GSP Insights

  • Rates and the Limits of Monetary Policy

    Pascale’s Perspective

    November 13, 2019

    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

  • Unentitled Urban Infill Land Financing Up to 75% LTC

    Hot Money

    November 13, 2019

    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.

  • “Meet The New Yield Curve, Same as the Old Yield Curve”

    Pascale’s Perspective

    November 6, 2019

    Remember all of the recent doom and gloom predictions and market volatility when the yield curve inverted back in August? The 2 year bond yield drifted above the 10 year yield. This traditional “recession predictor” caused large selloffs in equity markets and ironically drove long term bond yields down, further aggravating the inversion. After last week’s Fed cut and other stimulus, the effect has been to push short term bond rates below the 10 year. Note that, the Fed’s recent repo market liquidity injections involve buying short term T bills, driving those yields lower. On the long end, the 10 year yield has been rising due to, wait for it, stop me if you’ve heard this before, anticipation of a trade deal between China and the US (if only they could decide where to meet and whether to call it “Phase 1”). Today’s 2 year T closed at 1.61% and the 10 year T closed at 1.82%. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Non-Recourse Permanent Loan Program

    Hot Money

    November 6, 2019

    George Smith Partners is currently placing non-recourse permanent financing from $1,000,000 to $25,000,000 for industrial, office, retail or mixed-use stabilized properties located in top MSA’s. With the ability to advance up to 75% of purchase price, pricing is based on Treasury rates + 200 points and terms are 3, 5, 7 and 10 years. There is no cost to the borrower for appraisal, legal, title, escrow and recording.

  • David Pascale – Another Interest Rate Cut Will Help Hold Up CRE Values, But Was It Needed

    In the Press

    October 31, 2019

    David Pascale is mentioned in the National Real Estate Investor story, “Another Interest Rate Cut Will Help Hold Up CRE Values, But Was It Needed?”

    CRE cap rates are expected to remain unchanged, but investors looking for financing should benefit from lower rates.

    The Fed signaled that no further cuts would be coming this year unless the U.S. economy experiences a significant slowdown. At the same time, the Fed is “not going to raise rates unless they see signs of heavy inflation, so the chance of another Fed rate increase is very minimal,” according to David Pascale, senior vice president with George Smith Partners, a Los Angeles-based commercial real estate capital markets advisory firm.

    Click here for the full article: https://www.nreionline.com/finance-investment/another-interest-rate-cut-will-help-hold-cre-values-was-it-needed

  • Are We There Yet? Yes, But “There” Has Moved

    Pascale’s Perspective

    October 30, 2019

    Today’s Fed announcement and subsequent press conference by Chair Powell was a textbook case of well communicated policy. Basically, the Fed announced a 0.25% rate cut and indicated “that’s it” for this round of cuts. And markets didn’t freak out as they usually do when the punch bowl is being taken away. This “mid cycle adjustment” consisted of 3 rate cuts (July, September, October), the first rate cuts in a decade. Today’s Fed statement removed the key phrase “will act as appropriately to sustain the expansion” That may have roiled markets, but Fed Chair Powell then said the words that soothed markets worldwide: “I think we would need to see a really significant move up in inflation, before we would consider raising rates”. With worldwide inflation basically “stuck” at about 1.0-1.5% (well below the 2% Fed target), this basically provided a “ceiling” at today’s short term rate of 1.5%. It also helped pushed 2 year treasury bonds down to 1.60%, further “un-inverting” the yield curve back to a normal shape. Well done Mr. Powell – the 10 year closed at 1.78%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Floating Rate Bridge Financing with Earnout

    Hot Money

    October 30, 2019

    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 $3,500,000 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 self-storage, student housing, hospitality, commercial condo and specialty use. Program highlights include no negative arb, flexible prepayment and non-cash flowing assets.

  • Shahin Yazdi Explains Challenges that Force Developers to Shift Focus to Redevelopment Projects

    In the Press

    October 28, 2019

    Posted in Multifamily Insider Blogs

    October 28, 2019

    Multifamily development continues to be a darling of the commercial real estate world as limited new supply throughout the cycle has driven higher rental rates and pushed vacancies to all-time lows. Multifamily real estate offers developers a unique value proposition with low retenanting costs, cheap debt, and limited cash flow volatility relative to other property types. As the top target for investors ‑ one that often offers the best risk-adjusted returns – multifamily construction has experienced significant investment over the past decade. Yet more recently, even with investors seeing multifamily housing as a safe choice, the outsized returns previously associated with ground-up development have fallen. At George Smith Partners, we have noticed that investors and lenders have reacted by shifting from construction to reposition strategies. This is the result of the narrowing gap between the return on cost (developers profit) and today’s cap rates for stabilized properties.

