January 13, 2021
2020 was a year like no other and 2021 is starting out with turmoil and change. Let’s look at some trends to watch in 2021.
Covid and the return to “normal”: The U.S. is experiencing record spikes in cases, hospitalizations and deaths while the pace of vaccination has been slower than expected. In the U.S., over 10 million people have received at least one dose, about 3.3% of the population.
Optimism: New policies, wider distribution (mass vaccination centers, availability at pharmacies, etc.), and the expected approval of more vaccines should increase the pace. Estimates of normalcy range from Memorial Day to Labor Day.
Fiscal Policy/Inflation Outlook: Look for further stimulus as the recovery has been bumpy and uneven. The Fed estimates that the unemployment rate amongst the lowest paid workers is over 20%. The results of the Georgia runoff elections resulted in Democratic control of the Senate. Combined with recent economic data indicating that job growth stalled in December, this greatly increases the likelihood and expected volume of further stimulus from Washington. More stimulus = more dollars, more treasuries, and economic growth. Also, oil prices are over $50 a barrel, the highest since last February as major producers are limiting output. As normalcy returns, pent up demand for travel and other economic activities are expected to push prices up further. Could we see the return of “classic” inflation for the first time in over a decade? Will the Fed allow the economy to “run hot” in excess of its 2.00% target without raising rates? Will investors once again view commercial real estate as an “inflation hedge”, again?
Interest Rates: Due to ultra accommodative Fed policy, 2020 saw borrowers taking advantage of all time low fixed rate financings from Fannie/Freddie, CMBS, Life Companies and Banks. Rates in the 3.00% range for full leverage loans (with some IO) were available for the right properties (typically apartments, industrial, self-storage and selected office). 2021 is starting out with a jump in Treasury yields as the 10 year spiked from 0.84% to 1.15% in three weeks, before settling at 1.09%. The anticipated recovery should result in a steeper yield curve. Already, hedge funds are engaged in the “steepening trade” – buying short term treasuries and selling long term. Residential mortgage applications jumped 20% last week as borrowers rush to lock in low rates. Will commercial real estate borrowers and buyers join them? Will the Fed step in with “yield curve control” and buy longer term treasuries to keep those rates in check? Or, will the Fed turn hawkish, “declare victory” and ease up on bond purchases, allowing rates to rise?
By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
January 13, 2021
George Smith Partners identified a national capital provider providing floating rate debt starting at $50,000,000 on Class A & B assets in core locations for best in class sponsors. Non-Recourse pricing starts at 2.50%. Terms range from 10 to 20 years with the ability to advance 60-65% of value. Prepayment penalty varies based on the initial loan term.
January 6, 2021
A sell-off in treasuries today spiked the yield on the 10 year Treasury to 1.03%, the highest level since the March 2020 Covid meltdown. After the Georgia run off results became apparent, expectations are for more stimulus, further expansion of the Fed balance sheet, and (possibly) inflation. After hitting 1.00%, the next key levels are in the 1.25% to 1.50% range. The most recent “normal” treasury levels from late 2019 (pre-Covid) were about 1.75%. US Dollar value indices are dropping as the supply of our currency increases significantly each month. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
December 16, 2020
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
December 9, 2020
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%.
December 9, 2020
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
December 2, 2020
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
December 2, 2020
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.
November 25, 2020
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.
November 18, 2020
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
November 18, 2020
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.
November 11, 2020
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
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