FINfacts™ XXIV – No. 342 | November 2, 2022

MARKET RATES
Prime Rate 6.25%
1 Month LIBOR 3.84%
6 Month LIBOR 4.92%
5 Yr SOFR Swap 4.04%
10 Yr SOFR Swap 3.81%
5 Yr US Treasury 4.30%
10 Yr US Treasury 4.09%
30 Yr US Treasury 4.10%

RECENT TRANSACTIONS
$9,800,000 Refinance for Mixed-Use Building and Vacant Retail Building; Echo Park, CA

Term: 12 Months
Rate: 7.75% Fixed
Prepayment: None
Guaranty: Non-Recourse

Transaction Description:

George Smith Partners successfully advised on the refinance of two parcels containing a vacant commercial retail building and 90% leased mixed-use residential/retail building in Los Angeles, CA. The senior loan proceeds totaled $9,800,000 of non-recourse financing, approximately 58% LTV. After the COVID-19 pandemic largely stopped retail leasing, the Sponsor responded to changing market dynamics by altering business plans to re-entitle the vacant retail parcel to multifamily. Negotiating an LOI for the sale of the mixed-use residential building, the Sponsor required a bridge loan to pay off the existing bridge debt and carry both parcels until the completion of entitlements and eventual sale.

GSP had to strategically market the opportunity given a weak, Covid-related retail leasing market and relatively complicated business plan. With deliberate advising of GSP, the Sponsor was able to achieve fixed, non-recourse financing despite a fully vacant building.


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HOT MONEY
Low Rate Perm Multifamily Financing With Flexible Prepay

George Smith Partners is working with a capital provider with a clean balance sheet providing permanent fixed-rate debt financing up to $10,000,000. With multifamily rates starting at 5.60%, this portfolio lender offers loan terms from 3 to 10 years with step-down prepayment options. For 3 year loans, the lender’s prepayment penalty is open after 2 years. Financing only in California, this capital provider can go up to 75% of value on multifamily, self storage, warehouse, industrial, office, and retail (anchored and unanchored).

More Hot Money ›

Pascale's Portrait
PASCALE'S PERSPECTIVE
Fed Increases 75 bps, Powell Presser Squashes Rally, “Some Ways to Go”

First off, a 75 basis point increase for the 4th straight meeting put the Fed Funds rate at 3.75% – 4.00%, the highest since 2008. Prime Rate is 7.00%, 30-Year fixed rate home loans are about 7.30% and 30-Day Term SOFR is 3.79%. Markets rallied on “dovish” comments in the initial statement: “In determining the pace of future increases, the Committee will take into account the cumulative tightening…. (and) the lags with which monetary policy affects inflation.” Many economists note that Fed actions take time to work through the economy. A scenario where the Fed watches and waits while lagging indicators catch up could forestall economy-crushing excessive rate increases, aka the “soft landing.” Hopes of “the pivot rally” jumped as the 10-Year Treasury yield dropped to 3.98 from 4.06 and the Dow rallied over 300 points in 30 minutes… until Fed Chair Powell’s remarks and responses to questions. His opening remarks seemed like a direct response to domestic and international pressure on the Fed to ease off on rate increases. He reiterated that the Fed’s number one job is price stability and that a sustained healthy labor market depends on that stability. The irony in that statement is that fighting inflation will require more slack in the labor market, i.e. higher unemployment. It’s as if the Fed needs to “break employment to save it.” The phrase that really moved markets was: “It’s very premature to think about pausing”, which he repeated for emphasis. Powell recognized that conditions have already tightened in housing, business investments, and other rate-sensitive sectors. He noted that goods prices should have come down faster and that prices for services are rising significantly. Yesterday’s ADP report for September indicated robust hiring continues in the services sector – especially hospitality and leisure.

Future Direction: Powell indicated that the Fed might “slow the pace” of rate cuts in December and February. But the data point that really shook the markets was his response to the big questions which are: “How high?” and “How long?” – regarding the “terminal rate” or peak and how long before the next rate cut. It seems like the answers are “higher” and “longer.” Powell said that there is now “significant uncertainty” amongst Fed policymakers about the “ultimate level” for the Fed Funds rate. This follows recent comments by Fed President Kashkari that a “terminal rate” in the 5% range may be needed to battle core PCE inflation. Recent assumptions had the terminal rate at about 4.6% and hopefully peaking for a few months. Powell and the Fed are now setting expectations for a longer battle. Rhetoric such as “Some ways to go” and the recent mantra “Restrictive territory… for some time” drove the message home.

In the weeds: Powell discussed employment metrics he is closely following: job quits, vacancies and labor participation. The Fed is watching for any sign of slack in the labor markets. He also discussed softening rental rates and the inherent housing cost lag in the CPI statistics. CPI continues to count rental costs based on all lease payments, not just newly signed lease costs. This may understate the effect of Fed rate increases on housing costs for months. He noted that this lag is considered when reading the data. The rallies dissipated into negative territory as markets digested Powell’s remarks – the 10-Year jumped to 4.11% and the Dow dropped 1.5%. Stay tuned…

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

More Perspectives ›

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


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