The Banking Crisis and Its Impact on Small to Midsize Developers

Rising rates and high-profile bank failures have led to an unprecedented pullback in lending. How should real estate operators navigate?

Thesis Driven dives deep into emerging themes and real estate operating models. This week is a guest letter from Atif Qadir, the Co-Founder and Chief Impact Officer at Commonplace. It puts the 2023 banking crisis in context and explores its impact on small to midsize developers.

“It is a bad time to be small, whether you are a bank or a company in America.”

— Rebecca Patterson, former Chief Strategy Officer at Bridgewater Associates

Entrepreneurial, bootstrapping, pioneering. Small-scale enterprise is the backbone of the American economy. However, businesses of all types and sizes everywhere need access to capital to survive and thrive. This has been the case since the days of the earliest corporations, such as the Dutch East India Company, which financed global trading voyages. Real estate businesses, including small to midsize developers, are no different.

Photo by Clarissa Bonet for Commonplace

Real estate development is defined by the capital stack, the collection of financing sources used to fund a project. Sometimes a project’s capital stack is filled with debt, covering almost 100% of the project’s cost. In tepid economies, that number comes down to around 50-60%. In major recessions that percentage comes down even further. In any case, understanding debt—and how to get it—is a critical part of getting projects going and staying afloat across real estate cycles.

Right now, we are in the perfect storm of banking industry change, inflation, record high interest rates, a once in a generation change in how we use buildings, and a housing shortage of critical levels, according to Professor Tomasz Piskorski of Columbia Business School. During times of incredible capital markets instability, real estate developers are facing an unprecedented challenge when it comes to accessing debt.

This article maps the ecosystem of debt providers for commercial real estate, explains how this relates to the current and past banking crises, predicts what to expect in the months ahead and relays tips about how to manage downside risk and maximize upside as a small to midsize developer looking for commercial real estate debt.