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No News to Multifamily Investor Readers: Banks Are Not Lending. Commercial Real Estate Market at Standstill.
October 23, 2009 by Neil · 3 Comments
Readers here read on 10/19/09 that banks are under no obligation to lend in order to keep their charters in good standing. In fact, banks are going out of their way not to lend. Now, today’s American Banker confirms as much. Banks are refraining from lending in order to shore up their capital ratios. This may seem obvious, but if defies the very business model of banks. They borrow money from depositors at next to nothing, and lend it out the door at a significant profit. Now, the business model is borrowing from Uncle Sam at near zero, and holding on to that money for dear life. While the banks’ self-preservation mode is understandable, their charters were given to them in order to keep credit flowing. This is the lifeblood of our economy. Without this credit, companies cannot survive long-term. As to the commercial real estate market, people are unable to borrow at significant (but not unintelligent) loan to value ratios. When commercial real estate borrowers are limited to borrowing 55 to 60% LTV, transactions have to “make sense” a lot more. In other words, the returns have to be higher. Since sellers are only selling if they face a D — divorce, death, debt, dissolution of partnership, development project — the gap between bid and ask remains. Trading thus remains negligible.
I dont hear many a argument from people that we will just muddle through this
Itay,
The people you are hearing from are either passionate bears or bulls. The people who don’t feel especially passionate are not going to be vocal in expressing their views. Those people, indeed, tend to be in the middle. This trend is true for most points of view. It may not reflect what everyone thinks along the continuum.