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Mike DeCarlo

HVCRE update

By | Commercial Real Estate, Construction financing, Regulation

Our prior article about the Highly Volatile Commercial Real Estate (HVCRE) rule that was part of the Dodd-Frank Act’s Basel III capital rule needs an update.

May 22, 2018, the unclear and illogical HVCRE rule was amended. It now allows land to be valued at a current appraised value! This is a huge and welcome change. Previous to that, contributed land value was valued based on the prior sale. The new rule states, “the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property.” Hopefully, this will help regulated banks make more loans on commercial real estate for acquisition, development, and construction.

The new rule better defines an HVCRE acquisition, development and/or construction (ADC) loan. It also allows banks to make such loans without the 150% capital weight– a huge penalty for a bank.  And for borrowers, there would no longer be a 15% cash contribution requirement (because the land would be accepted capital) and once the property begins to produce income, that income could “taken out,” for example, to payback the project’s investors.

Tower Commercial Mortgage arranges $2.95M in Freddie Mac Financing for a 24 Unit Multifamily Asset in Salt Lake City Utah

By | Commercial mortgages, Commercial Real Estate, Construction financing, Multifamily housing
Multifamily apartments

SALT LAKE CITY, UTAH — Tower Commercial Mortgage through one of its capital partners, yesterday arranged permanent financing for $2.95 million in Freddie Mac financing. The financing was used to take out the construction loan for the newly built multifamily asset that was stabilized in 2017, located in the Salt Lake City area. The originated loan features a 10-year term with a 10-year floating rate extension and a 30-year amortization schedule. The sponsor completed the 24-unit property in August 2017, and the property was stabilized in December 2017. Tower Commercial Mortgage had arranged the construction financing previously to construct the property. The borrowers were not disclosed.

The sponsor approached Tower Commercial Mortgage two years ago to find construction financing for the project. The sponsor had been looking for two years and was unable to secure financing. Tower Commercial Mortgage was able to secure construction financing within six weeks.

Mike De Carlo, President of Tower Commercial Mortgage, said “We are thrilled with the outcome of this loan as the project was a very successful project and that the property’s sponsor couldn’t be happier.” He said, “Salt Lake City, Utah is rapidly growing and demand for housing is strong. There are many people moving in from outside the state, attracted to the many recreational activities the state of Utah offers. So new multifamily projects are necessary to keep up with the additional demand.”

#CRE, #CREfinance, #multifamily, #apartments

Commercial Real Estate Trends for 2018

By | Commercial Real Estate, Economy, Interest rates

2017 was a great year overall for the commercial real estate industry. Some of the trends will carry over into 2018. Here’s a short list of items to consider going into 2018.

Economic trends

Interest rates are rising. The problem is that only the short-term rates are rising. The longer-term rates are only marginally higher. If the Fed keeps raising the fed funds rate and the 10-year US Treasury doesn’t increase as well, the Fed could end up with an inverted yield curve. This could lead to a slowing economy. At the least, it could lead to some lenders not funding more loans because their net interest margins are shrinking– that alone could potentially slow down the economy. For commercial real estate, increasing rates will affect the spread between cap rates and borrowing rates– the smaller the margin between them the harder it is to find profitable investments.

GDP is growing at a better clip. GDP growth in recent quarters has been around 3%. Some are predicting 4% for 2018. Not everyone shares those forecasts, but one forecast from Goldman Sachs seems to think at 4% the economy will also be more productive– that’s a most welcome word (let’s read that again, productive) that hasn’t been spoken in a while and can replace the disruptive word we have heard so much for the past several years. The Wall Street Journal recently published a great article on how productivity might rebound. Do watch for technology to lead out increased productivity– no, surfing the net doesn’t count! Here’s one article discussing the forecasts of economists from several commercial real estate brokers.

The labor market is tight. Yes, unemployment is the lowest in years and could go lower below 4%. However, that also means wages should be going up and that could lead to inflation. So while everyone is looking at unemployment, it will be important to look at wage growth and inflation. The one thing that helps keep those in check is… here’s that word again, productivity. The more productive the labor market is the less pressure there will be on higher inflation. Of course, if you are developing anything, you are already keenly aware of the shortage of construction labor.

