Money Supply Contracts the Most Since the Great Depression - What does it mean for CRE?

The headlines are sobering for sure.?There have only been 5 times in the past 150 years (today marks the 5th) where money supply contracted more than 2% and in three of the previous times a depression followed. Before we panic, we believe there are differences this time, but it does portend a serious contraction in lending for commercial real?estate. This is especially?important for those who need to refinance in the next few years.

For the past 60 years money supply in the US has grown on average by 3% a year. For an economy to grow, businesses and consumers need access to capital for loans to purchase goods. When banks are flush with deposits, they increase their loan book, and the opposite is true when deposits fall. M2 in the simplest terms is the sum of all deposits in banks plus the cash floating around that can be spent. The difference?between the past contractions and this one is that M2 sits at $20.8T which is still $5.4T higher than before the start of the pandemic which makes the contraction look more like a reversion to the mean after a ridiculous amount of money was pumped into the system. But nonetheless, banks have less capital to loan and are growing more cautious.

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The FED's April Senior Loan Officer Opinion Survey (SLOOS) found that banks over the past 3 months have tightened lending standards and they are seeing weaker demand for multifamily loans. With respect?to tighter standards, the survey revealed banks are decreasing LTV, maximum loan size, length of interest only, markets served and loan terms. In addition, they have increased lending spreads and debt service coverage ratios. When asked about the remainder of 2023, banks indicated?that they would continue to tighten more.

As the above chart indicates, a large number of CRE loans are coming due over the next few years. Some operators may have to put more capital into deals to refinance due to lower LTV standards and reduced property valuations. In addition, interest rates are poised to increase even more which means cash flow for some deals will take a hit. Syndicators that have used bridge debt are going to be most impacted.

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As we have discussed before, this is a game of patience. Many deals are not getting done right?now because sellers have not adjusted prices to the higher interest rate environment. We have lost a few deals to others who seem to be willing to bet that rates will fall and/or rents will continue to grow at unprecedented?rates- we believe this is not prudent. We will continue to underwrite with conservative assumptions and wait for the market to reprice at levels that make sense.