Fiscal and Monetary Policy in Focus, Fed Meets While Stimulus Negotiations Grind On

Today’s Fed meeting and policy announcements showed the central bank committed to years of low rates and continued bond purchases with little fear of inflation. Markets were focused on the bond purchases and many were hoping for guidance indicating the purchase of longer term treasury bonds. The Fed’s $120 million of monthly bond purchases will continue as they “foster smooth market functioning and accommodative financial conditions, supporting the flow of credit”. A move to buying more longer term bonds (10 and 30 years) would alleviate fears that stimulus and deficit spending would lead to long term yields rising. No such announcement was made and the 10 year T is at 0.92%. The Fed balance sheet sits at $7.3 trillion and total US outstanding debt is $27.5 trillion. Note that at the end of 2007, the Fed balance sheet was at less than $1 trillion and US debt was $9 trillion. Supply/demand concerns are warranted. Meanwhile, Congressional negotiators are optimistic that they are on the verge of passing a $1.4 trillion spending bill for next year and about $900 billion in long awaited stimulus.

With vaccinations beginning this week in the US, there is cause for optimism, but it’s pretty certain that the next three months will be extremely challenging for public health and the economy. Both sides of the aisle agree: the stimulus bill is a “must pass” before this Congress adjourns. There is talk of a weekend session and possibly negotiating into next week with another one week stopgap being passed by Friday.

This is the final Finfacts of 2020, a year that has seen many challenges. I hope everyone has a safe and happy holiday season and best wishes for 2021. Stay tuned.

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

George Smith Partners is working with a nationwide bridge lender providing financing on cash-flowing including affordable housing, seniors housing, self-storage and all other major asset classes. Loans range from $10,000,000 to $100,000,000 and typical closing is 30 days. With the ability to advance up to 75% of value, the lender offers terms from 6-48 months, with extension options available and rates starting at 9%.

Treasury yields dropped slightly and stock market rallies took a pause. Why? Critical negotiations on U.S. Covid relief in Washington and the UK/EU Brexit talks are both hitting stumbling blocks with deadlines for both looming this weekend. The 10 year T is at 0.93%. Last Friday’s November’s weaker than expected jobs report indicated a sputtering recovery with slowing job growth. The data combined with rising Covid caseloads/hospitalizations have added further urgency to Congressional and administration stimulus negotiations. It looks like they are kicking the can into next week with a 1 week government funding extension, creating a must pass date for next Friday, December 18. Congress will then recess for the year and a “no deal” would allow jobless benefits, student loan forgiveness, eviction moratoriums, Fed assistance programs and more to expire. The failure to act would also deprive the economy of badly needed stimulus.

“V-Day” in the UK this week: vaccinations have begun! The world saw the Pfizer vaccine being administered to elderly citizens of the UK this week. The U.S. FDA is expected to approve the Pfizer vaccine this week and shots could begin in the U.S. next week. The UCLA Anderson School Economic Forecast, “A Gloomy Winter Followed by An Exuberant Spring” was released today. It predicts a robust “service recovery” led by healthcare, restaurants, recreation, travel and accommodation in 2021. Analysts have estimated that U.S. consumers have about $1.3 trillion in excess savings built up during the 2020 pandemic. As most consumer goods have been available for purchase with the boom in e-commerce, the thinking is that there is big pent up demand for travel, entertainment, live events, etc. This can’t come soon enough for the beleaguered hotel and retail sectors. A look at hotel loan maturities shows over $20 billion of hotel loans maturing in 2021 (as opposed to about $8 billion this year and an average of $7 billion for 2022-2029. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

Britain’s approval of the Pfizer vaccine means that shots will be given within days. The US is expected to approve vaccines by Pfizer by December 10 and Moderna by December 17, with shots being given by December 20. This optimism is tempered by record numbers of infections and hospitalizations nationwide going into winter. US officials indicate that 100 million Americans will be vaccinated by March 1, with over 70% of the population Congress is scheduled to adjourn for the year after December 11. The spikes in infections combined with the expiration of unemployment benefits and eviction moratoriums on December 31 is putting enormous pressure on Congress to finally pass another stimulus bill. Today, lots of optimism after months of failed attempts: a group of senators is circulating a $900 billion package that has bipartisan and bicameral support. Hopes are high but nothing is certain. The 10 year treasury hit 0.92% today. Stimulus and 2021 recovery hopes are contributing to the long term optimism. The Federal Reserve has indicated they will do everything in their toolbox to keep interest rates low. In order to assure low rates going into 2021, the Fed is expected to announce adjustments in their bond buying, which is now at $120 billion per month. The central bank is considering increasing their purchases of 10 year Treasuries, which will keep yields low going into 2021. Commercial real estate capital markets and borrowers will benefit from this policy. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners is working with a capital provider offering fixed rate financing for the purchase and refinance of industrial, office and retail properties in California, Nevada and Hawaii up to $20,000,000. With terms up to 10 years, this portfolio lender offers hybrid adjustable rate loans with fixed initial terms followed by an adjustable rate for the remaining life of the loan. Loan servicing is done in-house. A 60-Day rate lock is also available with a deposit and delivery of a fully executed rate lock agreement.

For multifamily properties, the lender offers rates starting at 3.35%, 4,3,2,1 prepayment, 1.20x DSCR and 65% LTV for the five-year term. Seven-year loan maturities are also an option. The Lender will utilize the COVID payment reserve to make the monthly mortgage payments for the first 12 months of the loan term until the reserve account is fully exhausted. Unlike agency debt, there is no duplication of debt service payments.

