George Smith Partners is working closely with a capital provider who is actively seeking to grow their build-for-rent portfolio. The capital provider creates an agreement with the developer by entering into a fixed-price purchase contract at any point of the development and funding up to 95% of the total project cost. The interest is 100% accrued until they start purchasing finished homes at certificate of occupancy. They can also purchase all units at final certificate of occupancy. This capital provider has a footprint across the nation.

A perfect storm is continuing to hit treasury prices and therefore yields are rising. Markets study every data report hoping for some sign that inflationary pressures are easing/slowing/peaking, hoping for a “pivot” from the Fed. Recent economic data hasn’t provided that hope. The supply/demand metrics in the Treasury market are strained: record debt issuance and major buyers (Japan, China, Pension Funds) are buying less or sidelined. Also, most importantly, we are seeing heretofore untried Quantitative Tightening from The Fed. The central bank regularly purchased $80 billion per month during several extended periods since 2010, but is now selling Treasuries. The Fed was still purchasing Treasuries into March of this year. The process is now picking up as it took months for those recent purchases to “settle” – now the Fed is selling up to $95 billion per month. In fact, the Fed recently sold $37 billion in one week.

“Bid to cover” ratios are dropping in recent auctions, indicating fading demand. There are signs that liquidity in the Treasury market itself is starting to dry up, causing the normally calm Treasury Secretary Yellen to recently comment on her concerns. Recent Data: Last week’s CPI report continued the recent narrative that price increases are pivoting from goods to services. This is more concerning to the Fed as labor is a critical component of services. Example: travel is especially inflationary due to pent up demand for leisure combined with the return of business travel/conventions. Airline ticket prices and bookings are skyrocketing and the industry estimates there is a shortage of about one million workers in the segment. Note that apparel and appliances are seeing price and demand declines. Many retailers are overstocked as supply chains loosen and demand softens. Fed Speeches: Neil Kashkari referenced CPI reports in comments this week. He indicated that perhaps “headline” CPI has peaked but he is more concerned about core inflation (excluding food and energy). He indicated the Fed was resolute in its determination and if core inflation lingers into next year, commenting “But if we don’t see progress in underlying inflation or core inflation, I don’t see why I would advocate stopping at 4.5%, or 4.75%.” This caught markets attention – as the previously assumed “terminal rate” was about 4.25%-4.50%, and he’s talking about 5.0%. Fed Pivot Watch: Powell has made it very clear that the Fed is willing to tolerate unemployment and significant losses in stock markets without “blinking.” But recent developments like the British gilt crisis and Treasury market liquidity may be early indications of systematic financial risk which would (hopefully) be intolerable to the Fed. Stay tuned….

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

If you have an inquiry regarding George Smith Partners’ commercial real estate financing, please contact your GSP representative or Jessica Mania, at (310) 867-2974 or jmania@gspartners.com