The takeover of First Republic by JPMorgan Chase adds another complication to a local real estate market already hampered by high interest rates, difficulties in financing and low occupancy.
And for Bay Area real estate professionals, the San Francisco-based lender’s collapse also means the loss of a trusted partner that was critical in helping get deals done, putting mortgages within reach for residents and lending funds at attractive rates to affordable housing programs.
First Republic knew the local business assets of the Bay Area “better than anyone else,” said Bora Ozturk, a principal of March Capital Management, a San Francisco-based real estate investment and development firm.
Ozturk recalled approaching more than a dozen banks to try and finance the acquisition of a small commercial property and turn it into a specialty food store. First Republic was the institution that made the deal possible, he said.
“They are not a good part of the ecosystem; they were the ecosystem,” Ozturk said. “There was very specialized lending they understood, like the exact business of a local coffee shop in San Francisco.”
The seizure and sale of First Republic—the third-largest bank in the Bay Area at the end of last year—place its formidable loan book in the hands of JPMorgan, a bank likely to take a much different approach to local lending. At the end of 2022, First Republic held $98.8 billion worth of loans in single-family homes, $21.6 billion in multifamily properties and another $14 billion in construction and development loans.
According to an April report from the real estate firm Colliers, First Republic was the most active lender in the Bay Area multifamily market, taking part in 40% of deals in the first quarter of 2023.
The company was also deeply involved in financing affordable housing: There are five affordable housing projects either in the pipeline or purchased with First Republic loans, according to the Mayor’s Office of Housing and Community Development; the bank was also a main lender in the city’s below-market-rate home sales program.
Rebecca Foster, CEO of the nonprofit San Francisco Housing Accelerator Fund, described First Republic as an “amazing partner” whose senior management sought to make a difference in its hometown. The bank had been continuously headquartered in San Francisco since 1985.
In 2020, First Republic offered a $100 million revolving credit facility to the organization, which assists nonprofits in acquiring and renovating low-income housing. The facility is renewed every 24 months, Foster said. While the accelerator fund isn’t expecting any disruption to existing loans from First Republic’s sale, it’s too soon to know what exactly could happen to the credit facility over the longer term.
“Having one partner at the scale of $100 million, at pricing that was as attractive as First Republic’s and with that kind of relationship, is going to be hard for us to replicate,” said Foster.
Cyrus Sanandaji, managing principal of San Francisco real estate developer Presidio Bay Ventures, said he was already in the process of migrating accounts to JPMorgan as part of a change to its banking operations. But he added First Republic helped finance two of his apartment projects with construction debt, and said it was unfortunate to lose the bank because “they didn’t need an education of the nuances of the Bay Area submarket.”
“There was an ease of transaction because they didn’t have a learning curve,” Sanandaji said. “That’s the reality of how most real estate has been built historically; it’s through local and regional banks.”
No More ‘Cheap Jumbo Mortgages’
Sanandaji said the bank’s failure provides an opening for others to step up and service lines of business that JPMorgan, the nation’s largest bank, is uninterested in pursuing. One of those may be the low-rate “jumbo mortgages” that First Republic was known for.
On a Monday shareholder call, JPMorgan CEO Jamie Dimon was explicit that his bank would not get into the business of low-cost mortgages.
“We’re not going to be putting a lot of cheap jumbo mortgage loans on our books,” Dimon said. "First Republic did a great job at service. But being in the low-cost lending business is not what JPMorgan does.”
That means some Bay Area homebuyers could have a more difficult time accessing mortgages in the aftermath of First Republic’s takeover, said Oz Erickson, chairman of Emerald Fund, a San Francisco development firm.
First Republic provided very low-rate residential mortgages as a means of acquiring new customers and deposits. In an age of low interest rates, that model proved highly successful as First Republic locked in an enviable base of affluent, credit-worthy customers on the coasts. But as rates increased and mortgages were revalued, those loans turned into an anchor that weighed down the bank’s balance sheet.
The FDIC is entering into a loss-sharing agreement with JPMorgan on First Republic’s single-family, residential and commercial loans. The bank will not assume First Republic’s corporate debt or preferred stock, meaning investors will likely be wiped out.
A New Regime
JPMorgan has committed to honoring existing mortgages, loans and letters of credit. However, new loans are largely on pause as JPMorgan begins the process of integrating the two banks and weeding out non-core assets. One of those assets will be the First Republic name, which will be retired as its properties are rebranded.
A JPMorgan spokesperson didn’t answer specific questions about how quickly that rebrand might happen or whether the bank would execute First Republic’s planned layoffs of 20% to 25%. Instead, he pointed to a remark by JPMorgan CFO Jeremy Barnum on Monday’s shareholder call, who said that the company is committed to “treating [First Republic employees] with respect, care and transparency.”
A group of JP Morgan executives were on early flights Monday morning to meet with people at First Republic and conduct town halls, Dimon said. He suggested that JPMorgan is seeking to retain top talent at the bank.
“If you’re an advisor and you’re listening to me: We have the best research, best equity. [...] We have concierge services. We take care of people. We’ve got excellent compensation,” Dimon said.
But some First Republic employees may be in for some immediate changes: Under the new regime, First Republic’s senior bankers are expected to return to the office five days a week, mirroring a memo sent internally to JPMorgan’s staff last month. JPMorgan staff on hybrid schedules are required to be in the office at least three times a week.
First Republic’s many local customers and partners expect to see changes, too—and not necessarily for the better. Few banks have mastered the kind of high-touch personal service that First Republic was known for, Ozturk said.
“The relationship managers knew everything about their client down to their shoe size; that’s why there was so little credit risk in the loans they were underwriting,” Ozturk said.
“It’s a really wonderful thing to have a local, very involved and engaged bank that works with so many nonprofits,” added Foster. “We really like the people who work at First Republic, they’re a hometown bank and a really big employer, and that has other ripple impacts in general in the community.”