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GSP Insights

  • Unanimous Fed “Stays the Course” As Inflation Worries Persist, Jobs Still Lag

    Pascale’s Perspective

    July 28, 2021

    The Fed announcement today was not surprising as to policy: no change in the overnight interest rate and monthly bond purchases will continue. As prices rise (whether transitory or not), inflation is becoming a political issue. Many lawmakers and influential economists are calling for a reduction in bond purchases. Today, Fed Chair Powell continued to stand firm. He emphasized that the ultra accommodative policies will stay in place until full employment: the bond purchases will be maintained until they have achieved “substantial further progress” in the job market. Today’s meeting and announcement basically push off any rate increases until late 2022 or early 2023. Powell again promised to warn markets in advance of any “tapering” of bond purchases. Assuming the warning comes in August/September, that would put the beginning of any tapering at year end. With $120 billion in monthly bond purchases, an orderly non-disruptive wind down would take 12 months, lowering purchases by $10 billion per month. The 10 year T yield ended the day at 1.23%, down 2 bps from this morning.

    Congress in the mix: Today’s announcement of an agreement on a bipartisan infrastructure plan will increase stimulus over the next few years. More pressing is the Debt Ceiling deadline. The US ability to borrow above its present levels expires this weekend. The Treasury will use the now usual “extraordinary measures” to keep the government from defaulting for the next few months. This will affect the supply of treasuries and these technical factors may further keep yields low, until buyers feel that there is a real danger of default. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Permanent Financing No Prepayment Penalties, Rates Starting at 3%

    Hot Money

    July 28, 2021

    GSP is actively placing permanent debt financing for office, industrial, multifamily, retail, and self-storage. With loan sizes up to $10,000,000, fixed rate pricing starts at 3%. They offer 75% of value subject to actual current debt service requirements and with terms up to 15 years (fixed period reset option 3,5,7-years) amortized over 30 years. There is never any prepayment penalty.

  • Market Volatility Whipsaws Treasury Yields

    Pascale’s Perspective

    July 21, 2021

    Stock markets plunged along with Treasury yields on Monday before rebounding yesterday and into today. The 10 year T dropped to 1.14% from 1.30% on Monday as concerns mount about rising Covid cases. The “June narrative” whereby a highly vaccinated society reopens and economic activity booms accordingly is being replaced by concerns about the highly contagious Delta variant. The recovery may be volatile and asymmetrical among regions and sectors. Interestingly, when the 10 year T hit 1.14% on Monday, it was in the middle of the pandemic low (0.50%, July 2020) and high (1.77%, March 2021). For now, inflation fears seem to be ebbing. The next 2-3 months will be fascinating as the “base effects” subside, supply chains return to near normal, and CPI/PCE statistics start to increasingly matter to markets. Next week’s Fed meeting may be the last meeting that Fed officials can claim price increases are “transitory”. Also next week: CPI, core CPI, and PCE announcements. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Rates Drop as Recovery Expectations Settle, Bund Plunges

    Today’s 10 year Treasury actually dropped to 1.28% as the 2nd half of 2021 gets underway. Many industry analysts predicted a 2.00% 10 year Treasury by year end 2021, spurred by robust economic growth coming out of the pandemic. However, the 10 year has been dropping in recent weeks, while very short term Treasury yields are rising slightly. This flattening of the curve usually signals lower growth expectations. The dip in yields may be a perfect storm of multiple factors; (1) Technical short covering of traders covering “bad bets” on treasury yields spiking; (2) Realization that the recovery may be uneven, an estimated 80% of all the stimulus has been spent and the effects may be dwindling; (3) Employment – last month’s new jobs number of 850,000 new hires is impressive, but it will take over a year at that rate to reach pre-pandemic job levels, traders feel the Fed will keep priming the pump until that goal is within sight, even at the risk of running “hot” inflation; (4) Relative value trade, the 10 year German Bund dropped to negative 0.30% after almost breaking above zero in recent weeks, so the US 10 year T at 1.30% is a good alternative.

    What are we telling borrowers? Today is a great time to lock in 10 year fixed rates. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Inflation Fears Subside and Slow Growth Expectations Depress Treasury Yields

