Amid rising rates and bank failures, commercial lending in Central Oregon marches on.

The Federal Reserve raised the short-term interest rates by 25 basis points again in late March, matching the February increase, to hedge inflation.  While the market was expecting perhaps 50-75 points according to Dr. Lawrence Yun, Chief Economist for the National Association of Realtors, the failure of a few regional banks, and specifically Silicon Valley Bank, changed that outlook.

With the failure of SVB and others, Yun expects that commercial lending may see a slight contraction due to tightening of lending from regional banks. Ashley Mears, Vice President and Commercial Banking Relationship Manager at regional Washington Trust Bank weighs in:

It is important to note what caused the failures and why it is different from what we saw during the last recession. The failures mentioned above were all about liquidity, not poor asset quality. A loss in confidence in the aforementioned banks led to a sudden run on their deposits. The banks were unable to fund their deposits in such a brief period due to their significant investments in long term securities and inability to borrow funds from other sources.

If businesses and consumers turn to “non-bank” institutions that are not regulated or start hoarding cash in alternate locations, or additional regulation requires higher liquidity levels, we could see constraints in commercial lending.

Banks fund their loans with deposits. In general, the lower a bank’s core deposits are, the higher their cost of funds as they will need to borrower more money or find other funding sources to fund their loans.

When cost of funds are high, banks tend to be hypercritical on their credit risk and re-evaluate their asset quality (therefore contracting appetite for the ‘mom and pop’, startup small business projects, etc.), directly impacting our local economy.  A healthy growing economy is reliant on cash and credit.

The best thing that consumers and business owners can do is understand the financial strength of their bank and realize that FDIC insurance was/is meant as that, insurance. If you can identify and work well with a strong and sound financial institution that is not reliant on taking on high-risk for high returns to outpace inflation and hedge the unstable interest rate environment to stay relevant in the market you may be able to avoid the constrictions in lending in the real estate market.

As The Fed will not meet in April, it could be as late as June or July before it reacts to bank failures and the slowing increase of inflation rates.

Meanwhile, cap rates will continue to rise to keep up with the cost of debt. Appraised values are down 16% from peak prices making it a real possibility that some commercial properties will be under water at the 5, 7 or 10 year call.

While money is tight, properties are still being traded. 1031 exchanges and long-term development plays continue to fuel the Central Oregon market. Sales volumes and price square foot remains steady across nearly all verticals in Central Oregon.

Talk to one of our brokers about commercial real estate opportunities in our market.