Domestic and Global Developments Fuel “Melt Up” In Treasury Yields

Behind the impeachment drama, our divided government has been getting things done: new trade agreement with Mexico and Canada, major spending bills (with major deficit spending), an outline of a trade deal with China (some are calling it more of a “trade truce” with the heavy lifting set for next year). The Fed is doing their part by injecting liquidity into the short term markets almost daily, but don’t call it QE. All of these factors along with some positive economic news from Europe and hopes that next year’s Brexit will be orderly have buoyed the 2020 global growth outlook. Treasuries are selling on the sentiment with the 10 year hitting 1.92% today, the highest since July. Maybe those prognosticators that picked a 2.00% 10 year T at year end are pretty close. The rising treasury and relatively stable LIBOR index could return us to a more “normal” index relationship: a steeper yield curve and a 10 year T getting separation from 30 day LIBOR (as the Fed has indicated no rate increases in 2020). So floating loan rates should again be “cheaper” than perm rates. The good economic fundamentals should keep loan spreads tight. In a few weeks, the securitized lenders (CMBS, CLO, etc) will be ready to issue new paper to bond buyers flush with new allocations for the new year. Portfolio lenders will have to compete as the securitized markets often set the bar on spreads.

Signing off for 2019. It’s been a pleasure writing this column for you and I look forward to an exiting new decade.

By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners is working with a national capital provider that will provide non-recourse fixed rate financing with an earnout up to 80% of cost. With terms up to 5 years, loan sizes range from up to $40,000,000 (larger in certain circumstances) and pricing starting in the high 200 bps over LIBOR for core asset types as well as co-living, self-storage, student housing, hospitality, commercial condo and specialty use. Program highlights include no negative arb, flexible prepayment and non-cash flowing assets.

Today’s Fed statement and remarks by Fed Chair Powell reflected a continuing change in the relationship between interest rates, economic stimulus, employment and inflation. 2019 resulted in three rate cuts (“mid-cycle adjustments”) which helped spur record stock market highs and low employment. Last week’s Jobs Report was a blockbuster even after accounting for the end of the GM strike. As those increases were implemented, many of the Fed participants indicated expectations of increased inflation this year as employment rose. The theory that full employment will result in inflation has been a bedrock of economic theory for decades. With unemployment at 3.5% and the PCE index at 1.6%, the theory is being tested and failing. By signaling no rate increases for 2020, the central bank is basically daring inflation to return. Many are concerned by polling indicating that public expectations of inflation are at historic lows. Which means that market participants are expecting low inflation and that may create a “self-fulfilling prophecy”. This week’s sad passing of legendary Fed Chair Paul Volcker brought back memories of the Fed’s most significant inflation battle. With inflation running at 12%, Volcker increased the prime rate to 22%, stopping inflation and causing significant pain as unemployment rose. Long memories of the early 1980s move markets to this day as treasuries sell off if inflationary news is in the headlines. The Fed feels that they have reached the “neutral rate” and it’s time to watch the effects. Stay tuned.

George Smith Partners is working with a national capital provider funding non-recourse bridge debt to 80% of total cost. True proforma based underwriting with a strong appetite for Multifamily and Mixed- Use properties (up to 100+units) with no in-place cash flow requirements. The Lender offers flexible loan structures with interest only terms up to 3 years for transactions up to $15,000,000. Risk adjusted, fixed rate pricing starts at 6.75%, fixed for the life of the loan with no extension fees. Closing costs including lender legal are less than $2000.

Treasuries will react to the following factors: (1) Economic reports this week: Factory orders on Thursday (manufacturing has been shaky in recent months as the economy is being carried by the ever spending consumer); The unemployment report this Friday, December 6 (watch the wage trends) and December 15 (China/US tariffs are set to go into effect unless the parties reach some type of agreement or an agreement to possibly agree later). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners is placing high leverage non-recourse bridge debt up to 80% + of cost through a national portfolio lender. Funding value add transactions from $4,000,000 to $50,000,000 the Capital Provider offers flexible loan structures with terms up to 5 years. Floating rate pricing starts from LIBOR + 290. Lender has a particularly strong appetite for Multifamily product in secondary markets nationwide. Other property types they will finance are: Office, Retail, Industrial and Hospitality.

