which is based in California, does not have any portfolio exposure to the SVB failure, Eskenazy confirmed.
“Owners that are not in a position to fund these loans as rates double and loan reserves begin to run out will be facing capital calls or collapsed ownership structures leading to potential foreclosures or excessive loan loss reserves at some point,” Eskenazy told Senior Housing News.
Whether that turns into systemic, overall economic concerns over the health of the banking environment remains to be seen. But one thing is for certain, regarding SVB’s failure amid an already tough climate:
“We didn’t need it,” Mace said.