The CMBS market survived the wall of maturities. The CMBS market is looking strong. A great article on the CMBS market is out at Three items to watch here. One, improvements in servicing agreements. This should make CMBS more user-friendly. Two, B-piece buyers are being more selective, more credit sensitive. As a result, CMBS loan candidates really have to meet or exceed underwriting requirements.  Third, the declining delinquency rate on CMBS to continue. The third one, with so much new volume coming into CMBS, delinquency would be expected to come down as new vintages of mortgages are funded and packaged into CMBS pools. This time around, delinquencies may remain lower as lenders and investors have been more conservative in their underwriting and deal selection.

International trade agreements. President Trump has pulled the USA out of some important trade agreements that could have an impact on our economy– its a bit early to tell. So this is a story to follow in 2018. Shipping and ports are the busiest they’ve been in years! So time will tell on this one.

Trends by property type

Multifamily will continue to be a hot market. However, watch out for rising vacancies as an early sign of the market softening. Another important development with the revised tax laws will be affordable housing credits. Keep looking for opportunities to serve the middle class, row houses, transit-oriented developments, and affordable rental units in most areas of the country would be a very welcome development. Finally, check out the chic micro units! These could be a very lucrative sector of multifamily– think luxury hotel rates with leases that last more than one night.

Retail continues to transform itself. As strong retail sales end the holiday season, it will be important to see how retail continues to transform itself with more attractions and creative tenants to draw traffic. Traffic is the key to retail’s success. Tenants are also finding ways to bridge the gap between physical stores and online sales through the omni-channel strategy. It has been said that consumers like to be able to return online purchases in physical stores because of the convenience. And retailers like it because the consumer ends up purchasing three times as much while returning the one item purchased online.

Industrial space has been in high demand with online retailers seeking locations closer to their customers. Expect that to continue, however, watch out for supply. With average construction times at less than 12 months, additional supply can be made available quickly and outstrip demand. So watch the available space in your market and the time it takes to fill up that new space. Look for rents to increase at a slower pace for signs that the market is becoming more balanced.

Office sector seems to be in a sweet spot. Tenants are using new office buildings in the suburbs to attract talent. There are new buildings being constructed in urban areas too. Construction cranes are in the air in most primary and secondary markets. Can demand absorb all the new space? Watch out for short-term oversupply. Watch the trend in the office flex product; it might become more than that as tenants and employees continue to redefine office work.

Rents have been increasing in 2017. Expect that to continue in 2018, unless the economy softens. Watch those vacancy rates in 2018 for any early signs of trouble in 2019!

Finally, look for emerging technologies to improve all aspects of the commercial real estate industry. Technology will provide easier access to data allowing more informed decisions and better service. At least that’s the hope. So embrace it before it embraces you.

We hope 2018 will be a great year for you. Happy Holidays and a prosperous New Year to you from us at Tower Commerical Mortgage!


Salt Lake City is recognized by Freddie Mac as a priority market for multifamily lending!

By | Commercial mortgages, Commercial Real Estate, Interest rates, Multifamily housing

Salt Lake City is now a priority market for Freddie Mac’s Small Balance Multifamily loans for $1-6MM. The agency lender has identified Salt Lake City for top market pricing. They recognize the need and that demand is strong for housing in this market.

Apartment owners of 5- 75 units in Salt Lake City (and given the property, surrounding cities) can get the same highly competitive rates (currently in the high 3%s) as in top markets around the country, like San Francisco, Los Angeles, New York City. Pricing is on a deal-by-deal basis. These loans are 100% non-recourse, have a step-down prepay, cash out option, and 10-year terms with a 30-year amortization. Interest only is available. No lender origination fees and loan closing fees are low. Loan-to-value ratios are as high as 80%.  The process takes less than 35 days from application to close. Apply and lock in a low rate.

As a correspondent lender, I can get you a quote in 24 hours. The items needed are:

  • Current rent roll (preferred with tenant names, start/end dates, and leased area)
  • Prior year and YTD property financials (perfer 2 years plus YTD)

What is a high volatility commercial real estate (HVCRE) loan?

