CRE Lending Meets (Maybe) With Higher Rates

WASHINGTON, DC—Friday's release of May's employment numbers by the Bureau of Labor Statistics pointed to an economy that is in steady, albeit hardly spectacular, expansion mode. The 217,000 jobs created—in many CRE-supporting industries—essentially assured the watching world that the dismal Q1 economic growth, or lack thereof, was largely a factor of the winter weather.

The statistics also plays into a growing narrative that business investment is increasing or at least poised to increase. One key driver of that demand, of course, is the willingness of banks to lend to such projects.

At this point in the recovery cycle, that appears to be a settled issue.

The most recent evidence comes from the American Bankers Association's committee of 13 bank chief economists, which predicted on Friday after the Labor Department released its  figures, that business lending will grow at a near double-digit rate over the next couple of years.  Banks, said EAC Chairman Christopher Low, chief economist of First Horizon National Corp.'s FTN Financial, "stand ready to meet demand as businesses take the next step forward."

Another favorable indication came recently from the Federal Reserve Bank's April 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices. It reported that on balance, banks eased their lending policies for commercial and industrial and commercial real estate loans. At the same time, these institutions reported stronger demand for both types of loans over the quarter.

Concerns, though, are growing at least in the commercial real estate sector that the delicate balance between easing loan conditions, banking's willingness to lend and demand from borrowers because they want to invest may be thrown off kilter if interest rates rise—which they could well do, sooner rather than later, if the economy continues on its steady track.

That issue was raised by Cushman & Wakefield in an analysis it released about Friday's employment numbers.

The combination of healthy, steady job growth along with positive underlying details suggests that the economy is now entering a new phase of growth, it said, which will lead to faster income growth, rising household demand and a stronger housing sector.

"This outlook, if it comes through, means that the Federal Reserve will continue to steadily taper its purchases of long term securities in the months ahead and will begin to set the stage for higher interest rates late this year and in early 2015."

Also, National Association of Realtors chief economist Lawrence Yun, raised similar concerns at the end of May, cautioning that rising long-term interest rates were on the horizon and that consistent economic growth was imperative to solid commercial real estate investment in the years ahead.

"Years ahead" though may be the operative phrase at least for 2014, where it appears all but certain that the Fed will keep interest rates low, at least based on previous statements it has made on the subject. For companies taking only a short-term look at their industry—not to be recommended of course—the view is very nice.

"For the commercial real estate sector, the economic fundamentals are getting better," Cushman & Wakefield said in its report. "Job growth will boost demand for office space, income growth will boost retail sales and rising consumer demand will lead to stronger growth in manufacturing and distribution."