The Next Crash

When I’m networking with commercial real estate professionals, the question of “When is the next crash?” often comes up. Maybe it’s human nature. My current local market in the Tampa Bay area is performing very well, in most if not all sectors. Brokers are doing very well with many inbound prospects and little need for outbound cold calls. Appraisers are busy. Lenders are busy. So why focus on the next crash?

When is the next crash? I don’t know. The 4Q 2018 was a very unrewarding time for equity investors. Equity markets experienced significant declines, S&P 500, emerging market and international holdings ETFs were down 10%-15%. Substantial stock volatility is currently apparent.

Many look to professionals to keep tabs on the next downturn. For example, RMA recently published Risks in Commercial and Commercial Real Estate Lending. The report highlights the current economic recovery since 2009 becoming “the longest recovery in history.” Interest rates (with the exception of some recent modest increases) and unemployment are at historical lows. Capital and liquidity in banking are at near historic highs, asset quality is strong and overall underwriting is acceptable.

The report asks, “What stage are we in the current economic cycle?” Similar to networking discussions, “When is the other shoe going to drop?” Regardless of your motivations, understanding market direction is helpful from a risk management perspective. Discussing the December 2017 passage of tax reform, rising labor costs, increase in interest rates, tariffs and trade deals and keeping eye on inflation is important.

The RMA study highlights that commercial loan growth as an anemic 1.1% increase in 2017, the lowest since 2011. Loans continue to be a significant profitability driver for banks and the pressure for loan growth is increasing. The RMA report highlights emerging risks including easing of underwriting standards, higher hold limits and managing concentration limits.

Launching new products is a very interesting loan growth potential, in which banks are expanding into areas not previously offered. Most often this involves technology. That said, we are very excited to provide chief appraisers and chief credit officers our YouConnect platform to reduce operational costs by automating due diligence. Appraisal workflow facilitates managing collateral risk, vendors, regulators, auditors and complying with internal policy. Connecting to other bank systems with dynamic reporting brings real value to the table.

Market corrections seem to be associated with each generation. However, arming yourself with technology provides a tool to address potential risks to your bank. Provide value to your financial institution’s C-suite with workflow, information and reporting to best position your bank from a risk management perspective.

The Next Crash
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