By | Commercial Real Estate, Construction financing, Regulation

Defined by federal regulators, an HVCRE loan is any commercial mortgage loan used to acquire, develop, and construct (ADC) commercial real property prior to a conversion to permanent financing as HVCRE where there was not at least 15 percent cash contributed by the developer. Watch out for this requirement on commercial mortgage loans that are considered high volatility commercial real estate. It’s just one of many insane rules bankers are having to comply with today. No wonder smaller banks are selling out to larger banks.

Banks must now hold 150 percent of their capital for all HVCRE loans—typically CRE loans are 100% capital weighted. The new rule went into effect back on January 1, 2015, but for whatever reason, banks are only recently (within the past year or so) rejecting loan requests that cannot meet the HVCRE requirements. The new rule is designed to protect the lender by increasing the developer’s equity cushion above the lender’s loan amount.


This could be a big surprise if you haven’t sought a commercial mortgage loan in recent years. The new requirement for obtaining a commercial mortgage has restrictions on the use of land as equity and regulators want to see 15 percent cash contributions from borrowers.

How it impacts developers

Here’s the biggest shock that will be a challenge. Your contributed capital into the commercial property must be at least 15 percent of the “as completed” appraised value in cash or unencumbered readily marketable assets! Yep, you heard that right; dirt, land, or ground isn’t of any value to bank regulators back in Washington, D.C. It should be noted that the “as completed” value is typically lower than the “stabilized value.”

In other words, what this means is, if you land banked some property for the past 20 years and now want to develop it and build a commercial building on it, you will have to demonstrate that you have paid in 15 percent equity of the “as completed” appraised value in cash or prove that the property was recently acquired with a sales contract showing what you paid for the property.

The other scenario where this would come into effect is you buy land and it appreciates while you are getting ready to raise debt. The bank would not be able to use that appreciated equity above what you paid for it.

Remember any and all cash into the project has to be documented, such as land purchase and soft costs. If you cannot show that what you paid for the property represents 15 percent of the “as completed” appraised value, the lender is now forced to ask you to pay cash or contribute unencumbered readily marketable assets (stocks and bonds, or cold hard cash) of 15 percent into the project before they lend a dollar.

For example, let’s say you found the perfect commercial project and use of your land that you have held for the past 20 years—say it was inherited. And let’s say it is now worth $750,000. You determine your construction budget will be $5 million. You think perfect, my land is 15 percent of the total costs and I have another 10 percent in soft costs and cash—thinking a LTC of 75 percent. So you call up your local banking friend and ask for a construction loan.

He says, sorry, we cannot accept that land as equity, so you will need to deposit $750,000 in the bank as collateral instead. And then, he looks at your balance sheet and says, hmm, you won’t have enough liquidity in your balance sheet after the deposit, so I am sorry, we have to decline your construction loan request. Huh?

Land isn’t considered tangible equity… Say what???

Why? It appears the regulators do not like to see a borrower requesting a commercial mortgage from a bank without having “tangible equity” in the project. Regulators would argue that one of the factors that led to the last financial crisis was borrowers claiming they had equity in a property (because of the land’s appreciation) when really the equity or capital they contributed was really just price appreciation. When real estate prices were moving up so fast that you could buy a property and within 6 months the property increased by 20 percent or more, that inflated price they would say is not really an equity contribution by the borrower. Ok, that’s understandable. But, shouldn’t the land still be worth something? In short, the regulators are arguing that the borrower didn’t really have any of their own capital or cash in the deal—no skin in the game.

A few exceptions

There are a few exceptions if the loan is secured by:

  • 1-4 family residential projects.
  • Properties that qualifies as a community development project.
  • Agricultural land

So basically, if you have a multifamily property that qualifies as a community development project for low to moderate income residents, then any bank that would finance the property would not be subject to this regulation. Unfortunately, this leaves out all other commercial properties that require financing. And of course, an SBA 504 loan may also be exempt from the HVCRE rule if it meets the requirements for community development and fits into the lender’s community develop act lending activities.

