Bank Failures Explained: Questions, Answers and How CRE Fits In

QUESTION ELEVEN

If my company is currently leasing space, what does the banking turmoil mean for me? What do I need to know?

ANSWER

There are a few key things to consider. • With the economy slowing and a mild recession as our baseline, we already expected most property types to shift towards a tenant-friendlier environment. Landlords will be looking to fill space amidst broad softening in momentum and the latest volatility will likely give tenants, on average, even more leverage. • That said, don’t expect all tenants to be treated equally. It usually is the case that tenants want information about a landlord’s financials and vice versa. For high quality tenants, you just got more leverage. For tenants with a shorter track record or who don’t have pristine credit, it may be harder to qualify for a lease. Landlords will want to ensure the viability of the lease commitment. • Due diligence on a landlord’s finances lets tenants be better educated about the propensity of a given owner to invest in their asset, absorb increases in operating costs (that they shoulder) and to weather the ongoing headwinds associated with the interest rate environment. Tenants should be well informed about these matters.

• For companies who have leased space in ongoing construction, the good news is that most development is considered to be attractive on a risk-adjusted basis. Even if banks pull back from lending here, the reality is that other lender groups have been willing to step in. Most new CRE product outperforms the broader market. There could be bumps in the road though, if a developer cannot secure financing and a project stalls. • Some companies had deposits and/or letters of credit at the failed banks. On deposits, even if a bank fails, the FDIC has a process to handle the resolution and that typically means your bank name will change, but within days of a failure, deposits are available. Recently, all deposits were made whole but that is not a guarantee moving forward. On LOCs, companies should be prepared to replace LOCs quickly in anticipation of demand letters from landlords. These unique circumstances apply to those who were clients of a failed bank. Knowing what to anticipate ‘in case’ is helpful but we don’t think many more banks will go down like the three we’ve been discussing in this document.

Bank Failures Explained - Questions, Answers and How CRE Fits In

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