Bryan Shaffer, Principal/Managing Director of George Smith Partners was a guest on the Commercial Real Estate Pro Network podcast with Darrin Gross.

Click here to listen to the podcast or watch the YouTube video here.

The discussion covers capital market trends where the commercial real estate market is headed.

“Large commercial real estate projects come with tremendous risk. The borrower sees opportunity, while the lender sees the risk. If the lender does not feel comfortable with the borrower or the project, they will not finance the deal. An experienced finance professional has the needed relations with the various lending products. They can help the borrower explain their project to a prospective lender that will assure the lender of the projects upside, and set them at ease with the potential downside.”

George Smith Partners is working with a regional portfolio lender providing construction financing with a mini-perm for all product types ranging up to $55,000,000. With the ability to advance 65% of development cost, pricing starts at 3.0% for three, five-or seven-year terms with a step-down prepayment. Loans will float after the initial fixed rate term rather than face a loan maturity.

Lot’s of talk (and tweets) lately about “going negative”, that the U.S. should consider negative interest rates just like Japan and Germany.  Today’s notes from last month’s Fed meeting indicated that the “benefits of negative rates abroad are mixed” and would create “significant complexity or distortions to the financial system”.  However, other esoteric tools for stimulus may be considered, such as a form of quantitative easing called “yield curve control” whereby the Fed sets an upper limit for short term treasury securities by purchasing enough of them to “cap” the yield.  This would be another large commitment to expanding the balance sheet as these purchases could be massive.  Speaking of the yield curve, the 10 year T is again dropping, today at 1.71% after hitting 1.95 11 days ago.  Negative news on the possible US China trade deal, now complicated by Hong Kong unrest.  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 65% of value for land financing, 75% of value for construction and 90% of value on build to suits and preleased properties. Loan sizes range from $5,000,000 to $20,000,000 for transactions located in California, Arizona, Nevada, and Washington. Fixed rate pricing starts at 9% for terms up to 3 years for all CRE types including residential construction and entitled land.

Fed Chair Powell’s congressional testimony was possibly overshadowed by other matters before Congress, but significant nonetheless. He reiterated the message from the last Fed meeting: the mid-cycle adjustment (3 rate cuts in 2019) is over, and the Fed is pausing. It was like a victory lap after stock markets hit record highs this week and he commented that the “economy remains consistent – moderate economic growth, a strong labor market”. The futures market is predicting “no cut” until well into 2020. So we seem to be finally at the “neutral rate” of about 1.50% (note that many Fed participants pegged the neutral rate to be about 3.50-3.75% in recent years). And the Fed stands ready to act if “developments emerge that cause a material reassessment”, so we are back to watching the data. Powell put his audience (Congress) on the spot. He mentioned that the present rate of deficit spending is “unsustainable” and that the USA’s debt burden will make it difficult for future Congress’ to actually engage in fiscal policy (stimulus, infrastructure) during the next downturn. He was basically saying that monetary policies have reached their limit (note that he shot down any talk of negative rates in the U.S.) and that fiscal policy is lagging and hamstrung by the budget deficit. However, Congress is busy trying to pass another stopgap 30-day funding bill to avoid a government shut-down before Thanksgiving.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners is working with a capital provider that will provide non-recourse floating rate financing to 75% of cost including small lot subdivision and predevelopment for multifamily use. Pricing starts at 7.5% for terms up to two years for Multifamily, Office, Industrial, Retail, Urban Infill Land and Mixed-Use projects. Loan sizes range from $1,000,000 to $15,000,000 for transactions located in California, Arizona, Texas, Oregon, Colorado, Idaho, Utah, Washington, Tennessee, North Carolina, Georgia, Pennsylvania, Massachusetts, Maryland, Virginia, Washington DC and Illinois. Origination fees are 2-3 points and there are no exit fees.