Therefore, real estate that does not have any tangible contributed capital is considered highly volatile commercial real estate. It is highly volatile because the borrower has not paid in enough of their own tangible cash. Apparently, there isn’t enough pain in the deal for the borrower. The borrower could theoretically walk away and not suffer a significant loss.

Of course, this is short-sighted at best. The regulators have not completely thought this through because they are not considering the value of the developed project—maybe “as completed” value but not the intangible value of creating something from raw, undeveloped land. The value of the end product as completed does provide skin in the game—not to mention the land contributed. Just ask anyone who lost their shirt during the financial crisis in 2008-2009 and they will tell you they did suffer some pain—even if they didn’t contribute 15% cash into the deal.

Banks must comply

Why do Bank’s care about this rule? First, they have to comply or be criticized by their banking regulators which can cause increased deposit insurance premiums, limit new branches, or limit any new products they might want to offer. Second, even if they made the loan, capital weight restrictions on the amount of the loan at 150 percent of the bank’s capital, reduces their already thin margins. 150 percent capital weight creates an additional cost of capital because it ties up 50 percent more capital that could otherwise be lent out to other bank customers. So, if they don’t follow all aspects of the regulation, bank examiners would likely criticize the bank for not following the regulatory guidance. Banks aren’t happy about this rule either, but it is the current regulatory environment they must operate in.

How can a borrower avoid being classified as HVCRE?

There are three conditions anyone of which triggers HVCRE:

1) The LTC is less than or equal to the maximum LTC requirements found in the Interagency Guidelines for Real Estate Lending. For construction loans, its 80 percent LTC, but most banks are lending at lower percentages.

2) The borrower contributes at least 15 percent of the “as completed” value of the property in cash or unencumbered marketable assets prior to any lender’s advance. Some banks are accepting soft costs as part of this contribution.

3) The borrower’s contributed capital and any capital generated is contractually required to remain in the project until the project is completed, stabilized, and converted to permanent financing.

If you’re looking to a bank for a construction loan and have held the property for a while, be prepared to show your skin in the game!

Good news!

We have non-bank construction lenders who aren’t under such silly regulations. Give us a call if you have banked some land years ago and now want to develop it.

Helpful links

This article isn’t meant to be legal advice and does not answer all the questions about the HVCRE rule. So if you want to learn more here are some links to the regulation, guidance Q&A and others interpretations.–US-Federal-Banking-Agencies-Release-Answers-to-FAQs.pdf


Reversing The Risk Retention Rule For CMBS Could Improve Commercial Lending

By | Bond Market, Commercial mortgages, Financial Markets, Lenders, Regulation

There are several key bank regulations in the Dodd-Frank Act which if loosened could improve bank lending. One important one, is the risk retention rule for asset-backed securities including commercial mortgage-backed securities (CMBS). Reversing the risk retention rule, Section 941 of Dodd-Frank could help improve the CMBS market. The rule became effective December 24, 2015 and gave CMBS an additional year to comply which has caused lower CMBS loan origination volumes over the past year as CMBS lenders prepared to comply. It caused some smaller CMBS lenders to withdraw from CMBS lending altogether.

The risk retention rule problem

The main issue causing problems with the rule is that the CMBS issuers must have “skin in the game” by retaining 5% of the aggregate credit risk of the commercial mortgage loans that it adds to a securitization. Typically, a transaction goes like this. A lender originates a commercial mortgage and either holds on to it or sells it to a larger CMBS issuer. The CMBS issuer is an investment bank who pools other commercial mortgages from various lenders as collateral to support the CMBS. The CMBS issuer does its own homework on the loan before it purchases it.

So a lender will only sell loans that it feels would be accepted by the CMBS issuer. To do otherwise, risks the lender’s reputation with the CMBS issuer. There is already a lot of risk reduction going on before they get to the risk retention rule of holding 5%. That was not the case before the crisis for residential mortgages leading to the risk retention rule.

