Good morning to Summertime Investing,
Commercial Lending
The Business and Investor Side of Our Business
Good News for now: Our interest rates are holding steady and we have Banks and Lenders still active –- in all aspects of the investing market.
Recession talk persists, yet our research finds a reasonable recovery is underway, as people continue to speak wallets and feet. Compared to 2019, TSA reports airline travel is back to its 2019 level and has been since the start of 2023. As for hotel occupancy, it’s now equal to the 2000-2022 median, though slightly below the 2018 record. Gasoline consumption is running at about 95% of 2019 levels, and gross movie box office ticket revenues are close to the 2016-2019 median. The economy continues to steadily return to normal.
However, not all skies are sunny and warm, we will address some of the headwinds we see continuing to point us in recession direction in our first of the month letter.
Even more, the latest inflation rates are nearing Fed target numbers. Yet, I doubt this will prevent one more small bump, by year end. Thus it is important to learn from the next Fed meeting. Keep in mind, their task is tied to inflation and securing the value of the US dollar. For investors, the preferred numbers of comparative value, are tied to the US Treasury notes.
1) Interest rates: Rates continue trending sideways. Up the past couple of weeks, in response to the debt ceiling reset and expectation of more bonds being sold, to cover the reset costs. Good News: Latest inflation numbers are becoming calmer than previous even thought interest rates are trending back to the highs of last Fall. Call to learn more. Let’s review how these numbers influence your mortgage decisions.
Consider: Over the past year, 10-year Treasury has traded between 4.25 % and 3.5 %. This despite the Fed funds rates having increased by 2.75 %. Good news: Rates of concern to you, are not directly tied to actions by the Federal Reserve Board, though they share many overlapping components.
2) Residential Real Estate: The Supply vs. Demand equation still suggest prices are supported and should go up. But, it is ALL local. Some geographic areas are experiencing softness and price declines. This pattern is expected to continue as the US is on track to generate approximately 2 M new households this year, with only 1.5 M new housing units built.
3) Commercial Real Estate: Jobs, expectations, and Federal Reserve policy weighs on commercial real estate. Call us. Let us help you prepare the ways to best navigate these numbers and how they weigh on your invest portfolio. Interesting stats: In comparison to 1984 when Reagan released his Morning in America advert; the United States currently has lower inflation, higher employment, lower interest rates, higher rates of home ownership, and a lower poverty rate.
Federal Reserve: Conversations from many Federal Reserve members suggests further rate hikes. There will be no reductions. Remember it is more than inflation. There is a need to support the US dollar, as the world currency.
Good News: Commercial investing, as a whole, is quite diverse. It is able to match and meet most commercial investor’s financial goals and interest. Our goal: Matching each client with the best lending options and customized programs. Let’s talk, today. Early prep is key.
Economic News
Banking and Financing: In short, two thoughts: Careful planning and strategic preparation. It is what the market demands, as many institutions are cautiously on the side-lines. Staffs are being trimmed, as management carefully reviews its balance sheets. Signature, SVB, First Republic were red flags screaming discipline. The coming years: Challenging days remain.
Insurance companies – a regular source for commercial financing – is also adjusting. Why? Less capital to deploy, as insurance claims continue at record paces, due to past flooding, storms and fire events. Expect jumps in premiums.
Retail, Restaurants and Hotels: Holding up quite well. In spite of a drop in savings and inflation fears, people enjoy the relaxing fun of food and entertainment. Expected declines have not yet materialized. People are imaginative and quick to adapt, when needful. Yet annual cash flow reviews are showing numerous projects currently not supporting debt service. We are helping some of our clients restructure and modify their loans. If you know of anyone getting close to the edge, coming close to due dates, please call. We can help!
Manufacturing: Continues to be a bright spot. Adding jobs each month.
Office Demand: Herein lies the problem child. Contrary to some difficulties in certain specific markets – San Francisco and Manhattan naming two – overall the sector is showing a slow increase in demand. This Spring increase in demand is outpacing the past 5 years. Yet, softness is expected to continue as theVODI (VTS Office Demand Index) is still 4.5 % below the same time last year.
Wild card dilemma A: In balancing P&L and Balance Sheets, CEO’s may choose downsizing real estate vs layoffs. This is good for employees and speaks to the job market ”feeling’ tight. Yet it may prove a lasting occupancy challenge for commercial office space and buildings.
Wild card dilemma B: Availability of Power Increasingly an Issue for New Development
The availability of power needed for new construction is an escalating issue across all providers in the State. Not only is it increasingly difficult to coordinate with the utilities for new infrastructure, but required equipment and materials have multi-year lead times, and in many instances the utilities lack the existing capacity to power new projects. Outcome: Delayed energization dates and increasing conditions of approval requiring new development to construct their own power facilities in the way of substations, or make large contributions to the utilities so they can expand capacity. It is never too early to get those utility applications submitted as your place in line may take several years before the lights get turned on.
CAP rates: For Apartments: Currently trending near 5 %, up almost 0.6 %, year over year. Retail properties up about +1/3 %, to an average of 6.5 %. Best is urban storefront holdings.
The Office sector shows the least increase year-over-year or 0.2 %, but averaging 6.7 %. In a detailed review, the Suburban sector is averaging 6.8 %, while Core (CBD) is about 5.8 %.
Industrial – bright spot of the past few years – has risen about 1/3 % to near 5.5 %. Single tenant is about 5.7 %.
Good News: Our commercial successes continues. Call us.
Our depth of lending partners allows us to work with certainty of execution. Getting it done!
From business-purpose loans with light documentation to re-development projects building housing and commercial property purchases. How does this work? It works because of who we are. We offer so many lending partners to provide the flexible loans, excellent programs and great terms to move your life forward. Our track record is proven. It does keep our phone ringing. Let’s talk. We can help.
A most specific need: Loans coming due. The need and demand is evidenced by our increased work to refinance various commercial properties. Suggestions before we meet: Check loan parameters and due dates. Don’t miss the annual lender requested financial statement. Key: Being well organized and meeting deadlines keeps lenders smiling. We know the language. Let’s talk.
Good News: We have great lending partners. They respect our work and attention to detail. This is good news for you, as they trust our approach and loan packages. In response, we carefully strive to maintain the quality of their depository relationships. This is called team chemistry and is what makes our lending relationship, a winner. Join our team.
You have heard me say: It starts with a first conversation. Let’s talk.
Let the fun of Summer continue. Early walks and longer days, as fruits are ripening.