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May 2018 Commercial Newsletter

Download Complete Newsletter | Volume 6, Issue 5

What Will Happen to Available Financing?

Having good financing available is a major supporting factor in maintaining solid commercial real estate values. Whenever our economy is recovering from an economic
downturn, the increased ease with which borrowers can then obtain loans, when combined with being able to buy property with a lower down payment, helps to increase both the demand and the excitement within buyers to own more property, which then helps to support and drive prices upward.

Keeping this in mind, the real estate market has recovered nicely within so manydifferent geographical areas since the last recession, and the ease with which good financing has been available has definitely supported this recovery.

So what does our crystal ball hold with respect to the future…and with the continuance of this good financing still being available? The good news is that the availability of good
financing should continue on as long as the lenders believe that the future of the real estate market remains sound.

So right now, while many markets are experiencing sustained levels of value with their commercial real estate, the pace of buyer activity in many areas has slowed, as buyers seem to be wondering whether or not they should still be paying today’s prices.

However, as long as the economy and the job market remain good, today’s real estate values can still remain solid. But at the same time, the lenders, to a certain degree, need to keep a watchful eye on where they believe the real estate market may be headed, and not just focus on where the market is right now.

With this in mind, the amount of available financing should still remain good as long as there are no new warning signs appearing on the radar screen, indicating that there may be a negative turn coming within the economy. In addition, this can be dealt with differently by the various lenders, as the ones that got bailed out the last time may just figure that the same money will be made available to them once again, and these lenders may still remain more aggressive with their lending.

Putting this all together, one thing remains true…the level of available financing with good terms for borrowers will probably notget better than it is right now, within this particular economic cycle.

So if you’re thinking of buying or refinancing, and getting good terms on your loan is very important to you, you may want to take action sooner…rather than later. With this in mind, and in knowing that interest rates are now on the rise, it will probably be some time before we see interest rates become lower once again.

Moderate Economic Growth Continues as Consumers Pull Back On Spending, Companies Keep Investing


The U.S. economy notched a moderate gain in the first quarter of 2018. In its advance estimate, the Department of Commerce reports that gross domestic product (GDP) grew by an annualized rate of 2.3%, a drop from the 2.9% growth of the final quarter of 2017, but still better than the annual average achieved over the course of this lengthy expansion, which is now entering its 105th month.

The government cautions that these estimates are based on incomplete data and subject to revision. However, the path of year-over-year quarterly growth continues to accelerate and shows no real sign of faltering yet.

The leading contributor was private nonresidential investment, which grew by 6.1% annualized. It was the eighth-consecutive quarter of positive growth, contributing 0.8% to GDP growth. Investment in equipment and intellectual property accounted for more than half of that contribution. Healthy corporate earnings and the newly enacted tax reform allowing immediate and full depreciation of selected capital investment seem to be boosting investment in equipment. This is especially important for future growth as it portends increases in future productivity, lifting wages and profitability.

Consumers pulled back a bit after a robust fourth quarter last year. Consumer spending slowed to 1.1% annualized in the quarter, the slowest rate since second quarter 2013, and contributed 0.7% to overall GDP growth. While personal incomes were up, consumers chose to bank more of that income as the savings rate has been ticking up from the dismally low levels reached late last year.

Net trade eked out a positive contribution to GDP growth, with exports outstripping imports as weaker consumer spending reined in purchases from overseas.

As expected, the drawdown of inventories during the last quarter was reversed as businesses restocked their shelves in the first quarter of 2018, accounting for 0.4% of GDP growth.

Also on Friday, the Labor Department released its latest report of employment compensation costs to businesses. With a tightening labor market, expectations are for faster wage growth, although that has not yet been evident in the earnings reported alongside recent monthly employment numbers.

The Employment Cost Index reflects total compensation costs to firms, including both wages and benefits. This latest report shows a continuing acceleration of the cost indices for both wages and benefits. The wage index for private sector workers grew by 2.9% from a year earlier, the largest increase since 2008, while benefits increased by 2.6%.

The Federal Reserve’s preferred measure for inflation is the price index for personal consumption expenditures excluding energy and food (“Core PCE”). This rose by 1.7% in the first quarter, still shy of the Fed’s 2.0% target. But as more signs of wage growth appear, the probability of the FOMC voting for three more rate increases this year is rising.

Any impact of the Tax Cuts and Jobs Act (TCJA) on consumers has so far been muted. However, the fiscal stimulus, which is still in the pipeline, as well as growing budget deficits are certain to put upward pressure on interest rates even in the absence of proactive Fed policy. It remains to be seen how firms will respond to expectations of a higher cost of capital, and how consumers react to higher household debt burdens.

It seems that we are enjoying, for now, a Goldilocks economic environment-not too hot and not too cold, a balancing act to be sure.

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