Status of the Market: The Church Can Thrive In Crisis
Stan Reiff: Thanks for talking with us, Nathan.
Nathan Artt: I appreciate the opportunity, Stan. I know that many church leaders are concerned about how the pandemic will affect their congregations and even the basic business operations of their churches, but there are definite areas of hope for them right now.
While all of the key signs of an economic downturn are present — falling commodity prices, a sudden and unexpected crisis, economic over-leverage, and an unstable currency market — this is different. The 2008 financial crisis was caused by Wall Street creating mounds and mounds of leverage upon leverage, along with an unprecedented artificial demand in housing, which, in turn, created over-inflated prices. The biggest difference, in my opinion, is that 2008 was truly the economy collapsing as our banking and capital markets system completely failed us. The recovery was slow.
Stan: That is great context. I understand that there is still an unprecedented amount of debt in the market, though. Is that correct?
Nathan: Yes, but very little of it is low-rated junk bonds and “side bet debt” like before. It’s mostly corporate and investment real estate debt, and it was taken out intelligently considering the low cost of money in the past several years. The demand in the economy is still very present; we just don’t have access to supply as we sit at home and learn a new way of life. No one knows when this will turn, and obviously the sooner the better, but my opinion is that if we can stay afloat long enough to last through sheltering in place and keep the banking system from collapsing, the recovery time should be much faster than 2008.
Stan: And we have seen organizations and businesses shift their models to work within the restrictions being mandated in ways that allow them to still reach their customers and donors. Can you tell us more about what you have noticed?
Nathan: Right, Stan. As in every crisis, there are organizations that not only survive, but thrive, and emerge stronger than ever before. We do not have a crystal ball, and no one should really be predicting anything outside of the next few weeks, but we wanted to point out several areas where churches have an opportunity to take advantage of current market conditions and put themselves in the best possible situation to take advantage of opportunities.
Here are a few examples of things that are happening in the market right now. We will dive into them during the rest of this conversation:
- Credit markets have frozen (banks are not lending money)
- The stock market had a fear-driven sell-off as a result of the COVID-19 announcement
- The markets continue to fluctuate based solely on the news of the day
- Class A office and multi-family development is forever changed
- Construction prices should drop going into 2021
- The cheapest money you can’t get… yet
The first thing to know is that banks are not lending money, at least not right now. This is especially true for churches, whose business model is based on assembly, which is currently banned. Banks are shuffling their commercial real estate lenders into pursuing loan modifications for their customers in an effort to avoid a mass delinquency rate across the board. Tenants are negotiating with landlords to not have to pay rent, and landlords are negotiating with banks to keep them afloat long enough to survive. Banks are also shuffling people to handle all of the Paycheck Protection Program (PPP) loans.
Stan: Are there other shifts relevant to churches that are trickling down from banks during this time?
Nathan: There is almost always more going on than meets the eye. Mortgage interest rates are greatly affected by the bond market, which is in complete turmoil as investors sell off bonds to raise cash (liquidity). When something like this happens it drives interest rates down, and quickly, from an already very low point. As an example, this spring our company was working on funding for two large multi-site churches and we received multiple term sheets from various lenders with long-term, 10-year fixed debt between 3.1% and 3.25%. Just a year to a year and a half ago that rate was in the mid-5s.
Stan: Wow — those are significant changes for sure. Could you provide some specific steps that church leaders should take to capitalize on these lower rates?
Nathan: Based on every economic study we can see, the credit markets are going to open back up before the stock market and the bond markets recover completely, hopefully in the next four weeks. In short, banks should or could be lending money again within the next month, and interest rates will be very, very low. Churches with any level of significant debt have the opportunity to refinance existing debt into a long-term, fixed-rate loan in the low 3s. What we don’t know is how long it will take for the bond markets to recover, which would drive those prices back to either the high 3s or low 4s for low-risk borrowers. While that is still a great opportunity, we feel that those churches with a financial package ready to go will be in a better position to move quickly while the rates are still low.
The Managing Finances to Thrive in Crisis blog post on the Ministry Solutions website provides more information on this.
Stan: As a result of these lending freezes and lower interest rates, what do you think will happen to the borrowing process once the credit markets open back up?
Nathan: Unfortunately, it will likely be harder to borrow money later on. Things have seemed to roll along easily since the recovery from the 2008 financial crisis. However, under our noses, large corporations and real estate investors have borrowed a lot of money. I mean, a lot. Interest rates have been so historically low that it just made too much sense to borrow money and focus on using cash and surplus to invest internally and through acquisitions, where the return on investment is far higher than the cost of money.
