“We contend, that for a nation to try and tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
~Winston Churchill
Oil prices are rising, supply chains are straining and everyone is proceeding with caution. Only one in three economists sees a chance of a recession over the next year. The military action in the Middle East has captured everyone’s attention – especially at the gas pump. However, the consequences of the war depend less on the price of oil this week than on how long the Strait of Hormuz is closed. Thirty-four percent of the world’s oil passes through the Strait, 22% of the world’s minerals and between 16% and 49% of the world’s fertilizer (depends on how you count nitrogen, urea or ammonia, which are all components of most all fertilizers).
So, although you may be complaining about high gas prices now, food yields are lining up to plunge – less fertilizer, less food produced; less food, higher prices. This could make the Costco COVID-era hoarding look like a joke. The HUGE problem is that the planting season is now for the end of the year and next year’s crops. As if that is not bad enough, Russia and China have both temporarily cut off their exports citing “domestic priorities.” The biological time clock is ticking, and no amount of money, subsequent fertilizer application or AI prompts will fix the problem.
While on the subject of agriculture, let me pivot to cockroaches. Jamie Dimon, CEO of JP Morgan Chase, recently said, “My antenna goes up when things like that happen, and I probably shouldn’t say this, but when you see one cockroach, there are probably more.”
I hate it when the guys in charge say the quiet part out loud. “Private credit” is where investment firms (also called shadow banking) lend directly to private companies, but without all the due diligence required by regular banks. This is reminiscent of the 2007-2008 global financial crisis. Though the vast majority of the loans may be safe, the lack of transparency has professional investors a little scared.
So are there cockroaches in commercial real estate? Besides the ones maybe in your favorite building? Well, there is not very much CRE debt in the private credit market, but the market is facing a reckoning of its own. Loans that were originated during the historically low-interest-rate environment of 2021 and 2022 are now coming due. Back then, roles were low, capital was abundant and property values were rising. Borrowers secured loans at 3.5% to 4.5%. Today is a harsh new reality, with current rates hovering around 6.5%. A property with a $10 million loan at 4% in 2021 would have annual debt service of $667,000. A refinance today at 6.5% would be $850,000 of annual debt service. The big squeeze is that, with rising cap rates, many of these loans are larger than the value of the property, creating “negative equity.” According to the National Bureau of Economic Research, 14% of all commercial real estate loans are now in negative equity (or upside down, as I like to say.). So far, lender flexibility, loan modifications and extensions have kept the cockroaches at bay. For loans coming up in 2026 and 2027, the critical question is whether rates decline enough to make refinancing viable before lender patience runs out.
Nick’s Numbers
Despite ongoing global uncertainty, we are still seeing lease deals happening and escrows completing. Owner-users are still buying, as are cash buyers. Here’s another surprising fact: Despite Amazon’s dominance, not including auto sales, 6 out of 7 retail dollars spent are still done in a brick-and-mortar store. Here’s a chart to illustrate Don’s concern about the Strait of Hormuz.
If you would like an analysis of your property’s value or discuss what you should be doing concerning interest rates or inflation and their impact on your business, tenants, or property, I’d be happy to talk. (Nick Zech, 858-232-2100, nzech@cdccommerical.com).
One new thing in the cards for you to keep tabs on. President Trump signed a new executive order pushing community banks to lend more to small-scale multifamily developers. Essentially, it takes building with 1-4 units out of the “commercial loan” guidelines, hopefully making it easier to obtain now.
On the personal front, I am still pursuing the 3 “R’s”: real estate, running and “’riting”. Last month I ran a half marathon in Perdido Beach, Alabama (State #15). Besides placing 2nd in my age group (yes, there were more than two of us!), I was shocked that I met three people from San Diego that have places there, which might be your real estate tip of the day. They call the area “The Redneck Riviera.” On the writing front, I am 36,000 words into my 85,000-word real estate techno-thriller, San Diego: Blue Falcon. If you like San Diego and real estate with a Jack Ryan-like character, I think you’ll like where this series is going.
I don’t know if there is a Trump card or a Joker ahead for the commercial real estate market, but either way, I think you’ll like the story…
The Story of a Deck of Cards
Original meaning of a deck of playing cards:
52 cards for 52 weeks in the year
2 colors for day and night
4 suits for the 4 seasons and 13 weeks per season
Twelve court cards representing the 12 months
If we add each of the cards (ace + ace + ace + ace + two + two + three+ seven + eight…and etc.) of the game, we will get 364
The card game is an agricultural calendar that told us about the weeks and seasons
With each new season, it was King’s week, followed by Queen’s week, Jack’s and so on until we changed seasons and started over with a new color
Jokers were used in leap year