We’ve run into a situation that I haven’t seen in a long time where building costs can far exceed the value of a property once it’s completed. This is halting a lot of entrepreneurial plans.
Given the ridiculous costs now associated with items as fundamental as concrete or drywall, the costs to erect a building can far outpace what it will be worth upon completion. This is happening on both commercial and residential properties.
If you have an industrial piece of land in the far suburbs or a primarily rural area, then you may find that your costs on the project will be substantially higher than the appraised price upon completion. The increases in interest rates have decreased the value of commercial real estate a minimum of 15% since its high point in 2021. In many rural areas where demand is even less aggressive, prices have decreased even more.
The same thing recently happened to one of my developers on a condo conversion of a center six flat here in Chicago. Given the increase in interest rates, the units when completed didn’t have the price points necessary to finance the project.
This will halt any prospects of financing because the bank will be looking for a loan to ending value ratio of 70% or 80% at the most. They’re certainly not going to lend on a project that isn’t worth what someone paid for it in the first place.
If you find yourself in this predicament, there aren’t a lot of good solutions to the enigma. Commercial property values are probably going to continue decreasing as we move through this economy with prices remaining high on building materials.
Patience may be the only order of the day.
Let me leave you with this.
Our main Inflation Indicator cooled to only 3% in June. This was significantly lower than one year ago in June of 2022 when it was measured at 9.2%.
It’s obvious that the work the Fed has done to increase interest rates has made a significant difference. The markets responded positively with equities increasing and bond yields decreasing today.
The Federal Reserve Board will meet in a couple of weeks to review the situation. Many still believe that they’ll further increase their Fed Funds Rate another quarter point. Core CPI that excludes volatile energy and food prices rose to 4.8% in June and the labor markets still remain overheated.
But the argument that this increase would be the end of the interest rate hikes is very strong. No matter what they decide to do, one thing is certain.
We’re nearing the end of the inflation cycle. The question now becomes whether or not we’ll have a soft landing or a recession in the overall economy.
Either way we need to be ready.
Horde your cash. Be conservative on your new projects. Be careful with hiring. Make your contingency plans today.
Be ready. The next phase of this unholy nightmare may be on its way.
We’re all going to get through this. Let’s get through it together.
As an inducement, we’re offering 33% off your first six months of bookkeeping and / or the first three months of electronic payroll services on a complimentary basis. In order to claim this benefit, please click on the appropriate button below and provide your contact information. We’d love to help.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Employee Retention Credits, M&A Due Diligence, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.