Our Bankruptcy Outlook – May 2023

The Atlanta Federal Reserve is reporting modest growth in its April Beige Book, with solid labor markets and consumer spending pretty strong – ahead of the pre-pandemic spending.

We’re watching some broader trends in these numbers:

Office building mortgages are vulnerable. The growing trend of employers mandating the return to office work has provided some stability to certain market segments. However, the presence of a substantial amount of available sublease space is anticipated to pose challenges. There is a rising apprehension among industry contacts regarding the availability of financing, as several banks have scaled back their funding commitments due to decreased lending from larger financial and non-bank institutions. These circumstances have accelerated concerns about declining commercial real estate (CRE) values, further adding to the bankruptcy concerns. Some reports are suggesting 39% of small and medium-sized businesses are behind on their rent, with 49% of restaurants experiencing difficulties.

The reduced demand for office space, and maturing debt, are putting pressure on landlords and property owners. Nationwide about $1.5 trillion of commercial real estate debt is set to come due by the end of 2025, adding to the strain. Older office buildings in less desirable areas are expected to be hit hard. Experts predict a divide between well-located, newer offices and struggling buildings. The rising interest rates and reduced demand for office space make it difficult for landlords to make loan payments, and the instability in the banking sector limits financing options. The overall market is heading towards a potential reckoning, with landlords facing their toughest test since the Great Recession.

Regional banks are getting hit hard with interest rate hikes. Certain financial institutions in the Southeast continue to face liquidity pressures, raising concerns about potential bankruptcy. Banking contacts revealed that a small number of customers expressed worries about recent bank failures and the vulnerability of their uninsured deposits held at a single institution. Fortunately, there has not been a significant withdrawal of deposits from banks thus far. However, the existence of unrealized losses has remained high, constraining the ability to sell securities for liquidity without adversely affecting capital. Despite these liquidity concerns, banks reported strong loan growth during the reporting period, which offers some reassurance amidst the bankruptcy concerns.

Other nuggets in the Fed’s April Beige Book:

Consumer Spending and Tourism: Retail sales softened but remained above pre-pandemic levels. Lower-income consumers were more selective with discretionary spending due to inflationary pressures. However, demand for new vehicles was strong. Travel and tourism activity remained stable, with a healthy demand for leisure travel and a recovery in business travel.
Transportation: Transportation activity was largely unchanged. Ports experienced a slowdown in container trade but volumes remained above pre-pandemic levels. Rail freight shipments declined, while truck capacity remained readily available.
Manufacturing: Manufacturing activity was mixed, with significant slowing reported in firms producing inputs for residential construction. Auto manufacturers noted strong demand, but consumer confidence was seen as a risk to the outlook.
Energy: Energy sector activity was robust, driven by exploration and production, crude oil refining, power infrastructure projects, and renewable energy projects. Chemical manufacturing softened, but utility segments remained strong.

If you need business advice on how to position your company to weather potentially volitile times ahead, please contact the experienced financial and bankruptcy attorneys at Jennis Morse.