Commercial Lending Insights: November Market Update & Financing Solutions
I hope you’re enjoying the Holiday Season! A lot to unpack this month with numerous end of year reviews of predictions and those looking into the future. My sources are Blue Chip consensus, Federal Reserve and other Industry leaders. Where we go is important for your money.
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Our recent work has encompassed the Home Health sector, Apartments, Development and Motels.
Economic & Market Realities
1) The Economy: Trade deficit drops to lowest level in some time. Still up year to date, but contracting the past couple of months. The Chicago Fed and the recent October retail sales, both ex autos are up. October up .8 % and November is estimated another .4 %. Weakness in the unemployment sector is just not showing up in spending.
Speaking from the Chicago Fed 5 State segment of the economy: The Chicago Fed’s main broad activity index shows a December reading around +0.15 with the three-month average still negative (about −0.13). Their charts display activity a bit above zero in the latest month but still below trend on a smoothing basis. Within that, production components are solidly positive, consumption and housing slightly negative, and the diffusion/3-month measures are consistent with slow expansion rather than a strong boom in the most recent plots.
2) Federal Reserve: Education First: The regional presidents are chosen by members in the community with a D.C. approval, while the Governors and Chair are chosen by the U.S. President and confirmed by the Senate. The first is open market, the second is political. This has been since the formation of the current Federal Reserve.
Perspective: To think the Fed isn’t interfacing with the White House is absurd!
News We Can Use: Most recent meeting had the expected 1/4 % drop to the Fed Funds rate. Dropping the Prime Interest Rate to 6.75 % and expected to show up in our credit cards and other short term lending rates. The 10 year Treasury, and indirectly Home Loan rates, currently show little to no improvement on the news.
3) Employment: October jobs numbers understandably weak. Government reduction starting to show up by way of DOGE and, add in the shutdown. Earlier revisions cut August 50 K, September cut 10 K, so the revisions continue to take the numbers lower.
The unemployment rate move was from 4.44 % (rounded to 4.4 %) to now 4.56 % (which gets rounded up to 4.6 %). Because the rate really only moved up .1 % can be why the market is not moving more than we would have expected with a larger .2 % hit the headlines are following. NOW, we do have to pay attention as the U-3 unemployment rate has been moving upwards .1 % each month the past 5 months.. straight line.
Consumer Sentiment: One cannot talk about employment and retail sales without diving in here. I have spoken before about the change in methodology. Suffice to say the reported numbers since are lower. With that some quips to consider: All say they are struggling, the country is divided yet the individual households are OK to good. The # 1 concern spoken is rising prices / inflation with the # 2 being immigration. Spoiler alert, consumer spending is still above trend-line, even when adjusted for inflation.
4) Inflation: To watch for is the ongoing story with tariffs. As they become set, the cost moves into the marketplace. Currently a lot of industries are in a wait and see position as price adjustments from tariffs are considered a ‘one bite at the apple’. One cannot raise today, lower next week, and a month later bump back up again. Spending cuts are currently in the general merchandise segment as more money is allocated into food. Most noticeable in the lower 1/3 of the economy.
For the stats, we have been above the Fed spoken 2 % target for 4 1/2 years, with the last 6 months having little to no further movement down. Wages continue to be edging upwards and supported thru the low firing rate and low hiring rate for jobs.
Hot off the press, from the 18th. PCE. The Fed’s favorite measure, heading in the good direction for interest rates. Headline dropping to 2.7 %. Still above the 2 % target, yet it is the trajectory many will trade on. Energy is the heat the past 2 months, going up. December numbers should be down as energy costs abate. Our often lamented topic of shelter is beginning to move in the correct direction. Down. Moving from 3.6 % to 3.1 %. Shelter away from home (completely created number) was a bright spot with a drop of 4 %. AirBnb and hotels being a soft spot the past couple of months exacerbated by the government shutdown. PCE 6 month run rate at 2.6 %, but the 3 month run rate down at 1.7 %!
5) Interest Rates: Commercial interest rates continue to trend sideways and are down about 1/2% from those posted a year ago.
6) Commercial in General: The MSCI index for CRE posted strong 4.2 % year over year price gains. Apartments pulled the rate down with only a 1/2 % pricing increase. In spite of the market turmoil with the change in President, pricing has continued to increase beating inflation estimates.
7) Forecasts: For 2025 the Chicago Fed hit within .1 % for GDP, the same for the unemployment rate, with PCE within 1/4 % and the 10 year note a bit of a miss at off by 3/8%. Looking to 2026, the summary is muddle thru sideways. A perfect market in my estimation. Not too hot, not too cold. A Goldilocks and the 3 bears kind of story.
Spotlight: Key Market Sectors
1) Apartment Real Estate: Expect annual supply to be at or below average. Roughly 135,000 annual starts the past 8 years or so, with 3rd Q and 4th Q obviously the slow time of the year.. Headlines are ‘70% drop in starts’ When I look at 3rd Q over 3rd Q the past 8 years we are lower, about 50 % lower. This is coming off the highs of 2022 and 2023 that resulted in the flat rent growth we have seen published the past year. Supply and demand folks, I call this a very normal outcome. Rental rate story should track about the same. Look to supply / demand and you can figure. We had a 9 % give or take push 2021 and 2022 to the supply side of the equation, with that what does one expect? Yes, the flat to 2 % growth. As we soak up the excess supply rents will again begin moving up.
2) Retail Real Estate: Keyvork Zoryan of Arselle Investments spoke recently in SoCal and stated; More than 200 million square feet of retail space has been demolished nationwide in the past 10 years, while new supply has grown only minimally. “The denominator is shrinking, but the consumer is actually spending more.” He explained, pointing to the strength of brick-and-mortar sales despite lingering assumptions about e-commerce dominance. And another speaker talking about how the retail sector has left the doldrums of the past decade and stabilized.
3) Residential Sector: Recent headline ‘homes underwater increase 21 %’. If you count just homes with mortgages this equates to a number of 2.1 % of those homes underwater (Great Recession the number was 25 %). In light of the recent pullbacks in value in some overbuilt markets, this is perfectly in line and not a worry to 95 % of the market.
4) Automotive Manufacturing: Largest manufacturing sector in the nation equating to 2.5 % of GDP and covering 930 M employees. Growth is positive with all markets pretty much saturated. Interestingly enough the US auto industry is the most profitable auto market globally. The sector seeks predictability with a lot of headwinds. Headwinds: Qualified labor and automation talent, robotics installations (capital constraints), upstream bottlenecks and the need to increase re-shoring. Tailwinds are the average age of cars on the road is the oldest reported in many years, lack of harmonizing parts and a 4-5 year development cycle.
Some Of Our Services: How We Can Help
Tax-Deferred Exchanges (1031s) Are Booming: Considering a 1031 Exchange? Contact us before you sell! We’ll help you maximize tax benefits, keep your capital working efficiently, and reinvest strategically.
Loans Coming Due? Act Now! Loan extensions are not guaranteed or as easy as they once were. If you have an upcoming maturity, don’t delay – start the financing process early.
Creative Solutions for Complex Properties: We excel at structuring financing for unique properties and deals that don’t fit traditional lending criteria. If other lenders have turned you down, we may be able to help. Interest only? No tax returns? All available, yet what is the most opportune for you?
We successfully structure loans for a wide range of properties, including apartments, hospitality, storage, office, industrial, and agricultural projects.
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With expectations of falling interest rates and significant new investments coming to the USA, now is the perfect time to prepare for future growth.
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