With the rule, the CMBS issuer, not originating lender has to hold a 5 percent interest in each mortgage they sell to a CMBS issuer. This causes issues both with the originating lender and with the CMBS issuer because the CMBS issuer must really know the lender’s origination and underwriting practices to have the assurance when purchasing loans from a lender. The bottom line is lower margins for all, higher interest rates and higher requirements for loans stemming from another rule that restricts lending. Loans that need to be refinanced and could be before the rule, now might struggle to get refinanced.

Additional issues occurring

A recent Wall Street Journal article expresses some of these issues.

“Pressures have been mounting on these firms for more than a year as volatility and risk have increased in the commercial mortgage-backed securities market.

Profit margins have narrowed in the past few months and are likely to be squeezed further as new rules take effect that require issuers of commercial mortgage-backed securities to keep at least 5% of the bonds they create.”

Some of the smaller lenders have left the business because of the new rules. Other lenders are having to increase their interest rates due to added cost of holding the 5 percent retention piece.

What to expect if you’re in the market for a commercial mortgage

CMBS lenders have, in the normal course of business, also been faced with increasing delinquency and default. As a result, according to another Wall Street Journal article more stress on CMBS lenders is causing additional requirements for commercial real estate borrowers. Some of the cautious steps lenders are taking to reduce their risk include the following. If you haven’t been in the market for a commercial mortgage recently, these are some things  you can expect.

  1. Lenders are keenly focused on their fundamentals of lending. Other than the top markets, commercial real estate geographic markets, lenders are really doing their homework and reviewing everything they can about the property in question. They are looking at the strength of the tenants, the lease terms, the net cash flow and looking closely at the sponsor’s liquidity globally not just on the subject property for example.
  2. The new risk retention rule has made borrowing more costly and complicated. Some property owners will not be able to refinance loans obtained prior to the financial crisis, or if they are able to it will be at a higher interest rate.
  3. Construction lending by banks (while not a CMBS product) has become more strict– with some of the big banks out of the business for certain property types. Part of this is the supply of new commercial properties, the other part is less permanent lending options available with CMBS. There are other non-bank lenders making construction loans, however. Some property types that remain strong candidates include industrial and multifamily.
  4. Increasing interest rates are causing lenders to underwrite commercial mortgages to higher interest rates than the current market rates -called a phantom rate. Note, a phantom rate is not the contractual rate– think of it as a stress test rate. By using a higher phantom rate, prospective borrowers will find that they are being approved, but at a loan amount lower than what they requested. So be ready to add additional cash to get a deal funded.

These and other lending rules have led to an increase in specialty finance sources to fill the gap that regulation has created with the big bank lenders. We are contacted almost daily by these lenders seeking deals to finance.

Reducing the regulatory burden

The Trump administration is working to reduce the regulatory burden that banks and financial markets are under. It could be a key step to improving the lending environment. Lenders were punished enough through their own mistaken lending practices to have the additional burden of more regulations imposed. Before any of the new regulations were written or became effective lenders had already learned their lessons. Lenders made the necessary changes to reduce their risk and make prudent loans. Banks don’t need post-crisis regulation to do it for them. Lenders are the practitioners, they know better than regulators what mistakes were made and how to correct them.

The regulatory backlash always happens after a crisis. A crisis happens, regulators point to the mistakes (that’s the easy part) and then write more rules to prevent the mistakes from occurring in the future (the hard part)– the problem is every crisis is different and rules don’t get repealed very often. Regulators have never predicted or stopped a financial crisis from occurring and it is not their mission. Even with prudent lending, lenders will have losses when the economy turns down and goes through a recession. If regulators wrote rules to prevent lenders from taking on risk and suffering losses, then there wouldn’t be any banks– because the rules would essentially prevent them from lending in the first place.

Finally, on a positive note, the economic outlook is strong and commercial real estate remains solid, and there are many lenders lending in a competitive environment so it’s still a great time for both lenders and commercial property owners.



What Commercial Real Estate Trends To Focus On For 2017

By | Bond Market, Commercial Real Estate, Economy, Federal Reserve, Interest rates, Regulation

2017 is almost here! We will be watching the following commercial real estate trends in 2017. These will be important especially if you need financing or are looking for a new property to develop or buy and need financing to do it.


