💼 Silicon Valley Tank
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📉 This Ain't Good!
Now, we know what you're thinking...A Briefcase issue on a Saturday?
Something must be going sideways for a Saturday issue! Or, Peter the Intern made another error in what seems to be a never-ending spiral of incompetence and mediocrity. We'll talk later, Peter.
But Peter isn't the issue. It's actually worse.
Catch Up: On Friday, Silicon Valley Bank (SVB) went into receivership in what is now the second-largest bank collapse in U.S. history. Over 90% of deposits are uninsured, amounting to approximately $160 billion.
First off, it is Briefcase's strong belief that SVB will either get some sort of bailout or another bank will buy it. This is good news, however, if either of those doesn't happen, then contagion could spread throughout the entire banking and tech ecosystems, causing other dominos to fall.
Housing is intricately tied to that possible outcome.
So how did we get here?
😲 50% of startups bank with SVB.
🏛️ To store cash, SVB invested significantly in US bonds (treasuries) over the last decade when yields on those bonds, much like interest rates, were low. This was a safe bet at the time.
📈 Except, as interest rates rose and venture capital dried up, many of those startups were forced to withdraw their funds from SVB because they couldn't raise more money.
📉 To shore up its balance sheet for these payouts, SVB had to sell a significant amount of those treasuries at a loss. Interest rates are higher, and therefore bond yields as well, so if you have a lower yielding bond that, say, you bought a few years ago, it is valued less now because yields are higher.
😱 So SVB sold bonds, at a serious loss, and investors and depositors began to get scared.
💸 A good old-fashioned run on the bank ensued, forcing the Federal Deposit Insurance Corporation (FDIC) to step in and take control.
Double whammy for startups
This couldn't have happened at a worse time for Silicon Valley. Over the past 12 months, the tech sector has been hit extremely hard (read more here).
We have seen mass layoffs and businesses closing down before the SVB fiasco. And, the party was just getting started with the prospect of higher rates increasing every time Fed Chair Powell opens his mouth.
And now, this.
Even startups who survived the last 12 months of decreased valuations and little to no venture capital, many will have the prospect of their deposits frozen for an unforeseen amount of time. This will make payrolls, debt payments, service provider payments, and everything else in the short-term challenging.
What does it mean for real estate?
Here are a few key takeaways from Friday's complete SVB trainwreck.
1. At the end of 2022, the office vacancy rate in San Francisco was an astonishing 24%. With the closure of SVB and all of the capital that is tied up in deposits (over $160 billion in uninsured deposits), this office pain is only likely to get stronger. This is also true for other tech-heavy metros like Seattle and Austin.
2. If contagion spreads and we see a mass shuttering of tech-centric businesses, the housing market will be affected. Many markets will see downward pressure on housing prices as recently laid-off tech workers cut back on costs and even move away from expensive tech-centric markets.
3. 15% (~$10B) of the loans on SVB's books are secured by residential mortgages and commercial real estate as of 2022. That's a significant amount of real estate tied into the fate of SVB.
4. Proptech: SVB had strong ties to many behemoth proptech companies such as Airbnb, Opendoor, Roofstock, and OJO.
Stay tuned for another episode of Silicon Valley Tank.
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