Happy Holidays from GSP

Happy Holidays and best wishes for a wonderful holiday season and a very happy new year!  We thank our clients and hope to continue helping make our success your success in 2019.

Bryan Shaffer, Steve Bram, Gary Tenzer, Jonathan Lee, Shahin Yazdi, Gary Mozer, Malcolm Davies and the entire GSP family.

 

The big question today was “Will the Fed Pause It’s Planned Rate Increase in the Wake of Recent Market Volatility?” The answer: “No” And the reaction: More volatility (which markets hope will make the Fed think twice about next year’s planned increases). The Fed today continued its “march to neutral”. The big long term questions are: “What is the neutral rate? Are we there yet?” Remember that Powell spooked markets by saying “We’re a long way from neutral” in early October. Then markets rallied on his late November comment that we are “just below” neutral. That comment and subsequent rally convinced many investors that the December Fed statement could be “one and done”, ie. an increase today and then a pause. Markets were up this morning pre-announcement on that expectation – hope/hype. But Fed Chair Powell tried to thread the needle today. First off, a unanimous decision to increase the rate, which amounted to a “Declaration of Independence” by the Fed in light of recent pressure from the Executive Branch. The Fed’s independence is critical to its standing in the world. Then the “dot plot” of future increases and Powell’s press conference indicated TWO more increases on tap for 2019, contrary to market expectations as the futures markets indicate zero increases for next year. Today, Powell said that we are at the “lower end” of neutral with the increase of the Fed Funds rate to 2.50% (note that 2.50% – 3.50% is the target range for the neutral rate amongst Fed officials). The Fed lowered their growth projections for 2018 to 3.0% (down from 3.1%) and 2019 to 2.3% (down from 2.5%). A seemingly offhand remark put today’s selloff into overdrive: when asked about continuing to trim the Fed’s balance sheet, Powell indicated no pause. Markets were hoping for a “dovish olive branch” in the form of a pledge to pause selling bonds purchased during Quantitative Easing. The 10 year Treasury yield dropped on the “flight to quality”, now at 2.76% (down 50 bps from last month’s high). Stay tuned  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners is working with a national portfolio capital provider that is structured with no pre-payment penalty. Loan origination fees of 0.50% for transactions up to $50,000,000 and there are no exit fees. Non-recourse funding up to 60% of cost, rate is set at acceptance of LOI, DSCR requirement of 1.45-1.50x and most loans close within 60 days of pre-screen. Higher leveraged options are available under similar pricing with a personal repayment guarantee. Properties must be in sub-market areas with communities of 100,000+ population.

Markets sold off heavily last week as the yield curve partially inverted, the first inversion since before the Great Recession. The sell off immediately spurred a flight to quality, the 10 year T yield dropped a low 2.82% on Monday, the 2 year dropped to 2.69%. The “inversion point” of the 3 and 5 year Treasuries is now less than 1 basis point (3 year at 2.775%; 5 year at 2.699%). Maybe recession fears are “so last week” as the market is now cheering progress in US – China trade talks. But the curve is nowhere near a “healthy” steep curve. Recent statements by ex Fed Chairs Bernanke and Yellen indicate a feeling that this indicator may not be relevant. Bernanke pointed out that “regulatory changes and quantitative easing in other jurisdictions” has distorted the “normal” market signals (by normal he means the “old normal”). The Fed seems set on raising rates next week, despite pressure from the executive branch to leave rates unchanged. The pressure may actually end up convincing the Fed that they must raise rates in order to retain credibility (for a lesson in central bank meddling, see recent economic events in Turkey). The question then becomes how many increases in 2019? Futures markets in Fed Funds and the LIBOR curve have lowered their 2019 rate forecasts considerably over that past few weeks as economic growth expectations continue to cool in China and Europe, and the effects of tax cuts and government spending will be wearing off in the US. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

GSP is working with a capital provider that will provide recourse fixed rate financing to 75% of cost (90% + on build to suits) including, acquisition, improvements, development, pre-development, discounted payoffs, bankruptcy exit, purchase of notes and cash-out. Fixed rate pricing starts at 9% for terms up to 1 year with extension options up to 3 years for Multifamily, Office, Industrial, Retail, Special-Use, Entitled Land and Construction. Loan sizes range from $1,000,000 to $10,000,000 for transactions located in California, Arizona, Nevada, New Mexico and Washington.

On Monday, the US Treasury “yield curve” partially inverted as the 5 year T yield dropped below the 3 year T yield.  A typical “classic” inversion occurs when the 10 year yield drops below the 2 year yield, that is the most scrutinized relationship on the range of treasuries. Stock markets tumbled. (Dow dropped 800 points yesterday) as this added to uncertainty. An inverted yield curve is a classic harbinger of recessions (every recession since the 70’s).  Other macro economic concerns helped fan the flames (Brexit, mixed signals regarding the China/US “cease fire” on trade, etc). This is the first inversion in a decade, so it’s a major uncertainty. The major question facing markets: Is this “old school” indicator still valid in the “new normal” era of post Great Recession metrics of massive central bank accommodations, and stubbornly low inflation? Or “are things different this time?” We are again in uncharted territory. The Fed is still holding massive amounts of long dated Treasuries as it is now in its second year of the long slow unwind of its $4 trillion balance sheet. Markets seem to be counting on a very gradual sell off, keeping the long yields down. But most importantly, the lower 10 and 30 year bond yields are a product of reduced growth and inflation expectations for 2019, 2020 and beyond. Potential causes: the effects of US tax cuts fade, Italy weakening the Eurozone, continued trade disputes, etc. Many major economic groups are lowering growth forecasts for the next few years. Inflation is still spotty and not steady, note that oil prices again dropped today (after rising from lows) as the long awaited OPEC production cuts may be “off”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners identified a capital provider offering fixed-rate debt for transactions from $2,000,000 to $15,000,000 specializing in the 10 western states. This lender will finance Industrial, Manufactured Home Communities, Mixed Use, Multifamily, Office, Restaurant, Retail, Self Storage, Medical Office, Single-Tenant Net Lease. No pre-payment penalties, 3 years’ interest only, 30 year amortization and terms up to 15 years on partial or non-recourse loans.