One of the biggest trends to watch will be unemployment– particularly over the next two years. If you followed only unemployment you would have a good feel for where commercial real estate values are headed. Cap rates tend to follow the unemployment rate. So understanding the health of the labor market is an important indicator. It affects how much office space a company needs, the sales volume of a retailer, the industrial space needed for distributors and manufacturers, how many travelers are booking hotel rooms and household formation which drives occupancy and affordability of multifamily. All of this is dependent upon how many people are employed. Closely related unemployment is interest rates.

Interest Rates

What the Fed does will influence interest rates for sure. But unemployment is also what the Fed is watching that influences them to take action too. The Fed’s dual mandate to influence unemployment and control inflation is only done by changing interest rates. The Fed has the ability to change short-term rates by changing their federal funds rate. That’s on the short end of the yield curve. They can also influence the longer end of the market through their HUGE multi-trillion dollar bond portfolio.  It’s the long end that can impact borrowing rates. Raising short-term rates has a direct impact on long-term rates.


Recently interest rates spiked up because of the Fed’s anticipated decision to increase the federal funds rate. But it was also because of market factors such as an increase in commodities and President-elect Trump’s election win and commitment to infrastructure spending.  The bond market has had a big reaction to those two events. It will take time for both increasing commodity prices and any infrastructure spending to impact an increase in prices generally that would lead to inflation. At this time, inflation is still not a concern. But with low unemployment, the largest drivers of inflation is wage growth and with low unemployment, employers have to pay more to get qualified workers. More people working with rising wages will eventually lead to inflation. So we are watching this closely too.

Tax Reform

With President-elect Trump, tax reform is a top priority. The benefit of this is he’s a commercial real estate developer and operator too! So we can expect that whatever actually happens to tax reform, there will be some beneficial change that is positive for commercial real estate. One of the likely benefits is the 1031 exchange will remain. That’s a close item of the tax reform that we will be following, in addition to lower tax rates– another plus for economic growth.

Financial reform

The Dodd-Frank Act, unfortunately, is not going away. But with President-elect Trump, some of its provisions hopefully will. By reducing the regulations that banks are under they will be more nimble to expand their commercial real estate lending in smart ways. Banks do not need regulations to force them to make better loans. Banks are very cognizant of making safe and sound loans. The fewer regulation banks are forced to comply with allows them to make loans that make sense for both them and their borrowers. Yes, there may have been some bad actors, but generally speaking, less banking regulation will allow our economy to function more efficiently, productively and grow at a healthier rate.

To much success in 2017!

Happy new year!


Fed Raised Its Rate And It Is Old News

By | Bond Market, Economy, Federal Reserve, Interest rates

This week the Fed raised their overnight lending rate 25 basis points to .75%. But this is old news. The market basically did it for them with the bond market’s overreaction to the election results with president-elect Trump. So what! The Fed raised their rate 25 basis points. The 10 year US treasury yield has already risen from a July 8th low of 1.38% to 2.6% as of today– that’s 122 basis points. As interests rates rise, bond prices decline and the bond market has been selling off since July– two sides of the same coin. So, did the bond market really see a Trump win back in July? The bond market is very conservative, so did they see a republican win? People have been saying the increase in interest rates generally is a reaction to the Trump win, but that’s not so, because the increase started in July. Or is there an underlying trend that the press hasn’t picked up on yet? Political events and politicians really don’t have a large impact longer term on economic trends unless the effect major policy errors or war. The longer term trends typically are due to larger underlying pressures.

Higher rates attract foreign investment which bids up an already strong dollar which is great for imports, terrible for U.S. exports and foreign investments if you have them. Stocks have moved higher but many anticipate the stable dividend stocks with bond-like qualities which have been so strong for so long will also go the way of other income producing assets– aka bonds. Precious metals have fallen as the dollar has increased– that’s a typical inverse relationship. Commodities have fallen too as they are priced in U.S. dollars and have an inverse pricing relationship– except for the price of oil which has rallied approaching $60. Say what? An oil rally? Some have suggested that oil is the reason why bonds have sold off since July, pushing interest rates higher. Trump’s campaign statements about infrastructure spending and lower taxes to generate growth in the economy has further spiked interest rates.

