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Real Estate And Small Business Investment In The United States

Small businesses are major GDP and employment generators in the United States. In 2008, small business firms were 99.7 percent of private-sector employer firms and employed about half of all private sector payroll employees (SUSB). Earlier estimates show that small businesses have generally been responsible for half of all U.S. GDP. The term “small business” varies from source to source, but typically “small” is based on an employment or receipts standard – fewer than 500 or fewer than 250 employees. After the jump we look at the way that real estate interacts with small businesses.

Credit Access and Other Problems for Small Businesses:
• In 2009, “The principal immediate economic problem for 51 percent of small employers remains slow or declining sales, six percentage points more citing the problem than one year ago. Uncertainty was identified by over one-fifth (22%) as theirs, followed by access to credit (8%) and falling real estate values (8%), virtually the same as last year. Even among owners who report they cannot get credit, twice as many cite poor sales as cite credit access.” (NFIB 2010, page 1)
• 2010: “Poor sales (29%) and uncertainty (26%) continue to be greater problems for significantly more small business owners than access to credit (12%). Still, a majority of owners able to judge think credit is more difficult to obtain today than one year ago.” (NFIB 2011, page 1)
• On net, a greater share of banks have reported easing terms on commercial and industrial loans to small firms since the second half of 2010 while tightening prevailed from the first quarter of 2007 through the first quarter of 2010. A similar trend is seen for spreads of loan rates over banks’ cost of funds for small firms. (SLS)
• By comparison, more banks began to report weakening loan demand from small firms as early as the fourth quarter of 2006. Only in the first quarter of 2011 did the share of banks reporting stronger loan demand by small firms exceed the share reporting weaker loan demand. (SLS)

Real Estate Ownership for Small Businesses:
• 2009: “Falling real estate values (residential and commercial) severely limit small business owner capacity to borrow and strains currently outstanding credit relationships. Ninety-five (95) percent of small employers own real estate, including a primary residence, the business premises (commercial), or investment real estate that is neither of the two. Twenty (20) percent hold one or more mortgages on real estate that finances other business assets and 11 percent use real estate as collateral for business purposes. A non-mutually exclusive 20 percent hold a second mortgage on a property. Thirteen (13) percent report at least one property upside down.” (NFIB 2010, pages 1 and 20)
• 2010: Real estate ownership continues to be a major drag on small business’s capacity (and presumably willingness) to borrow. Ninety-five (95) percent of small employers own real estate, including a primary residence, the business premises (52 percent), or investment real estate that is neither of the two (37 percent). (NFIB 2011, pages 1, 29-30, and 33)
• In 2010, 68 percent have at least one mortgage, 17 percent at least one second mortgage, and 12 percent have at least one property used as collateral. Forty-six 46 percent of small employers own at least one type of real estate property free and clear (it is un-mortgaged and not used as collateral). (NFIB 2011, page 1, 31, and 33)
• 2010: The real estate situation appears to have improved for small business owners in 2010 versus 2009, particularly with respect to the share of all business owners with upside-down properties (8 percent in 2010 versus 13 percent in 2009) and the share of all business owners using mortgages to finance other business purposes (17 percent in 2010 versus 21 percent in 2009). (NFIB 2011, page 33)
• Equity in real estate held by nonfarm noncorporate businesses fell from a peak of $6.1 trillion to $3.5 trillion before recovering to $4.1 trillion in the most recent quarter (2011-Q2). Nonfarm, nonfinancial corporate businesses have also seen a decline in real estate equity, though real estate holdings for these types of businesses have always been less than $1 trillion. (FoF)

Primary Residence Ownership and Small Businesses:
• “The owner’s residence is every bit as much a part of the business balance sheet as the firm’s equipment and vehicles. In fact, the asset value of the owner’s residence is more important to more owners than other real estate assets. A decline in the value of the residence therefore adversely affects the balance sheet.” (NFIB 2011, page 29)
• Ninety-four (94) percent of small employers own a primary residence (94 percent). By comparison, 91 percent of REALTORS® including 94 percent of REALTORS® aged 60 or older own their primary residence. (NFIB 2011, page 29; NAR 2011, page 73)
• Housing equity fell from $13.5 trillion in 2006 to $6.2 trillion according to Flow of Funds data from the Federal Reserve, largely due to price declines measured to be about 30 percent from the peak. (FoF)
• In 2010, 65 percent of small business owners who own a primary residence have a mortgage on it and 24 percent of mortgaged owners indicate that one or more of the mortgages taken out on the primary residence was to finance business activities. These figures are similar to those in 2009. (NFIB 2011, page 33)
• Twenty-nine (29) percent of small employing businesses operate primarily from the home in 2010; the share is much larger among firms with fewer employees. Thirty-five (35) percent of firms with 1-9 employees are primarily operated from home while less than 5 percent of firms with 20 or more employees operate primarily from home. (NFIB 2011, page 54)

Real Estate Equity and Small Business or Other Investment
• In a 2007 paper on distribution of the net proceeds received by sellers of existing homes, Kennedy and Greenspan estimated that between $50 and $400 billion went toward financial and other investments annually in the period 1991 to 2005. The average annual investment was $160 billion. (pages 16 to 17, line 11)
• In the same paper, it was estimated that from 1998 through the first half of 2002, an estimated 14.5% of free cash from equity withdrawals went to real estate, business investment, or taxes. This amounted to $15.5 billion on average each year. By comparison, the share going to stocks and other investment was 7.5 percent. (page 22)

Data Sources:
FoFFederal Reserve Flow of Funds
NARNational Association of Realtors®
NFIB – National Federation of Independent Businesses (see specific papers cited below)
SBA – Small Business Administration
SLSFederal Reserve Senior Loan Officer Survey
Large and middle-market firms are generally defined as firms with annual sales of $50 million or more and small firms as those with annual sales of less than $50 million.
SUSBStatistics of US Businesses

Frequently Asked Questions (2011). Small Business Administration Office of Advocacy, Washington, DC.
The Office of Advocacy defines a small business as an in¬dependent business having fewer than 500 employees. (The definition of “small business” used in government programs and contracting varies by industry; see http://www.sba.gov/category/navigation-structure/contracting/contracting-officials/eligibility-size-standards and http://www.sba.gov/size. The government uses employee size standards that vary from 50 to 1500 employees and receipts standards that vary from $750,000 to $35.5 million by industry.

Member Profile (2011). National Association of Realtors® Research Division, Washington, DC.

Small Business Credit in a Deep Recession (2010). Dennis, WJ, Jr., NFIB Research Foundation, Washington, DC.
“Small employer” was defined for purposes of this survey as a business owner employing no less than one
individual in addition to the owner(s) and no more than 250. Full Methodology page 57.

Small Business and Credit Access (2011). Dennis, WJ, Jr., NFIB Research Foundation, Washington, DC.
“Small employer” was defined for purposes of this survey as a business owner employing no less than one
individual in addition to the owner(s) and no more than 250. Full Methodology page 73.

Sources and Uses of Equity Extracted from Homes (2007). Alan Greenspan and James Kennedy., Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, DC.

The Small Business Share of GDP, 1998-2004 (2007). U.S. Dept. of Commerce, Census Bureau and Intl. Trade Admin.; Advocacy-funded research by Kathryn Kobe.

Danielle Hale, Research Economist

As a Research Economist at NAR, Danielle studies tax issues, the wealth impact of home ownership, and different measures of home prices.

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