Pascale’s Perspective

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    Report from 2017 MBA CREF

    Pascale’s Perspective

    February 22, 2017

    The 2017 Mortgage Bankers Association Commercial Real Estate Finance convention was held in San Diego this week. GSP sent our usual contingent of about 30 brokers and we met with 35 lenders and held countless informal meetings. The mood continues to be upbeat for the capital markets and here are some of my observations for trends in the capital markets for 2017. Banks are highly regulated (especially the money center, “too big to fail” top-tier banks), as they pull back on lending construction loans, under stricter guidelines. But many are offering bridge loan programs, often on non-recourse basis. Life Companies have plenty of capital to inject into the market this year. In fact, many are increasing their allocations for 2017 with most groups lending at around 65% LTV with spreads (for 10 year terms) ranging from T + 130 to T+240, depending on quality and leverage. Shorter and longer terms are available and some sponsors are locking in 15, 20, or even 30 year fixed rates now, especially with the recent uptick in Treasuries. Short term fixed and floating rate loans are also available and we’ve seen many branching out with creative bridge lending platforms. Debt Funds are also offering a massive supply of capital (both levered and unlevered). These unregulated lenders have plenty of competition for “light” and “heavy” bridge reposition loans from $5,000,000 to over $100,000,000, up to 80% of cost and beyond. Some are not shying away from heavy bridge or major renovation opportunities. Many are offering non-recourse money available for assets with zero cash flow going in. CMBS players seem to have decreased, relative to recent years, due to new regulations and lower profit margins. However, there is still plenty of healthy competition. Spreads are still very tight as bond buyers seem to like the “skin in the game” required by new risk retention rules. Rating agencies are closely watching hotel and retail underwriting during this cycle. New full leverage loans are being originated at rates as low as 210 to 220 over 10 year Swaps or all-in rates of about 4.50%. The “wall of maturities” featuring loosely underwritten loans originated back in 2007 (many with 10 years of IO) are often requiring new equity injections due to stricter underwriting standards. Mezzanine and Preferred Equity are offered by debt funds in form of secondary financing, in search of high yields, both for stabilized and transitional properties. stay tuned.    David R. Pascale, Jr. 

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    Treasuries Spike on Yellen Testimony and CPI

    Pascale’s Perspective

    February 15, 2017

    Janet Yellen’s first congressional testimony during the new administration was highly anticipated.  She defended regulations and Fed independence, as expected. She also dropped a minor bombshell when she said “waiting too long to remove accommodation would be unwise” and that the committee will evaluate employment and inflation against expectations to see whether “a further adjustment of the Federal funds rate would be appropriate.” In addition, a recent CPI report showed US consumer prices increased in January by 0.6% (markets expected 0.3%) making it the highest since February 2013. The 12 months ending in January showed an annual increase of 2.5%, the highest since March 2012 and well above the Fed’s stated target of 2.0% (note that the Fed’s preferred indicator, PCE, has not yet hit 2.0%, but this is a strong indication that it will soon). This is definitely a sign that inflation is firming up, both including and excluding energy costs. The 10 year Treasury yield crossed above 2.50%, which could be a key technical level. Other wild cards: (1) Congress and the administration are set to roll back some or most of Dodd-Frank regulations in order to spur more bank lending, etc. This may reduce capital requirements for the money center banks. Much of the capital held by banks is in the form of Treasuries. This may trigger a major selloff.  (2) China:  The administration is singling out China for currency manipulation and trade practices. If sanctions and/or tariffs are invoked, China may retaliate by selling a good portion of the $1 trillion of US Treasuries it is holding. stay tuned.    David R. Pascale, Jr. 

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    Treasuries Rally on Fiscal Policy Uncertainty

    Pascale’s Perspective

    February 8, 2017

    The end of the 30-year bull market in bonds may not be as “over” as was predicted in recent months. The 10-year T yield dropped to 2.31% and is now at 2.34% (after hitting highs over 2.60% in mid-December 2016). Bearish short bets on Treasuries have also been reduced in recent weeks. The markets are still waiting to see the expected stimulative fiscal policy from Washington. Details and consensus are not emerging as quickly as anticipated. Euro jitters are back: France’s upcoming election may result in a “Frexit” (France leaving the European Union) that could result in the dissolution of the Euro. The Greece debt crisis is also back in the news: Another restructure or bailout required to avoid default, but the political climate in northern Europe countries is increasingly opposed to such aid. This, along with the CMBS rally and tight spreads from portfolio lenders (Fannie, Freddie, Life Companies, etc.), are keeping all-in rates in the 4.00-4.75% range for new 10-year full leverage loans for solid properties. As you can see from above transaction, sub 4.00% financing is available for some 7-year terms. stay tuned.       David R. Pascale, Jr.

