Investors in California and around the country will likely know that the U.S. Federal Reserve increased interest rates on June 14 for the third time in the past several months. The nation’s central bank says that the decision to raise rates was taken to stabilize the economy and keep inflation under control, but many financial experts believe that worries over commercial real estate lending may have also played a role.
The 2008 financial crisis was largely caused by irresponsible lending, and sizable increases in commercial real estate values over the past eight years have prompted fears that another asset bubble may be developing. Banks currently hold about $3.8 trillion in commercial property loans, and a large portion of this debt is held by smaller banks with assets of less than $50 billion.
Industry analysts have suggested that commercial real estate prices may be nearing their peak, and figures from Real Capital Analytics indicates that investors are beginning to take these predictions seriously. Commercial property transactions during the first four months of 2017 were down by 17 percent compared to the same period a year ago and are 30 percent below their 2015 peak according to the real estate information firm.
When banks unwilling to extend credit, commercial property developers sometimes turn to alternative lenders. Nontraditional lenders are able to make more risky loans because they are not subject to the same regulatory oversight as banks, but they generally charge high rates of interest and often insist that loans be paid back quickly. Attorneys with experience in this area may be able to help developers to avoid the pitfalls of alternative lending by scrutinizing loan documents carefully and pointing out any provisions that seem onerous or could be difficult to meet.
Source: Bloomberg, “Fed Raises Rates, Maintains Forecast for One More Hike”, Christopher Condon, June 14, 2017