Marcus & Millichap

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Capital Alert

November 8, 2019

Prudence, Preparation and a Definitive Strategy

Commercial real estate has enjoyed a period of unprecedented stability in recent years. Economic conditions have been favorable for investment, debt and equity have been plentiful and deal flow has been robust. Investors have been able to take advantage of these strong market conditions and find great investment opportunities. And, by all accounts, these conditions are largely unchanged today. Supply and demand factors remain in balance, lenders have not gotten over extended and borrowers have maintained a more reasonable level of leverage as compared to the period leading up the most recent downturn. At the same time, however, there is an on-going debate over the direction of the U.S. economy. On October 30, the Federal Reserve lowered interest rates again amid recent weakness in retail and housing sales, manufacturing and business confidence, and a slowdown in global growth.

Consumers are in a far better position today than a decade ago.

While the record economic expansion of the last 11 years is late in the cycle, many economic indicators such as overall employment and consumer confidence remain strong. And, consumers do appear to be in a far better position today than a decade ago especially as it relates to their balance sheets and reduced debt loads. But, at the same time, income volatility has been high over the last six years. This has made it difficult for families to appropriately plan for their spending or increase savings, according to a recent analysis of six million bank depositors by the JPMorgan Chase Institute. The study found that families need about six weeks of take-home pay in the bank to weather a simultaneous dip in income and a spike in expenses. But 65 percent simply don’t have it. That means that an economic bump in the road, if it comes, could have a greater impact on consumers than expected. That, in turn, would no doubt impact the performance of commercial real estate.

Considering continued market uncertainty, it might be wise to implement a defensive strategy at this time. Or, at least, a definitive investment plan based on your unique situation. It is also recommended that you take a conservative approach relative to leverage, loan duration, covenants and non-recourse loan provisions. Establish relationships with mortgage bankers and investment sales professionals you trust, who can keep you informed of what’s happening in the market and provide options if needed.

The sky is not falling. But increased awareness to the market volatility is important. Perhaps we will see a soft landing rather than a full-blown recession, or the economy could surprise the naysayers and continue to perform well long into the future. Either way, it’s smart to evaluate your balance sheet, shore up your finances and to be prepared for either outcome.

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