Well here we are. Many businesses are trying to figure out how to navigate the current economic situation. “The economic outlook fell to historic lows, down 75% from a year ago, as prices rose about 8.6%,” according to the 2022 JPMorgan Chase & Co. Business Leaders survey. OutlookPulse. Businesses face challenges of all sizes, with the biggest costs associated with inflation and labor issues. Despite these challenges, there are still many companies entering new markets and expanding their service or product lines, but this could be slowed by rising interest rates.
Traditional loans, primarily SBA loans, are starting to see the effects of rate increases. It used to be that if someone got a mortgage of $600,000 at the lowest rate, now that rates are going up and are expected to go up again, for that same monthly payment, those businesses can now only qualify for a mortgage of $475,000, which is obviously limited when real estate prices reach record highs. . We’ve seen it in a few of the deals we’ve been involved in, as banks become more cautious in their outlook. Refinancing no longer makes sense to most homeowners, it affects capitalization rates, which holds back the investment market.
Rhode Island’s overall economic outlook is best represented by Leonard Lardaro’s Current State Index of the University of Rhode Island. “While we have moved beyond the effects of the pandemic for  months now based on the regular CCI, I think it’s reasonable to conclude that Rhode Island’s true global recovery has indeed begun. said Lardaro. “That’s the good news. The bad news is that the economies of the United States and Rhode Island are beginning to slow as the effects of monetary tightening begin to be felt. Only two of five leading indicators improved in May, total manufacturing hours, which rose 4.9%, and new jobless claims, which improved significantly with a 94% drop.
The industry continues to climb competitively. Rhode Island faces the problem of increased demand relative to inventory. Due to inflation, construction costs still outweigh relocation, but with limited inventory, this leaves many homeowners with little or no alternatives for their needs. Based on conversations with developers in the market, there is a feeling that the cost of some building components is starting to stabilize and that will help going forward, but supply chains are still having an impact.
In the office market, all owners have adapted more flexible durations. The past two years have had an incredible impact on how business owners view the future. Scope increased from 12 months to 6 months. We are seeing delayed or short-term (1-2 years) commitments from office users in suburban and urban markets. Landlords, while being flexible on the term, are trying to keep rents, but there has been some flexibility if that means keeping a tenant. There is some movement towards the submarkets, but not the post-pandemic flood that many were predicting.
One of the things that will impact the market this year is the revaluation of real estate for tax assessment purposes. While values have continued to rise, many Rhode Island communities are experiencing a significant shift in real estate valuations this year. 18 of Rhode Island’s municipalities had an assessment update or reassessment in 2021. Tax rates have been adjusted, but many homeowners will experience a tax increase, all properties registering an increase in value. With these changes, we expected to see a busy calling season. We believe that many commercial property owners will have a strong case to make to tax assessors and/or appeal boards. Landlords who have not increased rental rates significantly have the strongest case for appeal.
Recently I was asked what my future prospects were and I reply that due to all the elements of uncertainty I know what I am doing for the next six months but I am not sure what will happen within the next six months. The coming semesters and rising interest rates are making people reluctant to make predictions. I tend to use surfing metaphors in my analysis, Rhode Island is the state of the ocean after all. The big surf has passed and done its damage, and although we are no longer fighting in the water as the wave descends, we need to be sure that we have not been dragged into a rip current . I believe that smart market participants will take advantage of these conditions, while always being aware of the danger of not remaining vigilant.
Tom Sweeney, SIOR, is President of Sweeney Real Estate & Appraisal, Providence, RI