- Recent bank failures and bailouts have raised uncertainty in the debt markets.
- In addition, the fed continues to raise interest rates to combat inflation.
- As a result, there may be opportunities for buyers of distressed assets in the near future.
I like to generally be upbeat and positive. Its not always possible, but I think if you can look at the sunny side of life, it’s a nicer way to get through a day. That’s quite an introduction to a blog article talking about the state of the economy, eh?
But now is the right time to check in on the economy. We all know about the recent bank failures, the rise of interest rates, the high inflation – its all lead to some significant uncertainty in the markets. But what is next? Where is the economy going? And what does it mean for the commercial real estate industry? Well that’s what we are going to talk about this week.
Bank Failures Significantly Impact the Commercial Real Estate Markets
Its been a pretty rough few weeks for the banking industry. The most shocking was probably the Silicon Valley Bank failure. It was amazing how quickly it went from allegedly doing well to a complete failure. That was followed shortly thereafter by Signature Bank and Credit Suisse effectively being rescued.
These failures obviously create a lot of uncertainty and tension in the market. And that uncertainty creates problems in the credit markets. When a bank fails, it often results in a decrease in the supply of credit, which can make it harder for businesses and individuals to borrow money. This can lead to a decline in economic activity, as businesses are unable to invest in growth or hire new employees. In addition, the failure of a bank can lead to a loss of confidence in the financial system, which can lead to a broader economic downturn.
The tightening of credit markets can also have an impact on interest rates. When the supply of credit decreases, lenders may raise interest rates to compensate for the increased risk of lending. This can make it more expensive for borrowers to access credit, which can further slow economic activity. That is about where we are now, as I am sure you have all seen a tightening of the credit markets.
Fed Continues to Raise Rates
In addition to the bank failures and tightening credit, the Fed continues to fight inflation. On March 22, the Fed once again raised interest rates another 0.25%. This was the ninth consecutive rate hike. Chairman Powell reiterated that the Fed’s goal was to get inflation down to 2%.
The latest twelve-month inflation data showed an inflation rate of 6% for February. So theoretically, at least, the Fed still has a long way to go. If that’s true, and the Fed agrees, we could continue to see more interest rate raises for the near future.
What All this Means for Commercial Real Estate
So what does this uncertain news mean for commercial real estate? Its not great. Not only are the debt markets incredibly tight because of the uncertainty in the banking industry, but even if you can get a loan, the interest rate is very high.
Obviously that could negatively impact buyers who are looking to acquire some properties. Because of that, we have seen, and will likely continue to see, cap rates increase across the board for commercial assets. It seems like sellers are starting to acknowledge the cap rate expansion and, as a result, the value of properties is decreasing.
This also could present a serious problem for anyone who needs to refinance a commercial asset. If you have a property that needs to be refinanced, it may be very difficult to find another loan for a rate that will not severely disrupt your cash flow. As a result, there may be current owners that are in trouble and looking to sell. Combined with widening cap rates, that could provide a lot of opportunity for buyers.
This is just one man’s opinion and I could be wrong. But if I’m not, there may be some choppy waters ahead for commercial real estate.