At the beginning of 2019, the federal reserve veered from the predicted course of two or three rate hikes over the course of the year to announce that rates were now at neutral and there would be no foreseeable rate hikes. While this action may have forestalled an oncoming recession by a year or so, other variables make avoiding a recession altogether unlikely. Although credit remains relatively inexpensive for now, construction costs are likely to increase as the trade war consequences work their way through the economy. For instance, lumber costs have increased 40% since the trade war with Canada began. While some of these increases will pass along to the customer, it is likely that at a certain point the customers will pull back and decrease their spending as a result of the increased prices, which would negatively impact the economy. There is still much talk of a potential recession in 2020 or 2021.

Turning the focus back to real estate, this uncertain economy is having noticeable effects on both residential and commercial real estate markets. First of all, declining interest rates continue to spur demand. As debt becomes more affordable, buyers who were previously priced out of the market are back in. The supply of properties has also been increasing in many of the “hot” markets, which has been keeping the prices from spiraling out of control. However, as noted above, the trade wars are increasing the costs of construction for rehabilitation and development projects and a shortage of skilled workers is increasing the labor costs for such projects. This combination results in a decrease in demand for new commercial developments and renovations, especially on the higher end of the market. Overall, the market seems to be in a bit of a holding pattern, potentially the calm before the storm. Although consumer confidence is holding steady for now, there is potential for cracks to develop and spread quickly as many investors and businesses suspect we may be reaching the top of the market. The experienced investors are beginning to pull back on their real estate investing, especially in the higher-end market.

A best practice for today’s market is adopting a cautious approach to commercial real estate investments while making sure that your cost estimates for improvements and rehabilitations are realistic. If you end up in a situation where you need funds to cover a gap in financing or to help complete a construction project, hard money or private capital financing can be the solution. Private lenders can quickly fund asset-based loans or cash-out refinances to bridge your financial hurdles. Contact Montegra at loans@montegra.com if you have questions about our private capital loan programs.