4th Quarter 2023
by Joe A. Hollingsworth, Jr.
First, the Federal Reserve convinces virtually all borrowers and lenders that inflation is transitory. Then, the Federal Reserve raises interest rates so rapidly that it disrupts the market, making great deals into trash overnight. Then, for a round two punch, the Federal Reserve sounds like they are going to increase capital requirements on most real estate lending banks, thus shutting off CRE as we know it. Between the one/two punch, most developers cannot proceed with deals that require bank participation.
While the demand side of the industrial market is stable and demand is fairly reliable (stoked by all the federal spending), the facts are that, artificially stoked or not, there are a good number of companies still expanding their operations, thus looking for available space. However, the case has to be built that only the strongest deals should survive, and the weakest deals are cast aside as in normal economic tightening. Most of us understand the tightening plan and have been through it several times. Economic cycles are designed to take out the weakest. Because we have had decades of lower and lower interest rates, a lot of “zombie deals” have survived that shouldn’t have, and now these accumulated defaults are exacerbating the problem for lenders.
Now, a whole new paradigm shift has occurred. In many cases, money is simply not available, no matter what the circumstances are. Bank’s shareholders and their management teams are absolutely living in fear about additional capital requirements that the Federal Reserve has continuously beat them over the head with. In the past, mid-size and regional lenders have been the fuel to keep the fire burning in real estate. Day in and day out, they supplied the vast majority of funds needed to move forward, and especially to speculate on well-timed and thought-through scenarios. This dilution fear of shareholders has driven banks to want to slim down the real estate holdings. Not only stopping new loans but expiring loans are being called for partial or full payment. Once again, having “calls” by lenders on their loans has presented a problem in the economic cycle, which simply wipes out equity when other financing is not available to replace existing loans.
I think now is a great time to be bold for those that can. While there is still good demand, there is limited supply; and, uniqueness and availability are driving rent prices ever higher. There are reasonably good fundamentals in place for sustaining this smaller but dynamic demand. I think it’s time well-healed developers step forward and build! Be audacious or don’t be anything at all.