The third quarter is quickly ending and not soon enough. I believe I speak for most of us in saying good riddance to 2020. Covid, Riots, Fires out West, the Election and now Oklahoma losing to Kansas State at home, all make this year one to forget, write off and move on.
Commercial real estate is starting to blow up. Yelp data is showing that 60,000 businesses have closed forever nationwide and will not reopen. The Mercury News from San Francisco shared this week that 1 out of every 100 businesses have permanently closed in the Bay Area. From the numbers released most recently the pace of business closures is advancing rapidly. The PPP program allowed many small business the liquidity to linger on through the summer. The hope of more funding from a second stimulus kept many owners optimistic that they might weather the storm. As Washington dithers on providing more funding for a crisis they brought on by forcing the closure and reduction of capacity in many cases, the liquidity from the PPP is fast running out. Without help, businesses are moving from a liquidity crisis to a solvency crisis, shutting the doors forever.
As the businesses close and leave, commercial real estate vacancies have begun to rise exponentially. I heard a speaker at the ICBA Lead Forward Conference this week use the term “eviscerated” when describing the retail and service industry and its impact on commercial real estate. Commercial delinquencies of all types are just now starting to show in the bank portfolios. If bankers move quickly they may be able to work out of some of the early troubled credits. Liquidating a retail or service sector business is not fun nor easy. Commercial Real Estate liquidation is not a straw that will break the camel’s back, it is the I-Beam that will bring down the bank. Now is the time to address all of your commercial real estate. Waiting for the subject property to fall beneath a break even cash flow point will be too late. Expect Cap Rates to rise in the next few months. Without tenants the value of the RE will diminish rapidly. Even with low interest rates there will be a dearth of funds available to buy distressed real estate unless prices are dirt cheap. That means, well beneath the existing loan amount.
Durable Goods Orders for August showed a nice rise after two months of significant increases. The rise of .4% overall was slightly less than expected but still good after a strong July. If you pull out transportation, essentially vehicles and planes, the number was also .4%. Part of this was a softening in the motor vehicles sales. After a strong quarter of vehicle sales the consumer was bound to take a breather. If you pulled out defense orders the number rose to .7% which indicates that the consumer continues to be strong in other areas. The amount of housing being built is pushing that number as new homeowners outfit their new digs.
The September Richmond Fed Manufacturing index was 21 which was up from the August number of 18. Between the various Fed indexes, the Durable Goods Orders and other indicators, we should expect the ISM Manufacturing report coming up on Thursday to be in the middle to upper 50’s.
If your bank is concerned about troubled credits or are already seeing a rise in problems, Stevens Risk Management is ready to assist. Whether it is with a quick loan review or assistance with action plans, we have the experience and the manpower to help right now. On October 14 I will be teaching Troubled Loan and Credit Management through ICBA. If you are interested there is still time to sign up. Check it out on the ICBA website.
On a lighter note, the leaves are peaking here in Minnesota. If they are as brilliant in your area, take a quick drive, enjoy the fall colors and disengage for a couple of hours.