In a market where rates have basically doubled in the last six months, inflation is at an all-time high, and rising interest rates have taken over the market, the idea of getting commercial real estate funding can be daunting.
According to Trading Economics, the United States Fed Funds Rate is “projected to trend around 4.75 percent in 2023 and 4.00 percent in 2024.” What does this mean for commercial real estate lending? Since inflation and interest rates have increased, a recession is likely. Because of this, capitalization rates will continue to rise, which means values will decrease.
So, what does this mean for commercial real estate funding?
Are we in a recession?
There is a lot of volatility and uncertainty in the market right now. The pandemic affected all loan areas in different ways. Multifamily properties saw higher rent, offices and other retail properties lost momentum with workers staying home between January and March. So, are we in a recession? Or is it on the horizon? According to the Forbes definition (a recession being two consecutive quarters of negative gross domestic product), we may already be in one, but it is a little more complicated than surface-level numbers.
According to a Yahoo Finance article, the answer depends on who you ask. 76% of Americans say yes, but economists, the Fed, and the Biden Administration will give you a different answer. Many will point to the labor market as evidence we are not in a recession, however, that doesn’t change the fact that gross domestic product declined for the second executive quarter over the summer. There are a lot of different factors that go into a recession, so there’s just no way to make a universal judgement.
Lincoln James Capital anticipates that rates will continue to rise, which will be harder on geographies with limited economic drivers. Small town America will feel this more than areas that have multiple and diverse economic drivers like technology, energy, and banking. These larger areas will do better in the “new normal.”
Since World War II, there have been 11 recessions. The U.S. typically experiences a recession every six years. The silver lining? There are always winners.
Who are the winners in a recession?
Certain asset classes do better than others during economic downturn. The pandemic hit hospitality, office, and retail hard, with industrial increasing in value.
Recession-resistant CRE asset types have a few things in common:
- Increased demand
- Historically stable during recessions
- The need is consistent (medical workers, housing, food)
- Low operating costs
- Low competition
A few recession-resistant property types typically include multi-family, grocery anchored retail, industrial, and self-storage to name a few. Every recession is different, and every geographic location can present different outcomes.
How to secure funding in a tightening credit market.
Thankfully, there are ways to prepare your business for a recession and still get commercial real estate funding despite a tightening credit market and economic downturn:
Be prepared to bring more equity to the table. Having more equity lowers the risk to the bank also protects you in case values decrease in the short term. You can always refinance the property when the market comes back.
Be thoughtful about the funding you are trying to get. Before taking on new debt, be sure to assess what the costs and payments will be. If it will simply be a band-aid on a bigger issue, like a bridge loan, you may want to re-evaluate to avoid causing more issues.
Increase and preserve liquidity. When economic downturn hits, banks can close lines of credit if the borrower poses high risk. Having easy access to cash can help you avoid those issues.
Keep your eyes open for opportunity in asset classes where the economy is hit harder. Diversify and add value to your existing commercial spaces, but don’t get involved with risky projects that can cause long-term damage.
Focus on the silver lining.
We see a lot of uncertainty in the market with the geopolitical risk and economic risk, but we see the inflation rate tapering off in the last quarter of 2022 and first quarter of 2023. Lincoln James Capital can help you secure commercial real estate financing with the best terms, despite high rates and economic recession.
There are always winners in a recession; stay focused on the areas for opportunity and what you can do to prepare.
Lincoln James Capital can help you find and secure CRE financing with the best terms.
If you have commercial real estate investment opportunities, Lincoln James Capital can help get your deal done. We have extensive market knowledge and can help you make confident decisions. We have a large database of lenders with a wide range of possible terms. Keep in mind, we don’t make more money from higher rates. We get paid to get our clients the loans they need with the best terms (which is not always the best rate) so they can close their deals and continue to build their business and increase wealth.