Three (Potentially) Concerning Credit Facts

In light of the ongoing macroeconomic pressure waves that are sweeping the nation and the world, credit rating agency KBRA has compiled a list of twelve credit-related factors. There was no mention of commercial real estate specifically, but as the business is situated within the context of the entire economy, some of the twelve elements they identified may nonetheless indirectly affect it.

First, is the impact on wealth. Any marketer would tell you that emotions always play a big factor in decisions. Also declining is consumer financial confidence. People panic when they see their retirement savings being destroyed, despite the fact that the wealthiest 10% of Americans own the majority of the value of U.S. stock holdings. And now, according to the Federal Housing Finance Agency’s (FHFA) national home price index, “we are only starting to observe softening in residential real estate, consumers’ second-largest asset, which was down 0.6% in July from the level in June,” the study added. Due to the possibility of a decline in retail expenditure, retail property owners must exercise caution.

Secondly, defaults should be expected. Default rates may increase if the nation does truly enter a recession as a result of rising interest rates. With the exception of the pandemic recession, they have averaged 12% over the past three years. KBRA anticipates any decline to be brief. Consumers have savings that are around 50% more than they were before the epidemic, and despite the impact of the equity market downturn noted above, their net worth is 24% higher now than it was before the outbreak. Furthermore, the labor market is healthy right now. Corporate profit margins are at 50-year highs, and since 2020, many businesses have paid off debt. KBRA thus concludes that perhaps things won’t be all that horrible. which would be advantageous since defaults are undesirable for CRE. Businesses that formerly paid for leases no longer do so.

Lastly, financial stability and volatility can be major problems. Numerous businesses, particularly in the CRE sector, capitalized on leverage and low-interest rates. However now that conditions are shifting, many may encounter a sharp decline rather than a continuous rise. The currency is also far too strong. only twice in the previous 50 years, has the U.S. Dollar Spot Index(DXY) reached its present level (113 as of September 30). These instances were during the recession brought on by WorldCom/Enron in 2000–2001 and after Paul Volcker’s dramatic rate hikes in the early 1980s, according to KBRA. It’s detrimental to long-term financial security.