After recently funding growth with credit, corporates are now more sensitive to the banks' tighter loans.
Following six years of ever looser corporate credit terms, banks are again tightening credit. This credit tightening trend has caught Janet Yellen’s eye at the U.S. Federal Reserve. Yellen thinks it “bears watching” given the fact that a corporate-credit squeeze could hamper the economic recovery which recently set the stage for an increase—the first since 2006—in the target federal funds rate.
With all of 2015’s records, 2016 looks like the start to an overdue reversion to the mean.
For example, 2015 was the sixth straight year of double digit commercial real estate sales growth since the 2009 crater ($511 billion compared to $69 billion). The composition of sales is also interesting: 60% of deals in 2007 involved portfolios while 70% of deals in 2015 where single properties. Trepp Research states that transaction volume was driven by “low interest rates, an abundance of capital seeking yield and improving property fundamentals—factors that have been in play since the market started recovering in 2010.” According to Real Capital Analytics, 17% of all deals in 2015 were driven by foreign investors (28% Canadian, 8% Chinese), marking the first time that foreign investors were responsible for more of the deal volume than REITs and other corporates.
Will the Fed continue to raise rates in this environment?
Further hikes look likely, but not so soon. Due to “tighter business credit,” economists from Credit Suisse have pushed back their forecasted timing for the next fed funds rate hike to September. Regardless, there is no doubt about the credit tightening (as charted above). Banks stiffened lending benchmarks in 4Q15 for the second straight quarter; the first back-to-back credit tightening in six years. For example, banks tightened terms on commercial real estate credit, and reported to the Fed that they will continue to do so in 2016. Banks are also expecting to lose significant capital on energy-related loans: Wells Fargo has set aside a $1.2 billion reserve that covers 7% of its outstanding loans to the oil & gas industry.
We think this all calls for commercial real estate owners to take a careful look at easy ways to lower their building’s OPEX.
