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GSP Insights

  • Powell Puts It in Neutral, What’s Next?

    Pascale’s Perspective

    July 27, 2022

    Today’s 75 basis point increase in the Fed Funds rate was expected as it was “telegraphed” in advance by Fed officials. Coming on the heels of June’s 75 basis point increase, the Fed Funds rate is now 2.25-2.50%. This is the Fed’s targeted “neutral” rate that is neither restrictive nor accommodative. Goldilocks is sipping her porridge. The rate is right back to the post Financial Crisis high as set by newly approved Fed Chair Powell in December 2018. The 10-Year Treasury in December 2018 was hovering around 2.75%, just like today.

    Where are we and where are we going? Powell insisted we are not in a recession. “Recent indicators of spending and production have softened,” is his preferred terminology. What about the September meeting and the rest of the year? Markets rallied on perceived Fed dovishness going forward. Nasdaq saw its biggest one-day increase since 2020. He remarked that slowing down from the pace of 75 basis point rate hikes will be appropriate “at some point,” and the Fed is now in a “meeting to meeting” phase; and that it “likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.” The year-end target and possible “peak” is estimated at 3.25-3.50% – a full 100 bps into “restrictive” territory. Will that cause a recession? Again, Powell chose his words carefully, “This process is likely to involve a period of below-trend economic growth and some softening in labor market conditions, but such outcomes are likely necessary to restore price stability.” The 10-Year Treasury barely moved, closing at 2.76% as the yield curve flattened out (but is still slightly inverted). One-Month SOFR is 2.32%, Prime Rate is 5.75% as fixed and floating rates diverge. Now, time to watch the data – tomorrow: GDP, Friday: PCE, and employment report next Friday. Stay tuned..

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

  • Mezzanine Financing Starting at SOFR+10%

    Hot Money

    July 20, 2022

    George Smith Partners has identified a debt fund providing mezzanine financing for ground-up construction. The capital provider will lend in the top 20 MSA with rates starting at SOFR+10%. The minimum capital allocation per deal is $10,000,000, with the ability to go $20,000,000, and leverage up to 80% LTC. Property types include multifamily, student housing, and industrial. The capital source has a strong appetite for institutional level opportunities.

  • Fed Signals a 75 Basis Point Increase, Treasuries Remain “Range Bound”

    Pascale’s Perspective

    July 20, 2022

    Last week’s market consensus that the Fed would increase rates by 100 basis points at next week’s meeting has ebbed. Multiple Fed officials spoke last Friday, just before the traditional pre-meeting “quiet period” where they refrain from public comment. Each one indicated a 75 basis point increase was appropriate, clearly telegraphing their intent. Some officials feel that a big increase could damage the strong labor market. I guess that means that a 75 basis hike next week is “dovish”? With little economic data this week, treasuries are trading in a tight range. The 10-Year Treasury has been fluctuating between 2.90% – 3.10%, closing today at 3.02%. The yield curve inversion is holding with the 2-Year closing 21 basis points above the 10-Year.

    Next week will provide much more direction as it is “action-packed” with: Consumer Confidence on Tuesday, Fed meeting and statement on Wednesday, Q2 GDP on Thursday, and the all-important PCE report on Friday (the Fed’s preferred inflation gauge). The GDP report may show that we are in a recession now (defined as 2 consecutive quarters of negative GDP). Stay tuned….

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

  • “Hot” CPI Report Triggers Expectations of 100 Basis Point Fed Increase, Biggest Yield Curve Inversion Since 2000

