Good morning, readers.
The Federal Reserve has been ratcheting up interest rates for nearly a year as it looks to combat inflation and a tight talent market. But those efforts have consequences elsewhere in the economy, including the banking sector, where two institutions recently failed.
Speaking of the bank failure, there are some lessons we can learn from the collapse of Silicon Valley Bank and Signature Bank — read on to find out more about that and other top news and trends in U.S. business today.
For nearly a near, the Federal Reserve has been trying to curb tightness in the job market by aggressively increasing interest rates. So far, it hasn’t worked, reports Andy Medici of The Business Journals.
Instead, the higher rates are rippling elsewhere in the economy, contributing to the failure of two banks earlier this month and making it harder for builders to sell houses.
“It is often said that the Federal Reserve raises rates until something breaks. Well, something has broken,” said Anirban Basu, senior economist at the Associated Builders and Contractors trade group. “This is an unintended consequence, but not entirely unpredictable.”
Meanwhile, the job market is still strong, with only a few signs of softening. Job openings, wage growth and quit rates are down from previous months but still well over pre-pandemic levels. At the same time, the Consumer Price Index marks inflation at 6% year-over-year, down from 9.1% in mid 2022 but still well over pre-pandemic levels and too high for the Fed to ignore.
“If they stop raising rates, they will lose the war on excess inflation. If they keep raising rates, they risk additional damage to the banking system,” Basu said. “There is no win here for them, which is why I think stagnation is a likely outcome later this year.”
Get more how-to and business trend stories with The Playbook.
While home sales slowed nationally during the first quarter, some builders managed to defy the trend. Lennar Corp. (NYSE: LEN), for instance, found a way to increase sales during the period, reports Brian Bandell of the South Florida Business Journal.
Higher mortgage rates have made affordability a bigger problem for many buyers, and the market is still looking for a bottom and price stability, said Stuart Miller, executive chairman of the Miami-based homebuilder.
Lennar adjusts prices and incentives daily, lowering what it charges for a home in order to keep properties selling.
“This is exactly the kind of volatility we are built to endure,” Miller said. “If market conditions deteriorate, we will compromise (profit) margins through price cuts or incentives but still generate strong cash flow.”
Mortgage buy-downs — in which a buyer pays up front to reduce interest rates — have also helped keep buyers at the table as interest rates increased in recent months, said co-CEO Jon Jaffe.
As many cities continue to grapple with how to deal with the twin problems of office oversupply and housing undersupply, there’s one solution that has been much talked about: office-to-apartment conversions.
These projects can be difficult for a number of reasons, and they often don’t work for the developer financially. Portland, Oregon, is hoping to address that problem with incentives and code changes to encourage such projects, reports Jonathan Bach of the Portland Business Journal.
Portland adopted measures including a $3 million break on charges meant to offset a project’s impact on public infrastructure, and it loosened regulatory requirements around expensive seismic upgrades.
Developers generally favor the changes, but they are still pushing back on affordable housing requirements that they say will still stymie conversions even with the new incentives.
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When Joe Maxwell, managing partner at Fintop Capital LLC, tried to wire $2 million to his company’s newest startup investment on March 9, the money wouldn’t go through. The holdup and bank run that followed, which came amid the high-profile collapse of Silicon Valley Bank, was a wakeup call, he told Adam Sichko of the Nashville Business Journal.
“They had been such a great partner for so long, and did their job so well, that we never thought about this,” he said. “It really heightened our awareness that we need to have more discipline and oversight in our treasury and cash policies, at the fund level and at the portfolio level.”
Maxwell said Silicon Valley Bank’s failure came from its previous successes, which left it concentrated in the startup community, exposing it and its customers to the risks inherent to such a concentration.
“The profitability of that network, the scale of that network, is exactly what took it down,” Maxwell said. “The run was created from within.”
More lessons learned: How is NBA star Giannis Antetokounmpo not like streaming service Roku Inc. (Nasdaq: ROKU)? Antetokounmpo spread his wealth across deposits at 50 bank accounts, while Roku tied $487 million up in its Silicon Valley Bank account. If you want to be more like Antetokounmpo and less like Roku, check out Andy Medici’s wrap-up of the questions you should be asking about your bank and your business.
A $31 billion railway merger between Canadian Pacific Railway Ltd. (NYSE: CP) and Kansas City Southern has obtained regulatory approval, though the U.S. Surface Transportation Board placed strict limitations on the combined company’s ability to increase shipping prices, reports Brian Kaberline of the Kansas City Business Journal.
The deal closed in December 2021, but Canadian Pacific had to turn control of KCS over to an independent trust until it got the go-ahead to merge operations.
The approval means the combined railway stretches from the Pacific coast of Canada to the Mexican port of Lazaro Cardenas. The deal was opposed by a group of the company’s competitors led by Canadian National Railway Co., which had unsuccessfully tried to acquire Kansas City Southern previously.
Three Washington, D.C., homes have combined into one mansion, centered around the former residence of Jacqueline Kennedy, where she lived after the assassination of her husband, President John F. Kennedy, reports Michael Neibauer of the Washington Business Journal.
The $26.5 million price tag makes the 13-bedroom Georgetown home the most expensive residential property listed in D.C. right now.
The combined home’s features include a grand main reception hall, primary suite with private balcony overlooking rear gardens, third-floor lofted observation deck and herringbone flooring.
Want a cosmic way to boost hotel occupancy in your town? Build it under an eclipse.
About 13 months shy of an April 8, 2024, total solar eclipse that will be visible from Buffalo, New York, one out of every 11 hotel rooms has been pre-booked by group tours — and that’s not even counting individual bookings from eclipse-chasers, reports James Fink of Buffalo Business First.
“People do travel to watch eclipses, especially to cities that are in totality,” said Patrick Kaler, Visit Buffalo Niagara president and CEO. “Buffalo is lucky. We didn’t have to put a bid in to get this; it is something that is just coming our way, and we want to take advantage of this opportunity.”
VBN is looking to capitalize on the solar event further by setting up viewing locations and putting together special events, he said.
Thank you for spending some of your morning with us. Come back tomorrow as we close out the week, and send any comments or questions to jmann@bizjournals.com.
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