It’s been an interesting past week for the financial markets as regulators and onlookers try to make sense of the recent woes of several regional banks that have crumbled. Amid conversations and concerns swirling around following the failures of Silicon Valley Bank (SVB) and Signature Bank, leaders and technologists in the industry are left with more questions than answers.
One question that has risen in the days following SVB and Signature’s demise is: how will this financial crisis play out in the real estate tech sector?
Both SVB and Signature were big supporters of the proptech and cryptocurrency sectors, which have grown in popularity in real estate in recent years—at least, that has been true for the former. While the federal government stepped in to prevent further calamity in the financial sector, the ripple effects could reverberate in real estate’s burgeoning tech segment.
“When things like this happen, people get more conservative, including all investors categorically,” says York Baur, CEO of MoxiWorks. “What that means is certain companies that might not have failed will still fail because they can’t access capital.”
Baur believes that the flow of VC funding into tech, specifically real estate and proptech, will cool down following the bank failures and subsequent bailouts.
“The reality is when money flows, there are many investments that, in retrospect, look stupid or where when something fails, and you can say, well, that was a dumb idea,” he says. “When you enter a market as we have now with constrained capital, those things never get built in the first place, and some of those things—a tiny percentage—become the next big thing because no one could really foresee it.”
That was the case with products like DocuSign and, to a larger degree Zillow when it was just getting its start, according to Baur, who adds, “we will lose some of that for a while” during what he called a temporary cyclical delay.
Morgan Carey, CEO of Real Estate Webmasters, among others in the industry, applauded the government’s intervention over the weekend. However, he also notes that the decision wasn’t much of a decision to begin with.
“The reality is a ‘run’ on any bank is possible, and all banks are in relatively the same position, meaning cash available to disburse is significantly lower than cash owed to depositors,” he says, adding that inaction could have led to a chain reaction that could have matriculated through the financial system that would create a more insidious problem for the U.S. economy.
“In its most serious form, a run like that could quite literally collapse America’s financial structure completely,” Carey continues.
Thus far, that’s been a tall order in the wake of the SVB and Signature Bank collapses. Following last weekend’s events, Reuters reports indicated that San Francisco-based First Republic Bank started suffering similar turmoil as its shares dived amid fears of a possible bank contagion.
At first, the bank could meet the withdrawal demands thanks primarily to additional funding from other banks. However, this week, First Republic became the third bank that received a bailout—though it didn’t shut down.
The San Francisco-based bank will receive $30 billion in deposits from 11 banks, according to a joint statement from the Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation (FDIC).
All the while, the hits haven’t stopped coming for SVB after Wall Street Journal reports showed that the technology-focused lender’s parent company, SVB Financial Group, filed for bankruptcy on Friday.
Carey stressed in an email to RISMedia that SVB and Signature Banks’ collapse is a reminder to other tech companies to remain diligent with their business practices and fiscal responsibilities.
“Silicon Valley Bank is much closer to the VC world than many institutional lenders, and I believe they have adopted many of the fast and loose fiscal policies that endanger the investment sector at large,” he says.
While he admits that he is glad that depositors will be protected with the government bailout, Carey says he is hopeful that last weekend’s events will urge companies to “reevaluate their policies and financial partners” to ensure they are well diversified.
Russ Cofano, president and CEO of Collabra Technology, thinks the growing turmoil in the financial sector will add another layer of uncertainty in the proptech and startup ecosystem at a time when several companies were already struggling under existing market challenges.
“At a very high level, investors do not like uncertainty,” Cofano says. “Uncertainty creates a very challenging investing marketplace, and it was already dealing with its fair share of uncertainty related primarily to the market that nobody can get their arms around from an economic standpoint and an overall housing demand standpoint.”
The Federal Reserve has spent the past year trying to tame elevated inflation with its interest rate hike efforts, which has dished out a mix of impacts across markets, including economic uncertainty and recession concerns that could have arguably played a role in spooked investors pulling their money from places like SVB in search of safer options.
The recent bank failures and uncertainty in the financial sector could force them to pull back or stop increasing interest rates for the time being as things get sorted out in the market, but that remains to be seen.
“So you already have a sector that is sort of fragile, and then you throw this on top of it, it will make it even more (fragile),” Cofano continues. “I think the result we’re going to see is more technology companies, and specifically proptech companies, fail because of a loss in funding.”
It’s unclear what the mid- to long-term implications of last week’s bank collapses will be in real estate, but Cofano says real estate will still be a place of great promise for venture investors.
In the near term, Cofano expects a stagnation in the capital raising within the startup and proptech sectors as things get ironed out following SVB and Signature’s failure.
That may be a positive outcome compared to predictions made by Zillow CEO Rich Barton recently that characterized the recent banking crisis as a possible “harbinger of tough times.”
In a recent GeekWire interview, the Zillow executive suggested that “the real pain is probably coming” for the tech industry which has struggled in recent years following the pandemic.
In the meantime, Bess Freedman, CEO of Brown Harris Stevens, expects that the tech sector—specifically startups—will likely struggle to find capital in the future.
“For more than a decade, money has been really cheap, and interest rates have been so low there were all these startups, and investment and SPACs were a new thing…and everybody was throwing mud at the wall and trying a million things because money’s cheap,” Freedman says. “Now, all of a sudden, the markets are walking in as a disciplinarian and saying the party is over.
“We’re in a very different environment,” Freedman adds. “Money is more expensive. People are more fearful and are being very careful. They won’t just open their wallet and lend money to whatever.”
However, innovation will still be around.
Freedman notes that companies will find ways to continue evolving their products and offerings, albeit slower than in the past decade.
“It won’t be the level that it was in the past, but when people come up with great things, and there’s innovation that inspires others, and everybody tries to get better and improve, it’s great,” Freedman says. “I think it’s just a different environment, and it will be less loosey-goosey.”
Like Baur, Freedman doesn’t see the cooling pace of VC-backed companies and firms entering the market as inherently bad. If anything, it could mean an emphasis on quality over quantity, and financially sound and sustainable products and players stand up in the near to mid-term.
“I think we saw many business models that didn’t make any business sense, and people knew they were unsustainable,” she says. “In the real estate world…what we do as real estate brokers every day hasn’t changed. We may have new technology that can send information quicker or a new sort of platform that collects information, but what we do is so high-touch, and that hasn’t changed.”