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    Fed Holds Rates, Treasuries “Looking for Direction”, CMBS Rallies

    Pascale’s Perspective

    February 1, 2017

    Today’s Fed announcement to leave rates unchanged was expected. The Fed noted that consumer and business sentiment continues to improve, job gains remain solid, but wage inflation is not heating up. In addition, business investment remains soft. The Fed’s preferred inflation gauge, PCE, was released Monday, and it remains under the Fed’s 2.0% inflation target (1.7% annual increase). The Fed predicted “gradual” tightening and will most likely await the new administration’s fiscal policy, which is taking longer than anticipated to coalesce. Although the Fed indicated three rate increases for 2017, futures markets now expect two, most likely the first one coming in June at the earliest. CMBS: Maybe the dreaded Dodd-Frank imposed risk retention rules were not so bad? The year is starting with CMBS rallying as investors seem to love the “skin in the game.” Supply/demand dynamics are in play as buyers’ fresh allocations run into a slightly lower than usual January supply. So far, originators have been able to sell the illiquid risk retention portions of the securitization at approximately what the liquid portions were selling for pre-regulation. 10 year AAA bonds yields have plunged to about Swaps + 88 bps (down from about Swaps + 130 in October), with lower classes also rallying. These dynamics are allowing lenders to get aggressive. New full leverage 10 year loans for high quality properties are pricing as tight as Swaps + 210 or near 4.50%, with a majority of less prime deals still pricing sub 5.00%. stay tuned.   David R. Pascale, Jr. 

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    Inflation Hits Fed Target, More “Normalization” On The Way?

    Pascale’s Perspective

    January 18, 2017

    Today’s CPI numbers again demonstrate the link between oil prices and interest rates. Annual CPI hit 2.1%, which is just above the Fed’s stated “target” of 2.0%. Note that employment is already at the Fed target. The leading CPI category was gasoline at over 9.0%. Interestingly for real estate, housing costs were up 3.6%. The 10 year Treasury hit 2.43% today after the release, after dropping to 2.40% yesterday morning. Note that the Fed’s preferred inflation measure, PCE (Personal Consumption Expenditure) Index is at 1.4% as of November. But the CPI report definitely indicates an upward trend in prices. Let’s see if it’s sustained. A key component of the unprecedented and ultra-accommodative monetary policy from the Fed in the wake of the financial crisis has been quantitative easing via increasing the balance sheet. The Fed purchased about $80 billion of bonds per month during much of 2010-2013 which comprised of Treasuries and Mortgage Backed Securities. Although the bond buying stopped, the Fed is still holding those bonds and reinvesting the proceeds as they mature. Recent statements by Fed officials indicate that the Fed may be ready to start disinvesting (selling), by not reinvesting as bonds mature. This will lower the Fed’s balance sheet which also dovetails with stated policy goals of the incoming administration. One official indicated the right time would be when short term rates reach 1.0% or at the time of the next 0.25% increase in the Federal Funds Rate which has a potential to happen in June 2017. Again, the Fed is sending out trial balloons to avoid another “taper tantrum” when Bernanke abruptly announced the end of the purchase program and spooked markets. The effect of the increased supply on market and economy will be closely watched. It will be interesting to see when the “old normal” returns, i.e. short term rates near 3.0% and the Fed balance sheet back to its “normal” size of about $1 trillion (down from $4 trillion today). stay tuned.           David R. Pascale, Jr. 

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    Treasury Yields Drop, Was Trump Fiscal Policy Assumption Overblown?

    Pascale’s Perspective

    January 11, 2017

    With 10 days to go before the inauguration and Congress in session, investors have seen very little substance on promised major infrastructure and tax reform. The post election bond selloff may have been “overdone.” Today saw the 10 year yield drop to 2.33% (it was 2.60% on December 15th, 2016). Last week’s jobs report indicated tepid growth but some wage inflation. The higher bond yields were based on massive stimulus, not today’s economy. stay tuned.    David R. Pascale, Jr. 

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    Welcome to 2017, Are we moving from the “New Normal” to “Normal”?

    Pascale’s Perspective

    January 4, 2017

    Today’s “Hawkish” release of the December Fed Minutes is significant for what didn’t happen. The minutes indicated the Fed committee assuming the return of fiscal policy under a Trump administration (infrastructure, tax cuts, etc).  Also, some members pointed out that economic growth and inflation may be faster than currently anticipated and more or quicker rate increases by be warranted. In recent years, such a statement would most likely have caused a stock market sell off and other market disruptions, as the world economy was largely dependent on monetary policy i.e. central bank stimulus. Today, the markets barely “blinked” with major stock indices holding on to their gains. This is significant as markets are transitioning to focusing on fiscal policy from the President elect and Congress (and possibly from Europe soon), like the “old normal”. Treasuries, Predictions: After the major post-election selloff that saw the 10 year rise from 1.71% to 2.60% (December 15th), it has settled into a tight range at about 2.45% for the past week. Is this a “pause” in the steep climb? Where are rates going from here? Longtime FINfacts readers will recall George Smith and me reporting on the annual interest rate forecast in the Wall Street Journal. Last week’s New Year’s Eve survey of 16 economist from the major banks indicate a range of 1.35% to 3.10% with an average of 2.63%. Three economists have a 3.00% or above prediction, 13 of the 16 predict a year end above today’s rate. stay tuned.   David R. Pascale, Jr.