George Smith Partners is working with a national balance sheet lender providing fixed-rate, long term permanent financing for stabilized property types including self-storage, industrial, apartments, and office/medical office in primary and secondary markets. The lender will also consider retail – grocery/drug anchor with more than 50% of tenants open/operating for loans from $4,000,000 to $25,000,000. With the ability to advance 65% of cost, pricing is in the low/mid 3’s for terms ranging from 7-10 years.

Last week it was Pfizer and this week its Moderna: more positive news about the availability for a Covid vaccine. Pfizer is expected to apply for approval for emergency use of their vaccine as soon as this Friday, vaccinations will start this year. This hugely positive news is in contrast to the situation today: spikes in infections, hospitalizations and possible restrictions going into the holidays. Today’s announcement that the NY school system is closing and switching to remote learning rattled markets. The 10 year Treasury yield that nearly hit 1.00% last week dropped to as low as 0.84% today. Yesterday’s weaker than expected retail sales numbers also contributed to the drop in yield. The urgency of a “final” stimulus bill that can act as a bridge to the wide distribution of a vaccine is becoming apparent. Several cliffs loom at year end: federal unemployment insurance, student loan payment freeze, mortgage forbearance and eviction moratoriums. The hope now is for the lame duck congress to pass stimulus as part of the efforts to continue funding the government beyond December 11. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners is working with a national private equity firm focused on debt and equity investment strategies. The capital provider will provide non-recourse, fixed rate financing starting at 4% with up to 80% of cost and terms up to 5 years for ground-up construction and construction completion on all asset types. Loan sizes go up to $500,000,000.

Monday’s announcement of positive Phase 3 results from Pfizer’s vaccine trials caused one of the largest stock market rallies ever, which has continued throughout the week. The anticipated timeline for approval is this month. December – vaccinations for most vulnerable. January – vaccinations for first responders/health care workers. March/April – should be widely available. Experts such as Dr. Fauci and Sir John Bell are predicting life “returning to normal” by Spring 2021. Stay at home stocks such as Zoom saw values drop. Sectors including “return to normal” stocks such as tourism, airlines, movie theaters, theme parks rallied. Interest rates moved as the 10 year treasury jumped from 0.80% (Monday morning) to 0.98% as of today (look for 1.00% as a key technical level). The prospect of an “endgame” to the COVID crisis should theoretically return yields to their pre-COVID levels (10 year at about 1.50%). It will be interesting to see how this affects capital markets and lending criteria on the different sectors. Will next summer see consumers back to pre-COVID “normal”, ie. returning to indoor restaurants, movie theaters, gyms and traveling to crowded conventions? Lots of variables remain. For example, no one expects office occupancy to snap back to 2019 levels. The switch to work from home, either part time or full time, will remain for many workers. Lenders will be scrutinizing these trends when determining underwriting standards going forward. It’s definitely a game changer for hotels and retail. Owners in distress can now see their way to a better day. This may stave off the feared bloodbath of properties and loans being sold at bargain prices. Lenders typically reluctant to foreclose on properties will hopefully help existing borrowers get to a mid 2021 recovery. Of course, this brings the spotlight back to fiscal and monetary policy. Will there be a help for small businesses, tenants, homeowners, commercial real estate owners, etc? Congress is again sending signals that a stimulus will pass. Now the anticipated timing is before year end during the lame duck session. December 11 is the deadline to avoid a government shutdown. Stimulus could be baked into that. Hard to predict in today’s environment. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

George Smith Partners identified a private commercial real estate finance company that provides non-recourse mezzanine financing for multifamily communities in primary and secondary MSA’s nationwide. Mezzanine loan amounts go up to $10,000,000 with terms up to 10 years and 1.10 DSCR on an interest only basis. With the ability to advance up to 85% of value/purchase, this lender offers fixed rate all-in pricing for stabilized or near stabilized multifamily properties (potentially in need of renovation not to exceed $5,000 per unit) a proven location, and experienced owner and management. Mezzanine debt must be placed at the time of the senior loan origination by this designated agency lender.

Note to our readers: This column is not an endorsement of any candidate but is meant to discuss the capital market reactions to the post-election outcome.

Much like 2016, yesterday’s US election and the continuing aftermath have led to market volatility as investors struggle to understand the results. Once again, the polls failed to predict the actual results. As votes were being cast yesterday, investors were assuming a potential “blue wave” with Democrats in control of the Presidency, Senate and House. Equity markets staged a “relief rally” on the certainty of a definitive result. Treasuries sold off. The 10 year Treasury yield spiked to 0.96% after hours as investors assumed passage of another big stimulus package and potentially other major federal spending such as infrastructure. This bet on big fiscal policy meant lots of new treasury issuance so a sell off occurred. As the results came in during the evening, it became clear that the House and Senate were going to be split and the Presidential result would be uncertain for a few days at least. This scenario put stimulus and infrastructure expectations in reverse. Combined with the uncertainty of the Presidential result, a flight to quality was underway. This increased appetite for treasuries and the yield dropped 20 bps to about 0.75% this morning. Wall Street traditionally likes a divided government as that provides certainty of no major policy changes. But this hope is complicated by the need for some stimulus to avoid a long drawn out recovery from COVID-19 pandemic. The anticipated lack of fiscal policy will now put added pressure on the Fed to provide continuing accommodative monetary policy. I would expect that Fed chair Powell will address this tomorrow at his press conference for the November meeting. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners