What’s more worrying to commercial real estate professionals? The Federal Reserve Board’s latest hike of its benchmark interest rate or the failure of three U.S. banks?
Maybe both?
But despite the troubling economic news, there is some optimism among financial experts. Some are predicting that the Fed’s interest rate hikes will peak at a lower level than previously expected, while others are calming U.S. consumers and investors, stating that the country’s current economic woes are not nearly as severe as those that hit the United States during the Great Recession that started in 2007.
Another rate hike
The Federal Reserve on March 21 raised its short-term interest rate by a quarter percentage point. Fed officials, though, are now forecasting just one more rate hike this year.
Part of the reason? The recent bank failures will tighten lending and weaken the economy and inflation on its own, without the help of additional interest rate hikes.
During a news conference announcing the latest move by the Fed, Jerome Powell, chairman of the Federal Reserve Board, said that the bank failures could be thought of as the equivalent of a rate hike and “perhaps more than that.”
Nick Axford, chief economist with Avison Young, said that the Fed’s decision to raise interest rates yet again shows how focused the board is on taming inflation.
In positive news? Axford also said that he expects interest rates to peak at a lower level than Avison Young researchers previously anticipated.
“Banks will become more cautious in their lending, which will slow the economy and accentuate the decline in inflation that is already underway,” Axford said, in a written statement.
Axford says that this tightening of credit will further restrict access to debt that borrowers can access to refinance their existing loans. That could then force more disposals into a market in which investors are waiting to deploy a significant amount of capital.
“When the tide turns, we believe it could do so quite quickly,” Axford said. “Those with equity to invest and with no immediate need to secure debt finance could see further openings in the market, and fewer competitors with sufficient convication to act, in the months ahead.”
At the same time that the Fed continues to raise interest rates, commercial real estate professionals, along with everyone else, are carefully watching the health of banks across the United States. This comes after the recent failure of three banks: Silicon Valley Bank, Signature Bank and Silvergate Bank.
Cushman & Wakefield recently released a report on the bank failures. And its takeaway? This is not the time to panic.
Why? Those failed banks are only three out of 4,236 FDIC-insured commercial banking institutions in the United States. And the three banks that collapsed all had a heavy depository and lending exposure to the tech and crypto sectors.
As Cushman & Wakefield says, most banks have more balanced portfolios and are not overly dependent on one sector.
Cushman & Wakefield’s report said that while SVB and Signature Bank represented the second- and third-largest bank failures in U.S. history, their assets were only $209 billion and $118 billion. That’s a lot of money, but it’s far less than the assets of the biggest banks in the United States, the four largest of which have more than $9 trillion of assets.
For a comparison, during the Great Recession that started in 2007, even the United States’ largest banks were under financial pressure.
The current economy is also stronger today than it was during the Great Recession, Cushman & Wakefield reported. During the 2007 financial crisis, the U.S. unemployment rate had already risen from 4.7% to 6.8% when the Fed announced its first round of quantative easing. Today, the United States is experiencing an unemployment rate near an all-time low, sitting at 3.6% as of February of this year.
Oxford Economics also released a report on the bank failures this week. In its report, Oxford says that the country’s financial woes today are not nearly as severe as they were in 2007.
That doesn’t mean that the bank failures aren’t a cause for concern. Oxford said that there could be more bank failures to come in the United States. U.S. banks are sitting on large unrealised losses on securities because of rising interest rates, Oxford says. Banks are also facing potential losses of 15% or more in areas such as commercial property and leveraged loans.