A few weeks ago we shared a rare bit of good news for existing SBA borrowers: the decision by the SBA to forgive six months of payments on all 7A and 504 loans for personal and real property.
The forgiveness program began on April 1st for 504 loans, as CDC servicers halted auto-pay withdrawals. Some 7A lenders were able to do the same, but others will begin the process for May payments.
This bold move comes with another component we have since confirmed: the SBA will also forgive the first 6 months of payments on all new 7A and 504 loans originated between March 27th and September 27th of this year.
Yes, you read that right. This is not a deferral program. It is straight up forgiveness and it begins the day escrow closes, which will go a long way toward paying for moving costs, retrofit expenses or by lowering the effective cost of a new facility.
Let’s do the math on a 22,222-square foot building in Anaheim with an asking price of $5,000,000, or $225/square foot. Assuming you made a down payment of $450,000 (10%) and financed the balance with a 7A loan at 3.5% for 25 years, your monthly payment would be $22,528 per month. That would free up $135,168 in cash over the first six months of the loan to be used for any purpose. You could use the money for interior improvements, save it to make the next six payments on the loan or just look at it as a $6.08-per-square-foot discount on the price. Either way, the positive impact is significant.
That all sounds great, but perhaps the bigger question might be: is this the time to making that $5,000,000 investment? The answer depends on how quickly we get the economy moving normally again, what business you are in and what your space needs are projected to be over the next 5 to 10 years.
Pricing is driven by fluctuations in the balance of supply and demand. Since 2011 and up to March 19th of this year, demand far exceeded supply and prices moved up steadily to an historic high point. There just haven’t been enough buildings to go around for anxious buyers looking to stabilize their occupancy costs with low fixed-rate financing. Add the fact that construction has been at a near standstill due to the scarcity and high cost of land, and you had the perfect conditions for the longest bull market in history.
The little bug called Covid-19 has packed quite wallop in terms of market uncertainty and speculation on where prices will head going forward is a hot top these days. For the past couple of years, those of us who follow the industrial market carefully have been wondering when the Black Swan would land on the pond. Now that it has, we are wondering where it will lead us.
Thankfully, vacancy is also at an all-time low and it could literally triple and be within a normal range. Capital is cheaper than ever and many business sectors are thriving even under the current economic lockdown. Unfortunately, others are struggling and their future remains uncertain even after the economy ramps back up. Many of the job losses are temporary, and that bodes well for a return to normalized consumer spending in the coming quarters.
Add the fact that the shock to the system was not economically based, and it is easier to have an optimistic outlook going forward.
That all said, we may see some downward pressure on pricing. New transaction activity has slowed for the moment for obvious reasons. It will depend on who the initial sellers are as new product hits the market. Connecting those first few dots will tell us quite a bit in terms of pricing trajectory. Buyers should be careful to look for quality functional product they can occupy for the long term, just in case the recovery curve sags for a while.
What we do know is what the SBA is willing to do to help, and it may just be something for you to consider taking advantage of. We will keep you posted. In the meantime, please give us a call if you have any questions. We are here to help.