California residents may be aware that the U.S. Federal Reserve announced the latest in a series of interest rate increases on June 14, and the nation's central bank has braced markets for further rate hikes in late 2017 and 2018. Higher interest rates allow the economy to continue to grow while reining in inflation, but they also have an impact on lending. While most experts agree that banks should be active, many of them have raised concerns about a possible asset bubble developing in the commercial real estate sector.
Tumbling residential property prices played a large role in the 2008 financial crisis, and worries about the sustainability of the commercial real estate sector have contributed to a sharp fall in transaction volume. Year-over-year commercial property transactions fell 17 percent in the first four months of 2017 compared to the same period a year earlier, and they have plummeted by 30 percent since 2015 according to the industry information firm Real Capital Analytics.
Banks currently hold about 53 percent of the $3.8 trillion in outstanding commercial property loans, and most of this is held by smaller regional banks with less than $50 billion in assets. Higher interest rates, falling prices and stricter lending guidelines have prompted many banks to reduce their exposure in this area, and media reports suggest that even highly respected developers are finding it difficult to secure financing for their latest projects.
Commercial property developers can insulate themselves against changing economic conditions by completing their projects quickly, but this is often far easier said than done. Legal hurdles such as regulatory problems can cause expensive delays, but attorneys with experience in this area might assist developers by anticipating these issues and addressing them promptly so that work can resume.
Source: Bloomberg, "Fed Raises Rates, Maintains Forecast for One More Hike", Christopher Condon, June 14, 2017