Back to oil for a minute. Why is oil rising? Is it because of increased world demand or even U.S. demand? Has OPEC changed their stance? Has Saudi Arabia? What is the reason for oil prices bidding up? I do know, just like my car’s engine needs oil to run smoothly, the world economy needs oil to operate as well, so is demand coming from somewhere? Or is oil supply the driving factor? Someone knows, I don’t.

These are the current economic conditions. They are also the market’s expectation of rising interest rates. We have all had 10 years to think about these relationships and the implications of increasing interest rates. We knew this would happen, right? So that is why the Fed’s rate increase is old news. Further and more important, Trump’s win is also probably an overreaction even if the price of oil is an overreaction. Nevertheless, some have discussed that a 10 year U.S. Treasury yield of 3% would be enough to slow down the U.S. economy, which is already having its own troubles trying to grow, let alone the world economy. Is 3% possible? Or is the there finally enough strength in the world economy that a rise in U.S. rates wouldn’t be harmful? I don’t know if 3% is the tipping point.

Interest rates are likely going to come back down a bit in the short term, but probably not to the prior July low. I think the bond market has overreacted to recent events. But I think longer term the trend in rates has begun. Having said that, I am not a forecaster of interest rates, nor do I even try. It’s better to follow the market, is my motto. If you can’t beat them, join them. The Fed’s 2017 forecast is for 3 more rate increases.

Anyway, here’s my reasoning for why I think the interest rate trend is moving higher– at a very slow pace. These trends take time to develop. Trump’s policies will have to make their way through Congress and that takes time as we all know. Commodity prices are low and therefore, finished goods prices are not going to be going higher until producers start paying more for raw commodities. A strong dollar helps import prices remain low, so no inflationary pressure there either. Global inflation isn’t a concern currently either. Inflation is typically a threat at the end of a strong period of growth– something we have not had.

U.S. wage growth while ticking up is also not terrible even with a low unemployment rate. But that never seems to stay low for long and with labor market participation rates at historic lows with baby boomers retiring, employers are left with younger new entrants who have less experience and are more willing to work (forced they may say) for a lower wage. So wage pressures will remain subdued for a while as well. So I think we have 1 or 2 years more before we really start to see rates return to more normal, historical levels with U.S. Treasurys eventually settling in the 4 to 6% range. Nevertheless, the chart below helps me, at least, keep a rising rate increase in perspective. Look how long it has taken rates to drop from the earily 1980s highs. I don’t see an overnight return to high interest rates, do you? I’m not worried.


Another trend that is being discussed is this one on unemployment. As mentioned above, unemployment never stays at low for very long. When it is at low under 5%, guess what happens? An economic recession occurs. This pattern has occurred almost every time since the 1950s and probably longer than that. Why we can’t remain at low unemployment for long is a mistery. I don’t think economists have fully figured it out, but you’ll earn a Nobel prize for sure if you did! If you have, please let me know! But then the optimist in me sees the opportunity when unemployment is high on the other side of the recession. High unemployment is a good sign that the economy is starting to recover. See the chart below. And remember, none of this should be considered investment advice. These are just my observations.

Unemployment chart.

Additional sources for analysis.

Here’s the Fed’s public announcement on their rate decision.

The Wall Street Journal had a good article on the news. (WSJ)


What Trump’s Election Could Do for Commercial Real Estate

By | Commercial Real Estate, Economy, Regulation

Now that the election results are in and our country’s president and congress makeup has been determined, we can look forward to a further period of growth and opportunity in commercial real estate.

Trump’s acceptance speech

It was reassuring to hear President-elect Trump’s acceptance speech right after the election results were in. He immediately highlighted the need for more government spending:

“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”

For those unfamiliar with American politics, the idea that a Republican president would put more government spending at the top of his agenda is anathema to the party’s traditional “smaller government” stance. Unfortunately, as Milton Friedman said, “We are all Keynesians now.”  While a smaller federal government with a smaller budget would be ideal, if increased growth and prosperity results from more of this type of spending (rather than the prior eight years of transfer payments) it should improve the outlook for our country.