There are a few things that cause a global market crisis: commodity prices (bonds) falling, the economy being hit with something sudden and unexpected (COVID-19), and over-leverage (debt). All three of these things are present at the moment, along with a stalling Class A office market and slowing multi-family development. Churches are redefining themselves, and no one really knows how to underwrite that.
Stan: So what does this mean for church leaders?
Nathan: Banks are a little scared. People have a lot of debt, and there were already questions outside of COVID-19 on whether the credit markets were due for a season of tightening up anyway. However, banks will still be in the business of loaning money and taking deposits. Churches that are going to be successful in borrowing money will need to have a higher level of quality in the packages they present, and a much higher level of quality in their financial statements. Just always remember that when a credit officer is forced to assume something, he or she will always assume the worst. We have to do a great job of making the decisions easy for nervous lenders.
Stan: I would assume that many churches that were working on building projects have put those projects on hold until the market is a bit more stable. What will construction look like down the road?
Nathan: Before COVID-19, there was already a lot of chatter about the construction industry, which has been hotter than ever in history. After the slow recovery from the 2008 fallout, there was an enormous pent-up demand in the years that followed, which was met with a lack of workers to meet the demands. This drove up labor and materials costs to obscene levels.
However, that may be changing. There is an enormous amount of Class A office renewals hitting the market at the exact same time as a large load of new inventory. According to CoStar, the largest aggregator of real estate data, the multi-family market (apartments) is in jeopardy of being overbuilt. Some markets, like Houston, have even red-lined (disallowed) multi-family development. Now, with COVID-19, many struggling hospitality companies such as restaurants and hotels may not survive.
Stan: Is this good news for churches looking to do some construction?
Nathan: Undoubtedly. Two years ago, general contractors and subcontractors had a backlog for two to three years. Now, at least in some markets, contractors don’t have enough current work to finish 2020, let alone work for 2021. This poses an enormous opportunity for churches in the planning stages of a construction project. Most companies are still using “current” prices, but know those prices are still based on having more work than they can deal with. The market has not yet adjusted. Expect contractors and subcontractors to get much, much hungrier and aggressive over the next six to twelve months. Do we have any idea how significant the price drop will be? No. What we do know is that it will be a lot more competitive than it has been on both materials (suppliers) and labor (subcontractors).
Stan: I know that while some churches are in the process of expansion, others have been looking to consolidate, potentially merging with other churches. How do these economic conditions affect church mergers?
Nathan: According to Jim Tomberlin and Warren Bird, who wrote the book Better Together: Making Church Mergers Work, just over 25% of the churches in America are somewhere between death and life support. Based on our research, a lot of this has to do with gentrification and cities reforming themselves, where urban areas are being reformed and the small congregations of urban churches are selling their homes for high prices and moving to the suburbs. However, as I noted earlier, the churches that are successful right now are successful because they were prepared. The churches that didn’t have a digital platform and online giving are being hit hard. Our prediction is that churches that were already dying or on life support will not survive this crisis.
Also based on the research of Jim Tomberlin and Warren Bird, nearly 60% of all multi-site church growth in America in 2019 was through church mergers. If it is the case that churches that were already struggling will need a life raft, then healthy, growing churches should have more opportunities than ever to acquire relevant and useful real estate. And in my opinion, it’s always great to see churches being donated to thriving churches rather than being sold to developers and turned into apartments.
If you have any comments or questions about how your church can take advantage of any of these opportunities, please fill out Ministry Solution’s Free Analysis form at ministry-solutions.com or contact us at [email protected].
About Nathan Artt and Ministry Solutions
Nathan is the principal and founder of Ministry Solutions, where he has the responsibility of creating financial strategies for churches so they have more money to do ministry. He also provides high-level oversight of each project. His leadership has helped grow a small, one-man shop serving a few churches per year to a boutique, mid-size consulting firm with over $600,000,000 in successfully funded and managed church projects.
Ministry Solutions helps the growing, local church bridge the gap between the vision that they have and their resources available to fund that vision. The company was founded in 2020 and works with some of the largest and fastest-growing churches in America. Learn more at ministry-solutions.com
Stan serves as Partner and Professional Practice Leader - Consulting. Stan’s professional experience includes over 35 years in ministry operations, public accounting, government accounting, and missions. He provides strategic leadership of the firm’s professional advisory and consulting services, including research of emerging issues in the faith-based nonprofit sector and the development and implementation of products and services in response to those needs.