And what would “it” be, we query? Why “the cycle” of course. Pick your cycle of choice: the economic cycle, the credit cycle, the business cycle, the stock market cycle, the labor cycle, etc.While these, plus others, are loosely sequenced, they are by no means coincidental.
Our cycle of greatest consideration at Counsel Mortgage is the credit cycle, closely aligned with the real estate cycle … both residential and commercial – each different.
Earlier this month the president of the St. Louis Federal Reserve became the first Fed official to publicly suggest a need to not only hold the line on interest rates, but also to start cutting them again. St. Louis Fed President James Bullard said the nation’s central bank may need to act to prop up inflation and counter downside economic risks from an escalating trade war. (We note in passing that 10 years of ZIRP and 8 years of QE-type stimulus failed to produce sustainable 2% inflation.)
In remarks prepared for a talk in Chicago, Mr. Bullard said “A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target, and also to provide some insurance in case of a sharper than expected slowdown. The direct effects of trade restrictions on the U.S. economy are relatively small, but the effects through global financial markets may be larger.”
It seems the market took him to heart as the U.S. 10-year Treasury yields fell to 1.98% last week, the lowest yield since November 2016. Rates fell below the 2% level after the Federal Reserve last Wednesday signaled it was not only ready to cut interest rates, but planted the seed that re-introducing a QE-type of stimulus might be in the cards. This seems to be a global trend as major central banks around the world are moving towards easing policy and adding
monetary stimulus. The 10-year Treasury yield has fallen more than 70 basis points this year as the U.S./China trade war continues to take its toll on the global economy.
Other geo-political uncertainties continue to wax and wane, all affecting the day-to-day gyrations in the financial markets.
Nonetheless, the markets seem content to march along continuing to set records for longevity. Absent the disruption from e-commerce in the retail segment, the fundamentals of other CRE segments appear firm. Indeed, a senior economist at Wells Fargo Securities, went on record earlier this month to say the runway is clear for additional growth until at least 2021 before the start of the next recession. (A gutsy call in some opinions!)
Still, the lending environment among CRE lenders is staying the course. The consideration seems to be between variable & fixed rates, rather than to make the loan at all, or not.
Underwriting seems to be pickiest in the retail segment, particularly for value-add and re- purposed properties. Industrial and multi-family remain the highly sought-after darlings among asset classes, as they have been for several years now.
Incidentally, if you were one of the earlier investors in the recovery, say 2010-2015, that 5-10 year term loan may be coming due, or perhaps already has and you’ve been rolling it for a nominal extension fee with an otherwise generous lender. You might want to take a look at those terms again. We’re not at the same place in the cycle as we were when you originated the loan.
And what is our call given the commotion and complexities of the time? That’s simple … we work for you! We’ll advise, consult, research, and in some cases respectfully argue, but
ultimately the loan decision is yours. When you need something firmer than that faint voice in the night, give us a call.
Care to talk?
Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
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