Indiana Market Update: What’s Impacting Indiana Businesses?
After years of disruptions and economic turbulence, 2024 is off to a stronger start.
The supply chain woes of the pandemic have largely settled down, explains Marty Erschen, Indiana Commercial Market Executive at Northwest Bank. “We’ve seen businesses invest very strategically to improve operations and build resilience. Even those who scrambled during the pandemic have seen significant improvements now that their environment is less chaotic.”
However, rate hikes continue to impact Indiana small businesses
The past 18 months brought 11 rate increases. As a result, we’re now in an inverted yield environment, where current interest rates are higher than long-term rates. That’s often a predictor that we’re either already in — or headed toward — a recession.
“Over the past year, we’ve seen a lot of CFOs primarily focused on cost control,” says Erschen. “They’re focused on wage inflation control, managing their balance sheet and ensuring they have solid supply programs in place.”
However, rates appear to be holding for now — and brighter days may be on the horizon.
“While we still have elevated interest rates, I believe a lot of the uncertainty is behind us,” Erschen explains. “Uncertainty makes it harder to predict what to do next and now that rates have stabilized, CFOs are becoming more comfortable making decisions about growth.”
Work-from-home may change commercial real estate markets permanently
While interest rates appear to have stabilized, the effects of near-unprecedented rate hikes still ripple across Indiana’s commercial real estate market.
“Construction projects that kicked off within the past two years have been impacted by 11 rate increases and they’ve experienced a lot of stress on their cash flow,” Erschen says. “Their rates have doubled, if not more, and they hadn’t anticipated interest costs that high. And interest rates have affected valuations, too.”
These shifts appear to impact some segments of the market more than others, Erschen explains. There’s still healthy demand on the industrial side — such as distribution, warehousing and manufacturing — but the office market has softened considerably as more businesses extend hybrid and remote work arrangements indefinitely.
“We’re still not sure exactly how the shift to work-from-home will work its way through the entire commercial real estate space,” he explains. “But we are seeing more scrutiny on real estate developers’ liquidity from regulators, as well as our underwriting teams.” As a result, Ershen says Northwest Bank works with Indiana’s businesses on finding the right capital structure — so they can avoid being overleveraged and are able to execute on their business’s needs.
Erschen recalls working with a client to acquire a chain of liquor stores — a deal that not only called for a ton of creative underwriting, but also required Northwest Bank to partner with another bank to co-underwrite the transaction. “We were humble enough to acknowledge we needed help,” Erschen says. “But it’s important to listen to our borrower and find a solution that works for them, and being a smaller institution we are more capable and willing to support a capital structure that enables a successful acquisition.“
How Indiana businesses can weather economic uncertainty
Erschen recommends these three strategies to set your business up for success.
1. Revisit your financing needs
As businesses prepare to shift back toward growth — and projects that were put on hold due to uncertainty return to the table — take the opportunity to reflect on your leverage profile and your needs going forward.
“If you’re running hot and you have too much leverage, that could impede your cash flow, but being too averse to taking on leverage can mean missing opportunities for growth, “says Erschen. A trusted financial partner can help you find the right balance to manage risk while still pursuing your goals.
2. Embrace the unknowable
Amid economic turbulence, leaders can set their businesses up to succeed by focusing on strategy. “We can’t control interest rates, we can’t control recessions and we can’t control macroeconomic change. But you can control how you manage through challenging environments,” Erschen says.
Prepare your business to weather the storm by focusing on strategy and creating contingency plans to address the “What ifs” as they arise, so you’ll know the appropriate next step when the market shifts.
3. Put relationships first
During challenging times, strong relationships — with suppliers, customers and your bank — matter more than ever.
“An open and honest dialogue is important and the strongest relationships are ones that have navigated challenging environments with you in the past,” Erschen explains. “If a relationship doesn’t feel honest and transparent, it may be worth looking around to explore other opportunities.”
Northwest Bank is here to help
Times of economic uncertainty separate leaders from the rest of the pack — and businesses who act strategically during turbulent times can come out the other side stronger.
Whether you’re looking for trusted advice for financial planning, lending solutions to meet your needs or insights into your local market, Northwest Bank’s dedicated small business and commercial banking teams are here to help.
Visit us online to learn more about how we can help move your business forward.
