The current best indicator of future Fed action is labor market data – Chairman Powell has made that abundantly clear since beginning his war on inflation last May. To that point, the cost of labor in Q3-22 eased at least incrementally, with the Employment Cost Index rising 1.2% over the three months ending September 30. However, the Q3 increase is consistent with a 5.1% annualized increase, which is believed will keep the FOMC on track for another historically large rate hike at its Nov. 1-2 meeting. Current consensus among economists is for another 3/4% bump in Nov., and a 1/2 % hike in Dec. If this is how we finish the year, fed funds will be at the range of 4.25%-4.50% by year’s end. This will put Prime at 7.50%.
So, has the economy fallen off the cliff yet? We keep looking for the crash to hit the ground – hard landing – but so far, it’s only teetering on the ledge, notwithstanding consecutive quarterly declines in Q1 & Q2-22. Q3 GDP data in yesterday (10-27) showed a 2.6% annual increase. So, are we out of the woods? Not hardly! Drilling down in the muck of the details shows that GDP got most of its boost from balance of trade. The top-line real GDP figure was boosted by a 2.8 % contribution from real net exports. Real exports of goods and services rose solidly during the quarter. Considering the current strength of the U.S. dollar and the economic struggles of America’s trading partners, the strong growth in exports is unlikely to be sustained. The strength of the USD will continue to hurt the import/export part of the equation. The meat-&-potatoes for our domestic economy, consumer spending and business fixed investment, were flat in Q3.
Consumer balance sheets are solvent and liquid, but weakening. This bodes well for Q4 (Holiday) spending. Savings accounts still flush with COVID relief funds are being drawn down. At the same time, credit card balances are increasing – this at a time of rising interest rates. It’s expected that the consumer will have a Happy Holiday season, but Q1-23, and possibly continuing throughout ’23, will be flat-to-down. Recall that consumer spending is still around 70% of GDP.
Government spending was a large contributor to 2022 GDP. Depending on the outcome of the mid-term election (less than 2 weeks away – please get out & vote.) government spending may be neutered in ’23. If so, and the consumer turns idle, and the dollar remains strong (high domestic interest rates vs. the world), we may see our fall-of-the-cliff event in Q1-23. (More smart guy forecasts are lining up this way.)
So, is lending for CRE still active, even do-able? A resounding YES from Counsel Mortgage! From a fundamental standpoint, lenders of all types are heavy with cash. Deteriorating off-shore events around the world are driving currencies to the U.S. If the world sees the outcome of the election as more favorable than the last 2 years, the flood gates may open with exchanges of Euros, Yen, Pesos, etc. coming into the country, and looking for an investment home. In this rising interest rate environment, the highest bank CD I’ve seen lately is for about 3% for multiple years. In an 8%+ inflationary environment this isn’t particularly attractive, especially after taxes! Maybe investors would rather take their chances in the stock market, or bond market for that matter. Maybe … but both operate daily in chaos.
One of our current loans in process is a $10-11 million ground-up construction loan for a hotel in the Phoenix market. Yes, a construction loan!! We have several private money lenders lined up offering 6.5-7% during construction, then fixing the rate when converted to permanent at the end of the construction period. These construction lenders will provide their own takeout loans. Not easy to find; not easy to do, but we didn’t say it was easy!
We also have 2 SBA 7(a) lenders who will fix the rate for 5-7 years (25-year amortization), with no pre-payment penalty after 3 years. These are great loans for those of you wanting to buy a business, with or without real estate. Also, not easy to find.
Long time professional investors and money mangers know that the best time for acquisition, portfolio re-alignment, and financing is when the markets are in disarray – now is such a time. In the chaos is opportunity.
Looking for a guide through the mine field? Give us a call. We work for you, not for the lender.
Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
Counsel Mortgage Group®, LLC
Licensed in Arizona, California, Hawaii and Illinois
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480-502-1000
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