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What Does SVB’s Collapse Mean for the Real Estate Cycle?

Updated: Dec 1, 2023

News of the US Silicon Valley Bank (SVB) collapse has flooded the media headlines over the past week, and unsurprisingly, many are wondering how it fits in with the real estate cycle.

First the backdrop.

For those not aware, SVB was a leading provider of financial services to technology and innovation start up industries.

The bank is headquartered in Santa Clara, California, but operates in the United States, Europe, and Asia.

SVB worked with many well-known companies and investors, including Apple, Google, and Amazon — as well as venture capital firms like Andreessen Horowitz and Sequoia Capital.

Before the collapse, it was the 16th largest bank in the US, with more than $200 billion in assets.

And while I don’t expect the collapse to disrupt our run into the peak of this cycle, it is significant — for reasons I’ll explain below.

It’s the single largest US financial institution to fail since the bankruptcy of the Lehman Brothers during the global financial crisis.

Additionally, it comes almost 15 years to the day, 16 March 2008, since the investment bank Bear Stearns collapsed during the subprime mortgage crisis.

What happened? How did we get here?

Well, as you may have read, SVB’s customers were start-ups and other tech-centric companies.

Rising costs and accrued losses increased the need for cash over the past year, leading many to progressively drawdown on their deposits.

(Note: Tech companies do not perform as strongly in the second half of the cycle as they do in the first half.)

Panic started last week when Silicon Valley Bank announced that it had sold a bunch of securities at a loss and would sell another $2.25 billion in shares to shore up finances.

Investors concluded that if the bank had enough money to cover everyone’s deposits, why would they need to raise more money?

The thing is, SVB held billions of dollars’ worth of government bonds on its books — including those backed by mortgages (mortgage-backed securities).

This is common for most banks.

Banks are, for all intents and purposes, safe as houses (so to speak).

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