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    Fed Raises as Expected, Markets React to Hawkish Outlook for 2017 and Beyond

    Pascale’s Perspective

    December 14, 2016

    Fed Raises as Expected, Markets React to Hawkish Outlook for 2017 and Beyond Today’s 0.25% rate hike by the Federal Reserve has been anticipated for months and was no surprise. Note that this is the only rate hike for 2016, and the second in 10 years. Markets reacted to the Fed’s accompanying statement predicting 3 hikes in 2017 (3 months ago, they predicted only 2). Could this be due to a more inflationary outlook post-election? The Fed is seeing some tightening in labor markets, with regional Fed reports indicating labor shortages in some districts. The Fed also raised their long term interest rate outlook, whereby it predicts the “stabilized” interest rate in 4 years. In 2012, this predicted rate was 4.25% and the Fed has been lowering this projection over the years; but today it raised it 0.25% to about 2.90%. This meeting has the Fed being seen in a new light as the economy is translating from central bank-centric monetary policy (gridlocked Washington) to highly anticipated fiscal policy (broad infrastructure initiatives and comprehensive tax reform). When’s the next increase? Futures markets are anticipating a June 2017 increase, giving Congress and the new Administration time to enact policy in the spring. The “big question” is can the economy still grow with the burden of higher interest rates after 8 years of tepid growth despite near zero interest rates, or can the “new normal” transition into anything resembling “normal”? stay tuned.     David R. Pascale, Jr.

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    Treasuries “Stabilize”

    Pascale’s Perspective

    December 7, 2016

    Treasuries seemingly have found a new level with the 10 year yield hanging in the 2.40% range for the last few weeks. Economic data (construction spending, unemployment, productivity, factory orders) has been bullish, giving the Fed “clear sailing” for next week’s rate increase. Last week’s employment report headline of 4.6% was tempered by a low Market consensus is a 0.25% increase. The closely watched elements will be the accompanying statement, the “dot plot” and Fed Chair’s press conference for the pace of future increases in 2017/2018. stay tuned

    David R Pascale, Jr.

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    Bond Market – Post Election Trade Levels Out, Now Back to the Data

    Pascale’s Perspective

    November 30, 2016

    Early this week, Treasury yields seemed to “crest” as the 10 year hit just over 2.40% and then rallied to 2.31%. Note that the 10 year T was at its all time low of 1.32% in early July. With the stock market hitting all time highs, the long anticipated “great rotation” out of bonds into equities seems to be finally upon us. Markets are reacting to the anticipated return of actual fiscal policy after years of gridlock in Washington and the economy depending mostly on monetary policy from the Fed. But the big swings are all based on assumptions of policies that will not be in place until March 2017 at the earliest. The past few weeks have seen the markets react to a string of positive economic reports: Q3 GDP revised to 3.2%, consumer confidence much higher than expected, and today’s surprising OPEC agreement (which sent oil prices higher, always a harbinger of inflation). This Friday’s unemployment report will be closely watched. stay tuned.     David R Pascale, Jr.

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    Treasuries “Crest” After Week Long Trillion Dollar Global Selloff

    Pascale’s Perspective

    November 16, 2016

    The rise in bond yields post US Election has been international. Japan’s 10 year is actually in positive yield territory. Italy’s 50 year bond has lost 16% of its value in 3 weeks. The 10 year T went from 1.71% on election night to a high of 2.30% this morning, with daily yield increases. All of this was based on speculation of President-elect Trump’s fiscal policies (infrastructure and military spending combined with tax breaks). Today, investors looked at actual data (persistently low oil prices, new economic reports showing flat wholesale prices and tepid industrial production). Bonds may be “oversold” and yields are attracting buyers. Fiscal policies still have to be approved by a Republican Congress that includes its share of “deficit hawks”. Today’s 10 year T closed at 2.22%. The next few weeks should be interesting as investors digest data and clues to next year’s policies. stay tuned.     David R. Pascale, Jr.

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    Volatility, Uncertainty, followed by “Less Uncertainty”

    Pascale’s Perspective

    November 9, 2016

    Last night and this morning were a fascinating study in market psychology. First off; the markets had priced in a Clinton victory after Sunday’s “all clear” announcement from the FBI. Treasuries sold off on Monday and Tuesday (Election Day) and equities rallied. Then came the election results and markets began to roil worldwide, Brexit style: huge selloffs in Asian markets, Dow Jones futures were down 800 points, and safe havens such as US Treasuries and gold rallied. Then Trump’s acceptance speech included conciliatory language, toned down rhetoric, calls for unification, and fiscal policy: infrastructure investment, corporate tax reform. This calmed and rallied equity markets. The 10 year Treasury, which dropped to 1.71% on the initial “flight to quality” later sold off and the yield hit 2.06% before settling at 2.02%. Why? (1) Trump is promising infrastructure and military spending while cutting taxes. This will increase deficits and the supply of Treasuries, (2) As volatility lessened, the Fed is more likely to raise rates at the December meeting, (3) Several spots on the Fed’s Open Market Committee are coming up for nomination and Trump is expected to nominate more “hawkish” members. stay tuned.     David R. Pascale, Jr.