Status of the Market: Will the Church Thrive?
by Nathan Artt on Sep 15, 2020 12:00:00 AM
Almost every financial crisis in America from the Great Depression, to the Oil and Gas Crisis, to the Savings and Loan Crisis, to the Tech Bubble, to the Great Recession have all been caused by one single idea: OPM (Other People’s Money). As people borrow and invest money into artificially inflated assets and commodities, there comes a correction in the market that creates a major downturn in the economy. That’s what makes this crisis so unpredictable and difficult to understand. Since the shutdown in March, banks are in good financial standing, the S&P Index is up almost 50%, online retail/curbside pickup has doubled, the PMI (Purchasing Manager’s Index, the most prevailing trend provider for manufacturing and retail sales) is up by 20%, and the unemployment rate, while high, has mostly avoided the jobs more than $70,000 per year (exception for the oil and gas industry).
So where is the issue? The answer will come this quarter as we possibly see a large correction in the labor market. Most industries have been in survival mode, hoping that a second stimulus package will be released. However, the release of the HEALS Act or the HEROES Act (or something in between) seems like somewhat of a stretch before November considering heightened political tension with the upcoming election. Here is a snapshot of what we are seeing:
- Businesses less than 300 employees have seen a reduction in revenue on average of 35%
- Businesses less than 100 employees have been hit by a reduction in revenue on average of 50%
- An estimated 41% of black owned businesses have closed permanently since March
- Airline industry, without an infusion of capital, will commence the reduction in the labor force which could ultimately put 150,000 to 225,000 people on early retirement or into involuntary layoffs since March
- According to the Bureau of Labor and Statistics, the shutdown has disproportionately affected lower wage jobs and the higher paying jobs have remained mostly unaffected. This will likely change without a second relief package
- There will likely be a shortage of police officers, EMT’s, and teachers without a specific bailout of these government employees coming out of COVID
- Churches are closing, and will continue to do so at a rapid rate
What does this mean for the church?
The PPP Worked...For some
Our initial concern with the release of the PPP funds was that it was a federally backed program, but it provided underwriting and decision making authority to local banks. As a result, most banks used their funds to support their corporate clients (300+ employees) and their real estate clients. This was positive in that the delinquency rate in retail and corporate debt is very low, which has supported the economy in many ways. However, very few businesses less than 20 employees received the funds. This has disproportionately affected the minority community, who mostly have businesses with ten employees or less. In less than six months, an estimated 41% of black owned businesses have closed permanently. The forecast for black owned businesses doesn’t look very bright without a focus to ensure these businesses will receive funding in a potential second round of stimulus funds.
The church overall has seen mostly a flat line in income, but expenses have dropped drastically. However, this sustained income is mainly because the majority of families who support the church have yet to be hit with the full weight of the economic impact of COVID. For churches in regions where the economy is highly based on the airline industry or oil and gas, you will likely begin to see some drop off in giving from those families. However, it would appear as though the majority of job loss will remain in lower income brackets.
Credit Markets are very open and money is cheap for the right borrowers
Because, as a country, we still maintain a majority of highly rated debt and a low level of delinquencies, banks are aggressive right now in funding good deals. As a company, we’ve funded approximately $50M in church loans within the past quarter, with interest rates on seven and 10-year fixed rates between 2.9% and 3.2%. On almost every credit package issued, we are receiving offers from a minimum of four banks every time.
The other positive in the credit markets is the flattened/inverted yield curve. The cost of long-term interest is as cheap, or even cheaper, than the cost of short term fixed rates.
We have also seen a higher level of analysis with the lenders. While the leaders within the church space are uncertain about the impact of this pandemic on the church, people outside of the space are even more uncertain about how the church will fare through this season. The lens through which church financing is perceived is now: “how does a business predicated upon physical attendance survive an inability to meet at maximum capacity or for some, not meet at all?”. Banks are dealing with higher delinquency rates in retail and lodging, and are therefore carefully monitoring how other industries, such as the church, will be impacted. Refinance and purchase money are available to churches, but it will require a strong presentation to the banks.
