Congratulations to the RMA MN Commercial Lending Academy Class of 2024. Last week they graduated after an intense week of training on commercial banking. They did a wonderful job of practically applying the information shared on all the case studies. I wish you the best in your future endeavors in banking, you are well prepared.
Concerns continue to arise surrounding commercial real estate in the United States. Often too many banks and bankers take a look at their commercial real estate credit portfolio once a year. Essentially, they receive the tax returns in the Spring, unless, as often is the case extensions are filed. This can mean that your analysis and your risk rating is outdated by up to 18 months based on the financial information. If this is your case, you are missing the early warning signs that your client is struggling. As I share in my classes, a late payment is not an early warning sign of trouble, it is too late, particularly when we talk about commercial real estate.
New York Community Bank and others are already admitting that their commercial real estate portfolios are stressed. Now is the time to meet with your client. Get an honest assessment from them on their cash flow, by project as well as globally. Site visits are crucial to get an impression of the condition of the building as well as the occupancy rate that currently exists. From there you need to set up an action plan with your client to address any concerns that might arise.
The number of industries that are struggling through business model changes is currently unprecedented. Retail is moving to on line platforms. Food service is in turmoil over margins, staffing as well as location issues impacted by crime. Professional companies are deciding how much office space they need due to remote work and artificial intelligence use to become more efficient and needing fewer employees. In the end, each of these areas impact your real estate owners. It is not just the money center banks or the insurance companies or pension funds that are impacted. This has the potential to cripple your bank with troubled credits. Please start addressing the issues now to get ahead of the game and assist in helping solve your clients’ problems.
The consumer continued to carry the economy in January. The ISM Service index improved nicely from the December levels. Within the report, new orders, business activity and backlog all grew in January. Since the service sector impacts nearly 80% of the economy, we appear to be off to a good start in 2024. Even the comments within the report from respondents indicate a level of optimism that is surprising.
The fly in the soup here surrounds how long the consumer will continue to spend. There is contradictory information that indicate a slow down should be occurring. Economic theory holds that if consumers have a negative view of the future, they will curtail spending and build cautionary deposit balances. That is not happening, even though many polls indicate people are not confident about the future. Credit balances, particularly on revolving debt, have hit historical highs. This is at a time when interest rates are at the highest levels since 2007. Layoff notices continue to grab attention in the media as a number of industries are cutting back. Overall, there are few pendants that hold a positive outlook.
Part of the strength of the consumer appears to be demographic in nature. Baby Boomers are spending down their retirement savings and enjoying the time they have left. They realize that end of life care is massively expensive. They look at the resources they have and figure correctly, it might last through a couple of months of care at most, then be gone. They might as well spend on themselves now instead of the care later. Millennials and Gen Z appear to have a very different life view than prior generations. Many see no path to home ownership that will build an equity base that will return the investment. Further, they are more focused on experiences rather than stuff. Retirement for them is so far away, and in fact, many believe they will never be able to retire, that they have decided to spend what they have today and let tomorrow take care of itself.
If this assessment is correct, it will have massive consequences for our economy as well as for the banking and finance industry. Bank deposits as well as investment funds will be starved for cash. This means that borrowers will find it difficult to secure funding and rates will likely remain high for an extended period. Inflation, due to enhanced demand, will be sticky for some time to come.
Have a great Valentines Day.