Thrive in ’25

This photo was captured by Austinrailnow.com

Slammed by Bank Failures

The Marketplace has been slammed in the past two months with four U.S. bank failures, then add Credit Swiss to that crowd.  No one knows if this is the worst of it, or if it is the “tip of the iceberg” or the “first shoe to drop”.    But there is no question that this rolling recession we are experiencing, began with the crash of the homebuilding market last year as interest rates doubled, buyers ran for the hills and builders hunkered down.

However, from the beginning of the year homebuilders have made their adjustments by downsizing the houses they are building to meet lower price points.  They are building more one-story homes and fewer two-story homes, for example, and smaller floor plans on even smaller lots, if that is possible.

Also, homebuyers have made the mental and emotional adjustment to higher monthly payments, with interest rates rising from 2.67% up to nearly 7% then back down to around 6.25% now.

What a roller coaster ride, and not a fun one.

Now the regional banks are in crisis as they lose deposits to higher interest paying instruments like money market funds and CD’s yielding over 4%.   Regional banks are the key to our industry as they provide the majority of construction loans to developers of retail, office, industrial, self-storage and other commercial properties.

Currently, loans are harder to come by.

1. Everyone knows we are heading into a recession

2. Because of the bank failures their deposit base is under pressure

3. Because of bank failures the regulators will be particularly zealous since they missed the problems at the banks that failed.

So, new loans for investors to buy existing properties and for owners to finance capital improvements and finish-out will be harder to obtain. Developers’ new projects will undergo more scrutiny, face higher equity requirements and interest expense to make them pencil out.

$1-Trillion to Refinance this Year

But what is really scaring the marketplace is that there is $1,000,000,000,000,000 ($1-trillion) in commercial real estate debt that must be refinanced in the next 18-months or default.

Some of those assets may be underwater because they have lost tenants or tenants are not paying their rent, which may result in the owner not making building repairs and coming out of pocket to pay the mortgage to keep the property.  But when the owner goes to refinance, he will be facing much steeper mortgage payments, IF he can get a loan.

Now this represents only a small portion of properties and not the most desirable ones, but it will be a drag on the marketplace until these assets clear, in one way or another.  This will very certainly create even more stress on regional banks for the next year or more.

High Quality CRE in Top Markets Lose Value

Nationwide, institutional quality properties are losing more value, approximately 15% in the past year, according to Green Street Research.  However, Co-Star reports that “individual private buyers of small properties in secondary markets last month helped reverse price declines” of the past year.

Thrive in ’25

In my 2023 forecast I said that we must Survive ’23 to Thrive in ’24. Or now maybe Thrive in ’25?

Find the Opportunities, Don’t Be the Opportunity.

That is to say, in every market, especially when there are massive dislocations, investment opportunities will present themselves if you are smart, know what you are looking for, and don’t hesitate to execute when the moment arrives.

One of my favorite sayings is from the all-star batting champ, Ted Williams.  His mantra for hitting was, ‘Wait, Wait, Swing!”  Wait for the right pitch in your personal strike zone, then step in toward the pitcher with quickness and power.

Warren Buffet read Ted Williams’ book and adapted this philosophy in his own investing method.

 

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