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  • Writer's pictureCapital Bridge Partners

First Republic & the Effect on Bay Area Luxury Real Estate

Updated: Nov 19, 2023

By Daniel and Gavin | Capital Bridge Partners

The collapse of Silicon Valley and the subsequent panic at First Republic Bank (FRB) will have an outsized effect on Bay Area real estate that we have yet to fully understand. FRB is the preferred lender to wealthy individuals purchasing or refinancing commercial properties and luxury homes in the Bay Area (as well as Los Angeles, New York and other coastal markets).

First Republic enjoyed remarkable success as a private bank to wealthy individuals. They won favor amongst the affluent through a simple formula: offer the highest service and best terms on new loans to the best borrowers. In exchange for these great terms, borrowers were required to bring their deposit relationships. While FRB was already wildly successful, the low rates and interest-only terms offered during the Pandemic took off and the bank’s deposits doubled to about $175 billion.

For a long time, FRB had the right formula. But, it held these low-rate mortgages on its balance sheet. As rates rose, the value of the mortgages dropped. With the implosion of SVB and a subsequent run on similar banks, FRB’s stock collapsed 90% and a net $40 billion of deposits left the bank in a classic run.

A number of measures have allowed the bank to survive.

But, FRB no longer has the deposits or income to give cheap loans against expensive homes. From our perspective in the Bay Area, FRB had created and then cornered financing for high-end real estate and wealthy borrowers.

The bank run started about six weeks ago around March 7th and stabilized around March 25th, so the story has yet to unfold. However, with FRB removed and interest rates double that of only a year prior, the clear expectation would be a collapse in high-end sales and prices. It’s hard to imagine another outcome. My colleagues and I gossip about banks that might step in to fill the void like high school kids trading rumors.

There could be some mitigating factors. A recent article published in the San Francisco Business Times cited a lack of new inventory. Specifically, owners are handcuffed by those same low-interest rates FRB provided to them; they are not selling their homes because the prospect of getting a costly mortgage on a new house is prohibitively expensive; and the market is strangled for new listings. Simply, the supply of homes on the market is low, and the demand that exists may be willing to pay prices similar (albeit lower) to those seen during the Pandemic.

We really only have a month in the rear view mirror, and interpreting any data is premature. So, like it or not, we are living in interesting times. We hope to make the best of them.


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