2018 looks to be a banner year for small businesses, CRE investors and the broader US Economy. From 2011 through 2015, Madison One Capital had been cautiously optimistic about small business growth but has always expected short term interest rates to remain near historic lows even as the country experienced a slow recovery from the Great Recession.
2018 is going to be the year when the fun really starts – growth, innovation and appreciation will be the three core themes that will headline 2018.
That said, here are the 5 Elephants in the room you can’t ignore in the year ahead:
1.) Expect at least three .25 point bumps in WSJ Prime Rate
Scary, but very possible. WSJ Prime Rate could be as high as 5.25% by the end of 2018, up from its current level of 4.50%.
With growth and a resurgent economy, the Fed will want to make sure we stay sober with some measured increases in short term interest rates. A lot of small businesses and real estate developers borrow on short term interest rates like the Prime Rate for development, re-positioning or expansion commercial financing. While the increase in the cost of capital is a downer, the silver lining is that increases in interest rates mean businesses are or should be in position to raise prices. Rents and operating performance will be positively correlated, so being prepared to manage this cost requires upticks on the revenue side to offset the cost.
2.) HUGE Refinance Boom for CRE Owners and Small Businesses
When I say HUGE, I mean Donald Trump HUGE.
Higher revenue means higher margins if business can fix their cost.
While short term interest rates have continued to rise since December 2015, long term interest rates remain very close to historic lows. We predict that stable small businesses and CRE investors will continue to seize the opportunity to reduce their cost of borrowing in 2018. To put this in perspective, short term interest rates have increased over 125 bps since December 2015, yet the 10 Year Treasury remains near its historic lows (around 2.5%).
3.) Fintech will accelerate its path of Industry disruption
Don’t ignore the Fintech onslaught, which is comprised of crowdfunding portals and efficient technology in the commercial lending space. Small businesses and traditional RE companies can benefit by engaging with these companies in different ways. Companies can make choices based on their investing capacity, the utility of a startup’s services, its need for financing, and so forth. Admittedly, Fintech is more expensive, but today’s economy moves at a rapid pace and small businesses and investors alike cannot wait 36 months for a loan to close. FinTech will continue to evolve and the commercial lending industry will continue to be disrupted by the speed and efficiency of Fintech companies.
4.) Banks & Credit Unions will innovate to stay competitive
Let’s face it, the commercial lending environment is highly fragmented and onerous to a fault. With private lending and other industry disruptors in Fintech, Banks and Credit Unions need to continue to re-establish their industry superiority without stepping too far off the ledge.
They can accomplish these goals in a few different ways. First, embrace new forms of ancillary financing: Property Clean Energy Assessment Financing, available in 33 states, can be layered into the capital stack to maximize borrowed funds for CRED development, enabling banks and credit unions to advance funds at lower amounts relative to the completed value of the property, such as a hotel or a shopping mall. Secondly, banks are participating in the SBA & USDA program in record numbers, creating more and more competition in the government guaranteed lending space – this creates more opportunity for small businesses who are looking for the most attractive loan possible when expanding or acquiring new assets and revenue streams.
Look for Madison One to comment more on this part of the outlook later this month – there is a great deal of opportunity for banks and credit unions to grow in this market and we will identify what those opportunities are in short order.
5.) Trumponomics will more than likely stimulate Commercial Lending
Lower taxes mean more discretionary income. More discretionary income and more cash means consumption and investment, the primary drivers of our Gross Domestic Product. Businesses who are growing will invest, which fuels further growth. Wage earners will earn more, clearing the way for more purchases.
More importantly, Trump’s roll back of regulation will continue to have a favorable impact in commercial lending. Without getting into specifics, it restores confidence in the banking world and a welcome change for businesses who have felt hamstrung by regulations in years past.
We all have a lot to look forward to in 2018. Please contact us at Madison One to learn more about how we can help you grow you or your client’s business through our commercial lending platform. Madison One prides itself in adapting to changing market conditions, putting our Borrowers first in accomplishing their goals of success.
About Madison One: Madison One provides bridge and permanent financing solutions to small businesses and commercial real estate investors nationwide. The Madison One team has completed over $500,000,000 in commercial loan transactions, including SBA and USDA guaranteed loans. To learn more about Madison One, please email JBengert@madisonone.com for questions or additional information.