The Small Balance Intersection Update - October 4, 2024

Did you know that in 1913, less than 20 years after the federal income tax was declared unconstitutional by the Supreme Court, it came back from the dead as the Underwood-Simons bill was signed into law by President Woodrow Wilson?

Reduce Speed Construction Zone

August Construction Spending Cools Amid High Interest Rates and Tight Credit Conditions

U.S. construction spending decreased by 0.1% in August, marking the third consecutive month of decline as high interest rates, tight credit, and elevated operational costs continue to weigh on the industry. The private residential and nonresidential sectors drove much of the pullback, while public outlays rose slightly. Residential construction dipped by 0.3%, with single-family outlays dropping 1.5% following a prolonged downturn in permits from January to June. Multifamily construction also declined by 0.4%, its 13th decline in the past 14 months, as developers work to address an ongoing supply-demand imbalance. In contrast, spending on home improvement projects increased by 1%, with a robust 9.4% year-over-year growth, providing a rare bright spot for residential construction.

On the nonresidential side, overall spending rose just 0.1%, buoyed by public sector projects, while private nonresidential construction weakened for the second straight month. Commercial and healthcare construction were among the hardest hit, with commercial spending down nearly 15% compared to August 2023. Although warehouse spending saw a slight month-over-month gain, it remains down 20% year-over-year amid higher financing costs and inventory normalization. Meanwhile, certain sectors like manufacturing, communication, and transportation showed resilience with increased investment in August. Public infrastructure spending, particularly in highway and street construction, saw a notable boost, aided by federal infrastructure funding. Despite this, the Architectural Billings Index (ABI) remained in contraction for the 13th consecutive month, signaling further softness in nonresidential construction ahead .

Read more Wells Fargo Economics

Innovation Avenue

GAO Calls for Clearer Guidelines to Expand Small Business Innovation

In fiscal year 2022, about 40% of Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) awards, totaling $1.8 billion, came from open topic solicitations, which allow small businesses to define research needs and propose solutions. GAO found that open topics foster competition and innovation, as awards are distributed among more businesses compared to conventional topics, where agencies define specific needs. While some Department of Defense (DOD) components adhered to open topics' broader objectives, others narrowed their focus, making their open topics similar to conventional ones. The GAO recommends that DOD clarify its guidance to ensure open topics are more broadly defined, promoting consistency and enhancing competition. Clearer guidance could help the DOD better meet the legislative goals of open topics and increase small business participation.

For the full report, click here .

Yield to Relationships

FDIC Report Highlights Continued Focus on Relationship-Driven Small Business Lending

The FDIC’s 2024 Small Business Lending Survey (SBLS) provides valuable insights into U.S. banks' lending practices. Conducted in 2022, the survey collected responses from over 1,300 banks, representing more than 25% of the nation's banking sector. A key finding is that while many banks are adopting financial technology (FinTech), traditional, relationship-driven lending practices remain central to small business financing. Most banks emphasize personal interactions, using technology to enhance regulatory compliance, data management, and post-loan services rather than replacing in-person communication. Interestingly, fewer banks allow borrowers to complete loan applications entirely online, highlighting the ongoing preference for high-touch approaches.

Small and large banks differ in their underwriting methods, with smaller banks relying on "soft" information from relationships, and larger banks focusing more on "hard" quantitative data like credit scores. The survey found that loan approval times are fast, especially for small loans at large banks, with three-in-ten banks approving simple loans within one business day. Nearly all banks make loans of at least $1 million, and half lend up to $3 million. Bank competition is growing, with small banks increasingly competing with credit unions, while large banks face competition from FinTech lenders and credit card issuers. The report also notes that local branch locations play a crucial role in developing and maintaining small business lending relationships. Despite technological advances, the human element remains central to the U.S. banking sector's small business lending approach.

Read the full report here .

Main Street

Smaller Assets Shine as Rockefeller Center Seeks Major Refinancing

The refinancing of Rockefeller Center's $3.5 billion debt could mark a significant turning point for New York’s office market, but it highlights the growing appeal of smaller assets. Tishman Speyer, Rockefeller’s owner, needs to refinance a $1.7 billion loan by May 2025. While a successful deal would suggest renewed interest in high-quality properties, the market for larger offices remains weak. Only 30% of loans over $100 million were paid back on time this year, compared to 70% for loans under $10 million, showing lenders' preference for smaller, lower-risk mortgages. Additionally, large office sales have plummeted—just 29 offices worth more than $100 million sold in 2024 compared to 130 in 2019. By contrast, smaller assets have been easier to sell, with wealthy individuals paying cash to take advantage of discounted prices. This shift highlights how investors are increasingly favoring smaller, more manageable properties over larger, riskier assets, even as trophy offices and iconic buildings like Rockefeller Center seek refinancing. The trend reflects a preference for safer bets amid ongoing market uncertainty.

Read the full WSJ article here .