Economic uncertainty – how did we get here?

Big banks slow down before the big bang

And then, the fireworks started in earnest. “When we first saw it was the middle of last year,” Acton said. “The transaction market in the United States had been very strong in 2021 following the COVID shutdown. Things came back pretty quickly – very high levels of transactions occurred that continued into 2022. The week before the Fourth of July is when the large lenders we work with, the big money center banks, started reaching out to us saying ‘look, we’re really going to slow things down; we’re going to pull back; we’re not going to be advancing as much credit to properties. Certainly, we will honor all existing obligations and all that kind of stuff. We’ve been very busy the last 12, 18 months, we’ve grown our book enough. We’re getting pressure from regulators to slow down.’”

They weren’t kidding either: “By the middle of the year, the big banks really pulled back,” Acton said. “The smaller lenders, the regional, more local banks, kept lending.”

Those relying on the big banks for credit felt the impact of the slowdown. One of the world’s largest real estate investment managers, with some $90.7 billion in assets under management, AEW Capital Management was among those feeling the change among big banks.

“The commercial property sector really depends on available credit,” he explained. “Assets are big and lumpy and have cash flow characteristics. They’re very supportive of using financial gearings, financial leverage. When all that is pulled back or constrained, activity slows down and it slows down quickly. As trading activity slows down, uncertainty rises. Things become much less clear. And things just sort of come to a standstill.”

Here’s an interesting bit of perspective: “The total trading volume in the US through August is pretty much exactly the same as it was through August of the COVID year of 2020,” Acton said. “So in some sense, the contraction on credit, the pullback on credit, has had as much of a slowdown effect on the market as COVID did. For very, very different reasons, but comparable.”