ReleaseWire Connect

The FED Chairman announced a future reduction of bond purchasing and the ultimate ending of Quantitative Easing. An end to excess monetary liquidity. Interest rates surged as stocks fell.

The FED has been purchasing $85 billion of debt securities every month, Treasuries and mortgage-backed securities. They had said that this would continue until the rate of unemployment dropped, with a target of 6.5%. Although there has been some slight improvement in the employment situation the current unemployment rate of 7.5% is still a long way from the target. The economy has not been strong. First quarter GDP showed an increase of 2.5%. That was below the 3.5% expected by many economists. That was before the negative drag that will come from the “sequester” spending cuts. My expectation has been for a 2.5% GDP growth for the year. I think that my target will be difficult to achieve.

All of this is happening before there has been any time for the “Sequester” to hit the economy. What this suggests is that the economy is still in difficulty and unemployment will remain in the current range and could get worse.. The “Sequester” will cause job losses ahead. The bond market has reacted positively to this news. The 10 year Treasury, the benchmark for commercial mortgages has fallen to 1.73% as this is being written.

Last Friday the Labor Department released the Employment Report for February. It was stronger than was expected. Job creations increased by 236,000, better than the 171,000 that was generally expected. The Unemployment Rate declined to 7.7%. There were some revisions to prior months, January down and December up. It was an improving report and there were cheers from Washington and from the financial press. The stock market continued to climb to new highs while the ten-year bond, the benchmark for commercial mortgage interest rates, increased several basis points in yield.

When a client sends us a loan package we go over the operating statements in detail. Usually we will talk to the client's controller or accountant and have the operating statements restated. Typically we will remove non operating expense items such as depreciation and amortization. We will remove capital items that are being expensed such as leasing commissions and tenant improvements and renovations. These differences occur because accrual accounting tries to reduce income and reduce tax impact. Cash flow accounting tries to establish the maximum funds that are available to service debt. The value of all commercial properties, retail, office, industrial and multifamily comes down to the capitalization of the free cash flow that the property generates.

The cost of money and the return on invested capital are the most important factors that influence the success of any business. The reason why interest costs are so low, what to expect and the action to take are critical in these unusual economic times.

The Fiscal Cliff went out with a whimper. We read in the papers and heard on TV that the consequences would be horrendous. It was supposed to clobber our economy and hurt the economic recovery. In the end, as I said would happen in my December news letter, nothing really happened. There were some changes in tax policy. These hit the highest income people. All the other issues were put on hold and will be new economic crises later in the year. Kicked down the road.

There is a lot of hype on TV and in the news from people who have no knowledge about the economics involved and the timing and gravity of the situation. It makes good headlines and captivates audiences but it really doesn't amount to much. It is not even a slippery slope said Victor Weintraub, noted economist and President of First Charter Financial Corporation.

Now is the best time to refinance commercial Real Property. The opportunity to save very important money is here now and it will not last forever. Wise property owners will take advantage of the historically low interest rates that are available today. There is the opportunity to have real cost savings for the next ten years by refinancing into a new fixed rate mortgage now.