Real Estate Opportunities Are Increasing
Physical retail is being bit with something between a baseball bat from Sammy Sosa and a right hook from Mike Tyson. It’s not good, but as the retail industry goes through a major transition to online sales and smaller footprints, it will create many opportunities for churches to acquire great facilities in ideal locations.
Churches who survived on in-person attendance and lacked a digital platform prior to COVID are being impacted greatly. Barna expects that one out of every five churches in America will close within the next eighteen months. These leaders who are facing a transition of their facilities will have the option of selling their facilities to multi-family developers, or surviving their legacy through another church. We strongly believe that a majority of these churches will be merged into thriving churches.
For more information on how to make church mergers work, please see the latest, updated version of Better Together: Making Church Mergers Work by Jim Tomberlin and Warren Bird. (we do not receive any compensation for this recommendation)
Construction Prices will continue to drop, just not yet
There are several ways of looking at what the future will hold for construction volume and pricing. The best metric, in our opinion, is not the construction spending index, but the ABI, or Architectural Billing Index. Construction spending tells you what was already underway. The ABI tells you what is under design to be constructed.
We have not seen a drop in construction prices just yet. COVID has forced factories and manufacturers into a limited workforce, and therefore a limited production capacity. This has decreased the supply, while maintaining an existing demand, and has therefore actually increased prices on a few major trades. However, the labor force is continuing to increase over the past few months, which will increase production capacity, decrease lead times, and therefore ultimately decrease prices.
The ABI measurement for the amount of work for hire by architecture firms is down 50% in just a few months. This means that the projection of new work is arguably down by the same. Add to that the fact that many of the projects billed last year for retail, hospitality, and office have been cancelled or stalled. This means that volume should be down significantly by the end of the year and going into next year. As these general contractors, and more importantly their subcontractors, have millions of dollars of business to replace, you will see a hungrier labor force, a decrease in the price of materials, and an end result of lower construction costs.
There is an incredible opportunity to serve our brothers and sisters of color
I will always consider myself fortunate to have a diverse team and a diverse client base. During a time of social unrest, more and more white leaders have asked the question, “How can I leverage my platform to help my friends of color?”. This is one such opportunity.
Often, when our black church and business leaders speak up about systemic issues of racism in our country, we as white people scratch our head as to what exactly this means. I would like to use this as an opportunity to provide an example.
According to the Federal Reserve in 2017, black owned businesses are twice as likely to be denied for a commercial or small business loan. The issue is so bad that the Small Business Administration had to release an initiative to understand the basis of bias in commercial lending in November of 2017. This isn’t new for America. In fact, legislation created something called “redlining”, which gives banks the ability to choose not to lend to someone, or to a company, based on the income level of that area, regardless of financial position. This legislation is still active in America today.
This inequality in lending practices has manifested itself in the release of stimulus money. Fewer than 1% of CEO’s are black, and more than 75% of the executive workforce is white. Therefore the majority of larger businesses, which benefited from PPP, are run by white people. Most black businesses have fewer than 10 employees, and were therefore not the target of the PPP program and subsequently received no aid. As a result, more than 50% of all black owned businesses could be closed by the end of this year due to the pandemic.
We believe that the church can be political without being partisan. There are currently programs being considered in the second stimulus package to specifically target aid to these businesses, and we would ask you to consider leveraging any political or personal connections you have to ensure that these church and business leaders in minority communities are provided the same level of aid as their white counterparts.
The digital platform is changing church engagement
While we are still waiting for recent and relevant data on the subject, we are seeing a consistent increase in online attendance with churches across the country. The reporting we have received back is that while the Church as a whole is experiencing decline in many areas (the Methodist denomination reported giving is down 26% since March), the churches who have implemented strong digital platforms have seen a steady increase of new givers, but at very low levels.
One of the biggest changes has been the much larger geographical range that local churches are reaching. We have consistently been taking donor reports for churches in 2020 with addresses, and providing a heat map. When we look at the heat maps in comparison to 2019, we are seeing that the reach of the local churches on digital platforms is far and wide. The local churches are having city-wide impact, the multi-site churches in cities are seeing regional impact, and the churches who were regional are seeing state-wide and even national influence. In some cases with larger churches we are actually seeing people pop up in Europe and Africa.
What can the church do with all this information?