In case you nodded off in your Economics 101 class, Keynesian Economics is the theory that the government should increase spending (and cut taxes) to stimulate a slow economy, and conversely, should cut spending (and raise taxes) when the economy is at risk of overheating.  Of course, that’s theory.


The one thing that matters about what Trump said, is that he wants to actually develop and redevelop our infrastructure. That to me means that where ever that happens, the properties close to it will also rise in value or be a great redevelopment site as well. That translates into more opportunities for all.

Commercial real estate plays an important role in the U.S. economy. As new policies are written and legislation moves forward and as regulatory burdens are lessened, it will be good for the industry, your tenants, and the economy generally will benefit from fair and steady government policy that incentivizes growth.

We at Tower Commercial Mortgage are optimistic that the president-elect will develop and successfully advance a pro-growth agenda for all Americans. What is good for commercial real estate is good for our country!

Much success!

Best Package Delivery Management Services

By | Commercial Real Estate, Multifamily housing, Property Management

What is package delivery management?

Ask any onsite property manager or leasing agent and they can give you a good definition of a package delivery management system. Basically, it provides residents with an efficient, convenient, secure way of receiving their delivered packages. With greater use of the internet to purchase most anything, it becomes more important to deal with all the incoming packages ordered by residents. Some residents may just have their stuff delivered at work or another location. But being able to safely have packages delivered at the property provides residents with peace of mind. So offering package lockers with emails that are sent out when parcels are delivered is a value add in many locations.

Millennials, in particular, value this amenity when searching for a property, but really it is any tenant that buys stuff online and has it shipped to their apartment. It creates what is being called package anxiety because of the potential theft of the package if they are not home when it actually arrives or they get home late and the property management office or leasing office is closed. According to the NMHC/Kingsley first-ever survey on package delivery, it ranks second on their list of sought after amenities.

It could also be argued that a good package delivery management system could reduce operating expenses because of the staff’s time that has to be devoted to managing and storing the incoming packages. A package delivery management system is more critical in larger high-rise properties, and could be an important amenity for garden style properties too.  In any case, during the holiday season, a package delivery management system can leave residents feeling grateful indeed.

So what can you do?

It only makes sense to have a system for managing package deliveries. So I have tried to find some reputable products that are designed to solve this problem of all the incoming packages. Here are a few solutions that you should find helpful.

First,are Parcel Pending and ActiveBuildings EGG. These two companies have this problem figured out! It is self-operating and eliminates any contact with your property manager or leasing office. Residents are able to receive their package essentially 24/7 after it is delivered and they are notified when it arrives so they know it’s been delivered at the locker. These are most fitting for the garden community properties. High-rises typically already have central delivery and a storage room, whereas garden communities do not. So lockers make sense for that property type.

Second, is Notifii. They are a software company providing a partial solution. Think of it as a centralized mailroom that sends out push notifications when packages arrive. They do not provide a device to store the packages. So you’ll still have to have storage space (as you will with parcel pending or the EGG) but, you will also have to figure out the security and who will operate the physical storage. Not as easy for this to be “maintenance free.” For smaller properties or garden community properties this might night be a good option because of the lack of storage space, but it works well for high-rise.

Third, storage lockers from USPS. These are lockers, called gopost units located at convenient locations to accommodate a busy lifestyle. The Postal Service is currently installing units near certain Post Offices, grocery stores, pharmacies, transportation hubs, shopping centers and more. The downside is two things, it’s not an onsite amenity and it may not be available near the property or even in the city for that matter.

Fourth, Amazon storage lockers located near the property. The great thing about this solution is that it is an offsite service provided by Amazon– no cost nor fuss from a property management perspective, but it has the same downside the USPS lockers.

While there are many others, I have tried to highlight the various types of package delivery management options available. The costs range from expensive to free, and the benefits are zero to a highly sought after amenity. I hope you’ve found this article helpful. Below are a few links to other articles that might help you when researching this important issue.

Additional information

Package Locker Industry lifts off

Taking Package Delivery Management out of the leasing office

NMHC/Kingsley Package Delivery Presentation

Package storage systems help properties and residents handle deliveries