    Pascale’s Perspective

    July 13, 2022

    Fed Chair Powell has made it clear in recent statements – the Fed’s inflation response will continue to be driven by “the data.” Today’s release of the June CPI report indicated stubborn price increases across a wide spectrum of goods and services. The “headline” number of 9.1% is the highest annual gain since November 1981, expectations were 8.8%. Core CPI (excluding food and energy) rose 5.9% (5.7% was expected) and the highly watched core monthly increase was 0.7% (0.5% was expected). Key categories were up sharply over the last month: food (1.0%), energy (7.5%), gasoline (11.2%), apparel (0.8%), household furnishings (0.4%). There was some speculation that non-food retail goods like clothing and appliances would see price decreases as many retailers indicated they are overstocked, so these increases are indicators of broad-based inflation pressure. The Fed is now expected to increase rates by 100 basis points at the July 27th meeting. Futures markets show a 78% probability tonight, yesterday it was about 10%. A full point increase would be the largest since Fed Chair Greenspan fought inflation in the summer of 1988. The increase would put the Fed Funds’ rate (and 30-Day SOFR) up to 2.50% by the end of the month. The September futures indicate a 70% chance of another 75 bps up to 3.25% after the September 21st Fed meeting (there is no August meeting).

    The bond market sold off on the short end and rallied on the long end, inverting the yield curve farther than any time since 2000. The 10-Year started the day spiking up to about 3.07%, before dropping to 2.91%. The 2-Year jumped to 3.16%; a 25 bp inversion between long and short. The Fed is pushing to avoid inflation expectations to become entrenched and alter consumer, employee, and employer behavior. The fear is that workers who are expecting price increases to continue will negotiate higher wage increases. That will then put pressure on companies to raise prices in an “inflation feedback loop.” Markets seem “resigned” to the Fed’s harsh medicine likely triggering a recession. Note that the Atlanta Fed’s “GDP now” index indicates that a recession is happening now. It predicts a negative GDP for Q2 (the actual GDP estimate comes out on July 28). The hope is that inflation peaks soon and a short recession will be the perfect excuse to cut rates in early 2023. Stay tuned…

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

  • Non-Recourse Bridge Financing up to 85% LTV

    Hot Money

    July 13, 2022

    George Smith Partners has identified a capital provider funding bridge loans up to 85% LTV. The loans are non-recourse and do not require a DCR test on the stabilized cash flow; allowing the lender to provide higher proceeds despite the current interest rate environment. Fixed rates start at 5.50% and floating rates start at SOFR + 5.00%. This capital provider lends nationwide on all major asset types including RV parks, self-storage, and student housing.

  • High Leverage Portfolio Bridge Financing

    Hot Money

    July 6, 2022

    George Smith Partners is currently placing high leverage, non-recourse bridge financing through a national portfolio lender. Funding value-add transactions from $2,000,000 to $30,000,000, the Capital Provider offers a specialized program through flexible loan structures with the ability to lower cap requirements to 2 years. Floating rate pricing is priced over 30-Day Average SOFR, starting at SOFR + 400. The Lender has a particularly strong appetite for multifamily in high-growth markets in Texas, Florida, Georgia, Ohio, and Kentucky.

  • Markets Rally on Fed Minutes as Bond Yields Rise, June Jobs Report Looms

    Today’s release of the Fed meeting minutes for June indicated that there is an agreement for another 50 – 75 basis point increase this month (after June’s 75 basis point increase). The officials also indicated that an “even more restrictive stance could be appropriate if elevated inflation…persists.” Another 75 basis point increase would put the Fed Funds rate at 2.25% -2.50%, right at the Fed’s “neutral” rate. So, further increases after July would put it officially in “restrictive” territory. Another takeaway from today is the Fed feels the battle is shifting to one of “messaging”. Expectations of future inflation are becoming prevalent for the first time in decades. Fed officials worry that this expectation can result in more entrenched inflation. The notes also show that Fed officials believe that their constant messaging on their willingness to tame price increases is critical in reassuring consumers. The bright side? Officials note that by raising rates quickly today, they will have more flexibility later to pause or slow down in the fourth quarter and early next year. This Friday’s release of the June employment report will be closely watched – especially the hourly earnings increase and participation rate. Stay tuned…

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

  • Bridge Financing up to 85% LTC

    Hot Money

    June 29, 2022

    GSP has identified a bridge lender providing financing up to 85% loan to cost. Light transitional bridge is priced with a spread of 300 to 400 basis points over SOFR, while heavy bridge is priced with a spread of 400 to 600 basis points over SOFR. The lender will underwrite to a 6.5% stabilized debt yield. Product types include multifamily, self-storage, industrial, hospitality, and student housing.