First, if you took a PPP loan earlier in the year and have plans to pay it back, don’t do that just yet. We as a Church body may have been insulated through the last 5 ½ months, but there is a chance coming into this election that the layoffs and forced retirements may begin to have a larger impact on our consistent givers as a whole. However, the church is and has almost always been counter-cyclical. People run to church during times of crisis, and this is an amazing opportunity to serve people in new ways, but that will require some adaptations on our part in how we reach them. We recently covered this topic in our ebook, Gutenberg, Amazon, and the Evolution of the Modern Church.
Surplus is the new Capital Campaign
Over the past several years, we have seen a decrease in the number of episodic capital campaigns. The digital platform has had a lot to do with that, as it has created a larger gap between the “consumer” audience (people who watch online but don’t engage in next steps) and the “investor” audience (people who give and serve through the local church).
Most of the churches we work with have seen new and innovative ways to create efficiency in their operating budgets. We have coached churches for years on how to move from external sources of funding (capital campaigns and debt) to internally funded ministry expansion (surplus and campus operating efficiency). Through this pandemic, we’ve seen a major drop in expenses which has created a high level of surplus, as income levels have been maintained or are only slightly dropping.
Due to the impact of the digital platform, as well as our belief that the relevant churches will arise from this situation with a perspective of both/and versus either/or when it comes to corporate gatherings, the biggest opportunity for engagement is digitally. Meaning: Sunday morning will no longer be the first time invitation it once was in growing churches over the past 20 years. The goal of personal connection, however, is more important now as people desire high touch proportionate to high tech. There are new opportunities to increase operating efficiency and engage with a larger base of people than ever before. As a result, we also see a chasm forming between those who give and those who don’t. We used to refer to this gap as the 80/20 rule, where 20% of people give 80% of the contributions to the church, and we are now seeing more of a 97/3 rule, where 3% of all people who attend give 97% of the overall contributions.
As a church, we have a tendency to celebrate milestones more than the journey. For instance, we celebrate first time givers and then “tithers”, but don’t necessarily put much attention to the significant steps in between. Why? A lot of it has to do with the data that we track, and the lack of segmentation in our databases. However, for us to be impactful in our engagement of people, it starts with collecting and studying more information.
It’s still a good time to build
You read this correctly. Despite the uncertainty in the market, we feel that this is the right time to start looking at what facilities will look like once we have the opportunity to fully assemble. When you think of the time it takes to identify, find, acquire, and develop a facility, it’s typically a 12-month process at best. We will likely be back in full corporate worship by the time a new building is built out and open. Combine that with a much larger base of people looking to engage in person with other people after an elongated period of isolation or minimized social interaction. We strongly believe that there will be a high demand for corporate gatherings and weekday events.
Interest rates are at historically low levels, construction pricing is coming down, and there is a lot of inventory hitting the real estate market all at the same time. We do think that buildings will look different, or rather more in line with a change that was accelerated through this time towards a larger number of smaller, more relevant buildings.
Multisite: A larger number of smaller campuses, and more spread out
Combining many of the different elements of this email, we are reaching a much broader audience, less concentrated around current campuses. There are churches closing, real estate opportunities abound, money is cheap, and construction prices are coming down.
Smaller campuses have a number of benefits. There are far more properties between 20k to 25k square feet (SF) than there are at 50k SF. With smaller seating venues, there are also smaller program requirements, so office, children’s ministry space, and parking have lesser requirements. These buildings also typically cost less per SF to re-develop. We have also seen an inverted economy of scale with engagement; meaning, we see much higher levels of engagement in giving, serving, groups, and community service in 500-seat venues than in 1,500-seat venues. These smaller campuses pay for themselves more quickly and are far more efficient than larger buildings, which allows the church to accelerate growth through a self-funded campus model.
We base a lot of our strategic planning for campus expansion based on the concentration of people and giving in certain areas. Because those areas are expanding, we foresee church campuses far more spread out than before. As an example, we have a few churches right now who have built bases in cities more than 100 miles away from their broadcast campus, and are looking at establishing campuses in those areas.
We want you to remember:
- Surplus is the new Capital Campaign
- It is still a good time to build
- Multisite is a great option to capitalize on realestate opportunities and reach a broader, less concentrated audience
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