    Pascale’s Perspective

    June 30, 2021

    Last Friday’s “blockbuster” Personal Consumption Expenditures Report indicated the highest price increases since 1992. May 2021 prices increased 3.9% (overall) and 3.4% (core). The bond market barely shrugged, the 10 year jumped about 3 bps that day, hitting 1.53%. Today the 10 year is at 1.46%. The markets are increasing believing that inflation is transitory. The May, June and July numbers will be due to “base effects” of low numbers for 2020. The price increases are asymmetrical as certain sectors such as used cars, energy and transportation indices are up dramatically (remember that oil prices dramatically bottomed out in March-Sept 2020, before rising. Car prices are being overly effected by supply chain issues). Some commodity prices are dropping after hitting unsustainable peaks (lumber, copper, etc). Note that the 5 and 10 year Treasury “break even rates” (the difference between actual treasury yields and treasury inflation protected yields) is narrowing, another indicator of inflation expectations amongst investors. A major survey released last Friday showed consumer inflation expectations perceive the present price increases to be temporary. The depressed treasury yields could be an indication that economic growth is expected to sputter after this initial recovery. Also note that the infrastructure bill emerging from Washington will be smaller than earlier anticipated and is not being funded by massive new treasury debt (the compromise bill being discussed relies on unspent funds from other bills and increased IRS enforcement). This narrative fits in with recent statements by Fed officials who are more focused on full employment than price control . Remember that total employment (labor force) is still 8.5 million below pre-pandemic levels. So this Friday’s monthly employment report will be closely watched. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Opportunity Zone Equity for Multifamily Projects

    Hot Money

    June 30, 2021

    George Smith Partners identified a capital provider offering Opportunity Zone Equity for multifamily projects for top MSA’s. They are writing equity checks between $10 and $25 million per deal.

  • Long Term Treasury Yields Stay the Course In the Wake of Market Volatility

    Pascale’s Perspective

    June 23, 2021

    We saw market volatility in the wake of last Wednesday’s Fed Meeting. Markets were reacting to the perceived hawkishness of the Fed as possible rate hikes in 2023 or even 2022 were being discussed (note that previously the Fed had insisted the first rate hike would be in 2024). The Dow plunged last Thursday/Friday, before rallying on Monday morning. Yet, the 10 year treasury yield actually dropped during the week (no sell off), unlike the infamous 2014 “Taper Tantrum”. Why? First off, there was a sell off in short term treasuries (from 30 days to 2 years) with those yields rising, while long term yields (5 to 30 years) lowered. Markets sold off on the short term because those treasuries are more sensitive to Fed rate increases as the Fed Funds Rate is an overnight rate. Long term rates dropped as markets were anticipating a scenario whereby the Fed rate increase hampers economic growth (10-30 year treasury yields often fluctuate with growth expectations). The yield curve thereby flattened. Fed Chair Powell continued to assuage market fears this week in his congressional testimony. “We will not raise interest rates pre-emptively because we fear the possible onset of inflation”. Today the 10 year closed at 1.49% down from last Wednesday’s 1.56%.

     

    Spotlight on Washington DC, news for commercial real estate: The Supreme Court ruled 7-2 today that the head of the FHFA can be replaced by the President without “cause”. President Biden is expected to name a replacement for Mark Calabria, the existing head of the FHFA. How does this affect commercial real estate? The FHFA has been the conservator of Fannie Mae and Freddie Mac since 2009. The FHFA was put in charge of the agencies in the wake of the Great Recession and the housing market crash. Since then the FHFA has instituted annual caps on multifamily loan originations by Fannie/Freddie. The caps for 2021 are $70 billion for each agency. Note that the agencies originate about 50% of total apartment permanent loan volume. Today’s news is significant as Calabria was a proponent of privatizing the agencies. That would remove the famous “implied Federal Government guaranty” for Fannie and Freddie bonds. That would result in an uncertain future for the agencies as the private sector may not actively trade Fannie and Freddie’s bonds at the spreads we see today. This would possibly increase borrowing costs for apartment owners. Fannie and Freddie apartment loan rates impact values and cap rates nationwide and interest rates amongst private lenders (banks, life companies, funds, etc). Calabria’s replacement is expected to continue the Federal Government’s involvement in the agencies. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Conventional and SBA Hotel Financing

    Hot Money

    June 23, 2021

    George Smith Partners identified a hotel financier funding acquisition, refinance, and PIP/Renovation in the Western United States. Fixed rates are between 5.50% and 6.25% and floating rates start at Prime + 2% and up, for loan terms up to 7 years, and leverage up to 65% of value. Reserves are required for operating deficits and debt service where needed. SBA financing is available for properties located in California, Idaho, Utah, and Arizona for non-CBD locations for loan amounts up to $12.5 million (504) and $5 million (7a). Rates for the 5-year fixed (504) are 6.5% Floor and floating rates (7a) – P + 275. Leverage is up to 75% of value with 10, 20, or 25 year terms.

