The latest jobs report has arrived. The economy supposedly lost only 11,000 jobs last month. Economists expected 130,000. What’s the confusion and how does this affect the Commercial Property Loan? The bottom line is that there is no direction to the recovery. Job losses are down. Dubai World is looking to default on $60 billion in loans. Bank of America is repaying $45 billion in TARP funds so that it can pay its top executives top money. President Obama says that small and medium-sized businesses still can’t get the credit they need to expand and create jobs. Home sales are up. Prices are down. Consumers are spending less.
How do you plan as a business owner when all of the signs point in different directions? It’s difficult. If there is uncertain access to capital it makes it almost impossible. In this situation, you find that you can’t focus your efforts on moving your business forward. You spend your time in a defensive mode. Protecting your assets. One of the assets for many small businesses and investors is their commercial property. The credit crunch is causing problems in the refinance and purchase marketplace. Property values are in a downward spiral. Rental rates are dropping. Tenants are downsizing. This causes problems for both the commercial
Property Owner/Investor and the Lender
Banks continue to be under a microscope. There are still too many toxic assets on their books and a lot of them are commercial property loans. More than 120 banks have failed this year. In Florida, 12 banks have failed in 2009. A report was just released that there are an additional 42 banks that are on very shaky financial ground. The FDIC needs an additional infusion of capital. The government needs to make more funds available for the commercial market for business and commercial property loans. The economic recovery is going to be based on one thing and one thing only-JOBS. Without new jobs, there is no real hope for sustained growth. Better access to capital. Tax credits. Don’t rely on the housing market to stabilize the overall economy. We need to look at a comprehensive fix and we have been focused too long on the consumer.
Commercial Property Loans and the Deep Freeze
Almost the entire country is finding itself in the grips of an icy cold winter. The commercial property loan market is finding itself in a very similar position. What will it take to thaw out the lenders in today’s market? Is it the government? The investment community? A feeling that the country is coming out of this recession? What’s the answer? I think that it going to be a combination of the above plus some other factors that are not being discussed. The critical factor is that the banks are afraid to lend. They already have so many toxic assets on their books that they don’t want to add to the problem. It’s a combination of non-performing business loans, non-performing commercial real estate loans, and performing and non-performing jumbo residential loans. Most of the banks sold off their conforming real estate loans to the investment market and are continuing to do so.
The Federal government will need to continue buying mortgage-backed securities. They are slated to wind down this program in March of this year. If they stop purchasing these loans, several things are going to occur. The consequence that may have the most impact is an increase in interest rates across the board. The residential loan market is currently artificially low because of the government purchasing these securities. If they leave the market, institutional investors will not buy at the current rates. Expect to see mortgage rates move up about one percentage point. This will stall an already listless residential sales market, causing a further delay in economic recovery.
If we have a recovery that continues to poke along at the current rate with poor home sales, negative job growth, and consumer pessimism, don’t expect a thaw in the commercial property loan department. We need a concerted effort from the media and Congress to help push the banks to lend. The Fed may need to make some changes in how they view commercial loans at lending institutions, but if banks are afraid to lend, the recovery is going to be much slower. Groundhog Day will not come soon enough for us in the commercial property loan marketplace. We need to come out of our burrows, see the light of day and take control.