Malcolm Davies, Principal/Managing Director of GSP is interviewed by Jon Albano for the Lodging Leaders Podcast. Malcolm shares advice on financing new hotel development, mistakes you want to avoid, types of hotels that lenders and investors are looking to get involved with and locations that are most desirable for lenders and investors.

Click here to listen to the podcast.

Gary E. Mozer, Principal/Co-Founder of George Smith Partners participated as a guest on the podcast, Capital Markets Today with Louis Amaya.  Gary talks about the advice he gives his best clients regarding mitigating risk and talks about his economic sentiment for 2019.

Click here to listen to the show focused on Structured Debt/Equity CRE Financing.

Louis Amaya: You had mentioned taking different types of risk. Do you see that as speculation in today’s market, as we maybe head into something that is at least a stabilization of the growth that we’ve been seeing?

Gary E. Mozer: When interest rates increased so much in the last 12 to 18 months, you had a little bit of a dislocation in the marketplace because different people perceive different risks. Some people think there’s cycle risks. Some people think there’s product risks.  Different people underwrite and perceive the risks and price them differently. Some people say, “Oh, this retail deal, it’s retail so I don’t even want to do it.” Another guy says, “Oh, it’s retail and I’m concerned about it because it’s still retail.” Another guy says, “Oh, this is the right real estate with the right sponsor and the right market with the right business plan and we’ll price through the marketplace.” The inefficiencies in the marketplace is all about the perception of risks. Different people have different perceptions of risks. Some people said multifamily was the best product to be in. Some markets are being overbuilt and therefore the rent growth is slowing. The absorption is slowing. Multifamily is still a great product to be in, but you’re going to have to change your parameters of how you price and structure those risks.

 

Fed Chair Powell’s speech today sent stock markets up 2% and immediately halted this morning’s market “correction”.  The big change was Powell’s remark that rates are “just below” the neutral rate. Remember, the neutral rate is the rate the Fed is aiming to reach. The neutral rate is neither stimulative nor restrictive to the overall economy. Markets have been on edge as they feared that the Fed was on an unshakable path of continued rate hikes well into 2019. This sentiment was based on recent Fed statements and the “dot plots” produced at each FOMC meeting. It was assumed that there were four rate hikes on the horizon, one in December 2018 and 3 more in 2019. Today’s comments by Powell immediately changed that consensus to one in December and one in 2019. No doubt, the December 2018 dot plot will be closely watched. So it seems the Neutral Rate is 2.75%. It was once thought to be 3.25-3.50%. A lower neutral rate means a weaker global economy. Perhaps the “new normal” post recession world economy will require some accommodative policy after all. Today’s developments are an example of the “contrarian” economic news cycle: bad news becomes good news, (a grimmer economic outlook leads to lower interest rates in the future and markets cheer).  Powell also stressed that future policy is “data dependent” and not “set in stone”.  He also indicated concerns on the horizon: trade disputes/tariffs, Brexit, Italian bonds, and the IMF has lowered growth projections. Plus, today’s housing report showed new home sales falling to a 3 year low with inventory spiking. Corporate spreads are volatile and widening (pushing some Life Co loan spreads up also). The 10 year T hit a 2 month low of 3.04% today. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

Antonio Hachem gives his insight to Connect Media regarding capital markets and the availability of cash-out financing in the current environment.

What qualities are necessary in an asset for a borrower to realize cash-out proceeds?

Lenders are more likely to be open to cash-out refinancing when the borrower is substantially invested into an asset. A borrower’s original basis in the property no longer matters. For example, in our recent Sacramento financing, the borrower had invested in extensive capital improvements and value-add renovations to keep the property competitive alongside market rate multifamily assets in the region. The lender sees this as substantial “skin in the game,” and is more apt to reward that investment with cash-out financing.

Click here for the full article, “How to Realize Cash-Out Opportunities in Today’s Economy”: https://www.connect.media/how-to-realize-cash-out-opportunities-in-todays-economy/

 

George Smith Partners identified national bridge lender advancing floating rate transactions for all transitional property types from $10,000,000 to $100,000,000. Funded up to 70% of future stabilized value, floating rates start at LIBOR + 275 for a one year term plus options. Sub-1.0 coverage (ie below break-even cash flow) will be supported with a lender funded interest reserve. All transactions are pre-payable with no penalty. All executions are non-recourse beyond standard carve-outs.