    While cap rates for existing product have remained constant, construction projects have realized steady cost growth. Part of the cost increases were caused by oil and energy prices increasing in near lockstep with transportation expenses. Construction has been further hindered by unemployment reaching a record low, increasing the asking wages of skilled labor[i]. Furthermore, while ongoing trade tensions may be leading to lower global interest rates, the corresponding tariffs are making it more expensive to source building materials.

    Investors are also facing changes in land values. Land which previously presented excellent return opportunities for developers with entitlement expertise now forward price to maximize entitlement value. This results in a lower degree of pricing differential between by-right, entitled, and permit ready projects. These price differences are disproportional to the degree of difficulty required for completion.

    One consideration is that real estate cycles tend to have lengthy periods of supply and demand imbalances. Ground up developments characteristically require a time frame of several years, often misaligned with initial market conditions by lease-up. Buy side funds may be looking to hedge against a possible market downturn and are increasingly concerned about the risks associated with weaker future rents. This speculative activity, along with declining interest rates, appears like a leading indicator of a directional change in business cycle activity.

    With the aggregation of increased physical good prices, shortage of labor, and high land prices, the return on cost (ROC) metric for apartments based on un-trended rents is often sitting within 50-100 basis points of today’s cap rates. Previously these same projects would mandate a spread of 150 – 200 bps between return on cost and cap rates. This has a major impact on markets that are in need of ground-up development projects. Los Angeles, for example, is currently experiencing a void of institutionally equity partners. In 2019’s California Department of Housing (HCD) review, California “should be building about 180,000 units per year to keep up with demand,” however according to Public Policy Institute of California, “construction permits for only about 93,000 residential units were issued over the last 12 months.”[ii] As the discrepancy widens, public policy may play a role. More affordable housing will flip to market rate and force the housing department to find ways to preserve the covenants protecting affordable multifamily rentals. Landlords are required to notify tenants three years before policy changes go into effect, but push back could challenge the timeline. If repositioning products become limited in their ability to displace or evict below-market-rate tenants, the risk for developers might galvanize ground-up again.

    For now, favorable socioeconomics continue to drive needs for multifamily rentals. As costs for construction remain high, investors will continue to reach for the most easily achieved gains by seeking lucrative reposition products instead of risky ground up projects.

  • Going Negative?

    Pascale’s Perspective

    October 23, 2019

    The Fed Futures market indicates a 94% chance of a 0.25% rate cut next week. A December rate cut is also priced in to market expectations. 30 Day LIBOR is now 1.82% (appropriately since the Fed Funds target is now 1.75-2.00%). This means LIBOR should close the year out at 1.25%, leaving very little room for further cutting (assuming the U.S. does not “go negative” on rates). That assumption may be in question as a leading Fed economist analyzed 5 other central banks that instituted sub zero rates starting in 2012. The U.S. Fed held rates at near zero from 2008-2015. The paper suggested that the U.S. recovery would have benefited from negative interest rates, so the next recession may feature sub-zero in the U.S. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Permanent Construction Takeout Financing Prior to Lease-up

    Hot Money

    October 23, 2019

    George Smith Partners is working with a national portfolio lender providing construction loan take-out permanent programs for all product types ranging from $10,000,000 to $65,000,000 in primary and secondary markets prior to stabilization. With the ability to advance 75% of development cost, pricing starts at 3.50% for terms from five to ten years and the program offers a flexible stepdown prepayment. This lender offers true non-recourse and carve outs to an entity and not a warm body.

  • Negotiations Take Center Stage

    Pascale’s Perspective

    October 16, 2019

    Both Brexit and US/China trade talks have been sources of uncertainty all year. The news on each has fluctuated between positive and negative which has caused market volatility. This has weighed on bond markets and the Federal Reserve’s outlook (as evidenced by the recent Fed minutes). A case in point was last Friday’s high level US/China meeting and the subsequent announcement of progress towards a trade agreement. This optimism caused the 10 year T to spike about 10 bps and Fed futures rate cut probability dropped from 90% to 70%. This week, the US/China trade talk is less positive (more work needs to be done), while Brexit negotiations seem to be going well in advance of a critical deadline. The 10 year T is at 1.73% (after hitting a high of 1.79% this week), the futures market likelihood of a rate cut is back up to 90%. Inflation: Today’s NY Fed survey of the public’s expectation of long run inflation is at an all time low. It seems that people expect the “new normal” to last a while longer. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Non-Recourse Preferred Equity Financing up to 85% LTC

    Hot Money

    October 16, 2019

    George Smith Partners is working with an equity investor funding transactions from $4,000,000 – $20,000,000 for Multifamily, Hospitality, Office, Retail, Mixed-Use and Specialty Properties. Non-Recourse pricing starts at LIBOR+ 8% with terms up to five years and 85% of cost for developments and transitional properties in primary and secondary markets. The Lender offers interest only amortization and future advances for lease-up costs and capital expenditures.

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