The Indicator from Planet Money - Fear And Loaning

There's a fear radiating out from the commercial real estate market — a fear that some economists say could become a drag on any economic recovery. In fact, there's evidence it already has.

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Content Keywords: Stacey Vanek Smith NPR Joe Peak

Is the indicator from Planet Money, I'm Stacey Vanek Smith before up but for those who don't know you are a business reporter at WBUR in Boston and you come to us today with an indicator. That's right. I know you love nerding out on things like job numbers and Market indexes his trip. That's four days on this show, you know, it's in the right but this indicator comes from a source. I think might be new to you and a lot of listeners and it reveals an important unseen force that could be holding back the fragile economic recovery were in right now in your loan officer opinion survey initial S L oo s flu

And what is it? What is it? Exactly the senior loan officer opinion survey is this report the Federal Reserve Bank puts out about every quarter and one Economist. I spoke to says it's basically like like a banker gut-check. Yeah. Yeah. Yeah. Yeah asking him a what is loan demand look like and what are your lending standards right now have they tightened or loosened? That is Joe Peak. He works at the Federal Reserve Bank of Boston and we were looking at the latest sluice together and it there all these graphs that show essentially how loan officers had a lot of banks are worried. So big tighten their lending standards making it a little harder for customers to get home loans car loans credit cards, but there's one category of loans Joe is particularly concerned about commercial real estate loans at one point this past summer about 80% of loan officer surveyed said they've tightened the credit spigot on these type of deals.

And that is today's indicator 80% That's a lot of that spike is back in 2008 right to financial crisis because do I want to lend to you right now or a real estate deal? Probably not right? Because I'd be afraid that you're not going to be able to make the payments makes afraid to make loans on Commercial Real Estate since the summer didn't show banks have gotten even more cautious and I don't know about you Stacy, but I don't own any commercial real estate. There is a reason that should matter to you this fear radiating from the commercial real estate sector Economist like Joe say it could turn this economic recovery into a years-long slog.

And we'll explain how after the break.

The thing I love the most is I get to just call up really smart people who spent like decades researching it and I can ask him any question. I want to join to bring inside to help think about the world in the economy differently Unger celski and I read the Planet Money newsletter.

In normal times Boston financial district is a hive of activity thousands of people working in offices restaurants and retail shops buzzing through this Canyon of glass and concrete buildings. But recently I took a walk through the neighborhood and Stacy this is what it sounded like.

Oh, that's not good. Beer silence minus the construction crew here in there. The streets were eerily quiet walking through downtown walking to downtown except for some errant signal that that was me on my way to a little Park tucked between the office towers and that's where I met up with Liz Bertha. Are we recording now? This is a researcher at Newmark a company that buys and sells commercial real estate and she's been working in the area for years soap. She seen a chain companies moving in vacancies going down and rents going up. She says the neighborhood had to buy lunch meetings and you know industry events in meeting up with friends that work at other companies not so much hassle or bustle anymore since the pandemic many companies have moved or

And trying to sublet their spaces and now according to Liz Office Buildings in downtown Boston are only about 6%. What are usually be?

Well, it's hard to say because we weren't really measuring that in the four times a company buying an office building in a super busy part of town might wonder how many square feet is it or what are the amenities not is anyone even going to show up in cities around the country. The pandemic has been squeezing the market for commercial real estate offices, but also retail entertainment hotel space and the empty streets and storefronts. Those are just the effects that we can see visible impact that fear Rippling out from the commercial real estate sector and to understand how that plays out. It may help to play pretend for a second. So Stacy, let's imagine we're back in freak open times and you're a commercial landlord. I don't know Stacey commercial realty Corp and let's say let's say you own some commercial space downtown and you

Route to clothing stores restaurants and music clubs and things are going well until the pandemic it's and then a bunch of your tenants come to you and say I don't know if I'm going to make rent this month or anytime in the near future. So landlord Stacy. What are you do not have to find another tenant and demands for downtown commercial space is not great right now. I could also try to cut a deal with the tenant may be temporarily reduce their rent until things get back to normal except that creates another problem. What say you took out loans to buy all that commercial space and now you got paid it's coming to deal with them try to sweet-talk them into may be rolling over my loan or letting me delay payments a little bit. So that would be a great idea except Banks or not exactly eager to open up there.

Right. Now remember the sluice there is still a ton of economic uncertainty. That's Joe Peak from the Boston fat again. He says the cares act from the spring made it easier for businesses and Banks to defer loan payments for a while. But those measures are wearing off. We have a lot of loan delinquencies. A lot of those will turn into long the falls and some of those will turn into bankruptcies. So this business has fell so now banks have a problem. Thanks. See the market getting riskier. So there are a lot pickier about who they lend to or who they choose to give a break and the problem is credit for a market is sort of like oil for an engine, you know, what sort of lubricates the economy so if commercial landlords like Stacy Corp can't get loans. They're less able to cut deals with tenants.

Help me get through the pandemic hotels go bankrupt or retail stores go bankrupt, but that's not where the bankruptcies end. Because many of those jobs they're going to cut back their spending at all kinds of stores. And so that's going to make those store struggle, which I imagine we'll make the bank's tighten up even more the cycle continues and the commercial real estate market becomes like an anchor dragging down the rest of the economy.

A very sobering indicator that you brought to us. Is there some light at the end of the tunnel. Is there a way out of this cycle to let the researcher from Numark? She says a turnaround ultimately depends on people getting out there at the end of the demand for commercial real estate real estate in general is really all about the people where they want to live where they want to work how they want to spend their money and even with a vaccine on the way. It'll be a while until people can do that like they used to

This episode of the indicator was produced by Brittany Cronin fact-checked by Sean Saldana of the indicator is edited by Patty Hirsch and is a production of NPR.

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