  • 10-Year Treasury in “Slowdown Territory” as Yield Curve Zig Zags

    Pascale’s Perspective

    June 29, 2022

    The treasury yield curve is indicating near-term rate hikes and long-term economic slowdown. The 2-Year is 3.04%, 5-Year is 3.14%, and 10-Year is 3.09% (41 bps below its recent high). The markets are betting against the “soft landing” unicorn, as continued hawkish comments by Fed officials indicate that fighting inflation is the priority. Higher unemployment and/or slower growth could be collateral damage. Markets are “treading water” in anticipation of tomorrow’s PCE Report – the Fed’s preferred inflation gauge. The critical component will be the Core PCE monthly increase. Last month’s increase was 0.3%, and the analyst consensus for this month is 0.4%. The report will be the major market mover as we enter the 2nd half of 2022.

    Capital Markets Update: Market dislocation is occurring throughout capital markets as securitized lending (both fixed and floating) is slowing. Bond buyers are demanding higher yields, and some lenders are reluctant to clear their inventory and take losses. Some lenders are hitting the pause button on new originations, which then puts increased pressure and demand on lenders still active. New CMBS “full leverage” fixed-rate loans are pricing between 5.75% – 6.25%. “Full leverage” in this case is low leverage, as cap rates have yet to widen accordingly. We are seeing regional banks step up with rates in the low to mid 5’s with the ability to rate lock early. In the bridge lending space, active lenders are extremely busy as some competitors are on the sidelines. This is not a 2008-style “meltdown” as Bank balance sheets are strong and there is liquidity in the marketplace. It is a period of “price discovery” and uncertainty about asset values and the direction of the economy. Stay tuned…

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

  • Multifamily Takeout Pre-Stabilization

    Hot Money

    June 22, 2022

    George Smith Partners is in application with a capital provider funding take-out loans for new multifamily buildings, in lease-up, and prior to stabilization. Transactions range from $5,000,000 – $40,000,000 and can be sized up to 65% of “as stabilized” value. The rate is locked at application and prices in the mid-4.00% range for a seven-year execution. This on-book portfolio lender will close on a pro-forma and C of O, with only a 25% occupancy threshold. Coupons are fixed without the use of SWAPs allowing for prepayments that do not include a loss of yield formula.

  • Treasury Yields Drop as Anticipation of a Growth Slowdown Overtakes Inflation Fears

    Pascale’s Perspective

    June 22, 2022

    Markets are whipsawing back and forth between worrying about stubborn inflation, recession, or both- stagflation. The conundrum is partially a result of Fed policy. Remember, the Fed’s toolbox consists of “hammers not scalpels.” The central bank is not able to fine-tune or tweak sections of the economy. Instead, it’s interest rate increases are macro-monetary policy moves that affect capital markets, personal finance, consumer behavior, etc., on a large scale. Much of today’s inflation is due to a massive supply shock, as manufacturing and logistics underwent disruption due to COVID. So, the Fed’s “hammer” is to create a demand shock by raising interest rates. Example: Existing home sales volume is plummeting as mortgage rates spike (the 30-year fixed mortgage rate has spiked to over 6.00%, up from about 3.10% last year). Also, there are signs that gas prices have actually dropped slightly in recent days. Markets are looking at this as “good news and bad news” as high prices and increased interest rates are causing consumers to curb purchases. The 10-year Treasury hit 3.50 on June 14 on the narrative that inflation was possibly out of control. Today, it is at 3.16% on slowdown fears. No matter what, the focus will be on the data over the next couple of weeks. This week will include jobless claims and consumer sentiment. Next week will include durable goods and Thursday’s big PCE release. Stay tuned… By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • $600,000,000 JV Equity Bucket

    Hot Money

    June 15, 2022

    George Smith Partners has identified an equity provider seeking to deploy $600,000,000 in JV equity. They are pursuing multifamily, industrial, hospitality, for-sale residential and BTR strategies. With financing starting at $15,000,000, this equity provider is open to deals across the nation with an IRR of 15% or higher.