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Transcript of Real Estate Revealed Radio Show on AM560 from Sunday, March 13, 2022
Good morning. It is starting to feel a bit like spring out there.
I wanted to take a few minutes this morning to discuss global events and their impact on interest rates and commercial loans.
First off, what is going on in Ukraine right now is just terrible. My total and complete sympathies go out to the Ukrainian people. I hope cooler heads prevail and a resolution comes into place sooner than later. Unfortunately, I think we are a ways off from any resolution as there are deep geopolitical issues at play that will not be easy to resolve.
When I talk about the Russia / Ukraine war and its impact on interest rates and commercial lending I hope everyone understands I am not downplaying the real impact on the lives of Ukrainians when I discuss the financial impacts to the rest of us here at home. However, what is happening in Ukraine is having some substantial impacts on what is going on here in the U.S., and this could impact business owners and investors abilities to borrow money going forward.
Some of the key impacts effecting lending are as follows:
- Fuel prices are greatly increasing costs. This is putting strains on many business owners already suffering from higher costs due to supply chain issues. Some of these costs can be passed on to their customers or consumers but others cannot, and this is impacting business profitability. Whenever profitability takes a hit, it makes it harder for businesses to borrow money.
- The supply chain issues that already exist are only getting worse due to the conflict in Ukraine. There is increased demand for certain products and additional struggles to get products produced, shipped and delivered. This is hurting businesses abilities to generate revenues and continue to grow. Declining revenues alone, not to mention the impact to profitability, can cause lenders to pause when providing financing.
- Higher fuel prices and worsening supply chain issues are causing a further acceleration in inflationary pressures. This is increasing the likelihood of interest rates going up sooner than later. Increasing interest rates is going to further strain small businesses and is going to have a negative impact on investment real estate. Commercial investors and even homeowners cannot afford to pay as much as interest rates continue to go up, which will eventually impact pricing. We are already seeing lenders stressing interest rates 1% to 2% on any new debt, making it harder for borrowers to qualify to buy businesses, buy investment real estate, or secure additional working capital.
- Many lenders are concerned about how the Ukraine war is going to continue to impact the economy, and what could happen if that war expands or worsens. This has caused many lenders to get more conservative in their lending approach to the market. Some lenders already believe a recession is on the horizon and they are preparing for the worse.
Although these impacts don’t paint a very optimistic picture, it is not all doom and gloom. There are still many positives at play.
- Although they are likely to go up in the near term, interest rates are still near all-time lows and are certainly well below historical averages. So, this is still a good time to borrow money.
- Banks have very healthy balance sheets and plenty of liquidity, so they have capacity to lend more money and are unlikely to have major credit issues in the near term, which should provide on-going support for the economy.
- Some of the supply chain issues are likely to correct themselves as the world gets back to work and things start to catch up. If things slow down a bit as consumers have less money to spend due to rising gas prices and inflation, that might help the supply chain correct itself as well, which should in the long run be deflationary.
- There are more non-bank and alternative funding sources than ever before to help businesses and real estate investors get the capital they need.
- Whenever there is turmoil, opportunities abound. Many business owners will find new markets and new opportunities based on the challenges the market is going to face over the next few years.
Although we are back in unchartered waters, which feels so strange to say after having just come out of the pandemic, there are still reasons to stay positive. Most of the challenges in the short term can be overcome with some ingenuity and hard work. I am confident the US economy will survive this and be stronger than ever in the long run. If you would ever like to discuss the market or commercial financing options, we are more than happy to do so at any time. I can be reached at 630-988-4852 or via email at brad@commerciallendingx.com. Have a great Spring!