  • Fed Indicates that “Peak Dovishness” Is Over

    Pascale’s Perspective

    June 16, 2021

    Today’s Federal Reserve meeting, statement and presser from Fed Chair Powell definitely showed the central bank starting to pivot away from the ultra-accommodative policies put in place last year The headline: 13 of the 18 Fed voting members believe the Fed will raise rates in 2023 (this number was 7 of 18 in March 2021), with 7 of them now predicting a 2022 rate increase (up from 4 in March 2021). Inflation hawkishness has been abundant in recent weeks. Statements from Lawrence Summers, Deutsche Bank, various CNBC commentators have accused the Fed of being overly sanguine in policy and rhetoric. Powell acknowledged this atmosphere: “inflation could turn out to be higher and more persistent than we anticipate”. He also prepared the markets for a decrease in monthly bond purchases (now $120 billion per month) by saying “this meeting, is the ‘talking about talking about’ meeting” which referenced his promise to telegraph any decreases in Fed bond buying in advance. Today the telegram was sent! Bond buying will taper probably by year end. This matters to commercial real estate because the Fed is affecting both the index (treasuries) and the spreads (Fannie/Freddie bonds) with these purchases. As these purchases slow, the private sector would have to make up the slack to keep rates low. Also, the Fed increased their headline inflation expectation to 3.4% (up a full point from March 2021). Powell sought to calm markets near the end of the presser. Perhaps he was watching the Dow crash 400 points on a CNBC monitor in the room? Again, he used the “t word” (Transitory) to describe inflation. As far as the projections for upcoming rate increases, he reminded everyone they are projections and should be taken with a “big grain of salt”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Non-Recourse Western States Portfolio Permanent Financing Starting at 3%

    Hot Money

    June 16, 2021

    George Smith Partners is placing non-recourse financing for permanent transactions up to $40,000,000 for properties in California and major metros in all western states. The Lender will finance stabilized income-producing projects for office, industrial, multifamily, industrial, retail, Manufactured Home Parks, and will consider some special purpose assets on a case-by-case basis. Rates start at 3% and can be locked at application. With terms up to ten years, loan sizing is 50% of value for multifamily and industrial and 40% of value for retail and office.

  • Treasury Yields Drop As Markets Wait for CPI

    Economists are expecting tomorrow’s CPI report to show a 4.7% increase from a year earlier. Today saw the 10 year treasury yield drop to as low as 1.47%, possibly due to technical short covering in the markets. The big question is – will tomorrow’s big number rattle Treasuries into a sell-off? Or, will the number be tamer than anticipated? Last week’s weaker than expected jobs report calmed market inflation expectations. Tomorrow’s report may rekindle inflation fears.

    Spotlight on Hospitality: During the depths of the pandemic shutdowns in 2020, the hotel industry was hit hard, many hotels were closed for business or operating at severely reduced capacity. The monthly occupancy rate plunged from 62% in February to a multi-decade low of 22% in April. Many market participants were anticipating a wave of distressed property acquisition opportunities in the sector stemming from lender foreclosures. The “wave of distress” did not occur. The pandemic shutdown was vastly different from the credit crisis and Great Recession that began in 2008. This time, vaccine distribution and the 2021 reopening of society was within sight. Most lenders allowed their borrowers to hold on through the crisis. Case in point: the largest distressed portfolio in the US, the Eagle Hospitality Trust included 15 hotels located across the country. The distress in the portfolio stemmed from ownership issues then exacerbated by the pandemic. The auction is going better than anticipated with 5 assets fetching prices in excess of the stalking horse bids and the remaining assets expected to be sold this month. According to STR, May 2021 US Hotel occupancy hit 61.8%. Memorial Day weekend occupancy was nearly 80%. CMBS Hotel loans in special servicing dropped to a pandemic era low of 20.1%, after hitting a high of 26% last summer. Last month’s jobs report indicated that Leisure and Hospitality led the net increases in jobs at 331,000 new hires (#2, Government was at 48,000). Business travel is showing signs of life and even pent up demand. This week, the first major convention post pandemic, the World of Concrete in Las Vegas is well attended. Corporate travel is starting up amongst companies looking to get an edge on their competitors still doing business remotely. Here at GSP we are seeing more capital sources now considering hotel loans albeit at lower proceeds and higher risk spreads, but it’s a start. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Drop As “Taper Talk” Gets Closer

    This week saw a parade of Fed officials simultaneously calming markets on one hand while preparing for the inevitable reduction in monthly bond purchases. Prices have risen across a broad spectrum of commodities: lumber, steel, copper, aluminum, gasoline, corn, chickens and entry level wages. The officials, including SF Fed President Mary Daly and Vice Chair Richard Clarida are sticking to the view that the recent inflation is transitory. Issues regarding supply chain and labor market bottlenecks need to work themselves out. The thinking is that we need to see sustained inflation with normally functioning supply chains until a true assessment can be made. Only then will the Fed start “removing the punch bowl” in a measured and well telegraphed process. For now, its working as the 10 year T dropped to as low as 1.55% this week after hitting 1.70% in early May. But note that one prominent Fed official is “tolling the bell” as he said, “It’s time to start talking about tapering bond purchases.” Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners