Fed Chair Yellen’s comments yesterday were more cautious than expected regarding rate increases. She indicated that it is “too early” to determine if the recent uptick in inflation will continue. Treasury yields fell across all maturities, the 10 year T is at 1.83%. The consensus and futures markets now are predicting one more rate increase in 2016, but after the April and June meetings. CMBS: The recent rally is mostly concentrated in the AAA bonds (lower leverage), with the subordinate tranches still trading wide. We are seeing pricing for new loans reflect this compression. Under today’s underwriting metrics, an increase of 5% in loan proceeds will cost 30 bps in spread. The incremental cost of funds prices like a typical mezzanine loan. CRE Volume: As we close out 1Q 2016, research reports indicate substantially less CRE volume when compared to 1Q last year. Market volatility, higher lending rates, the lack of “mega deals”, a major slowdown in New York City transactions are among the reasons. Cap rates typically widen slower than interest rates as sellers cling to old metrics as long as possible. This means that returns on equity are dropping at a time when buyers are rethinking risk. The slowdown could have some positive effects; less CMBS volume leads to tighter spreads & the sales market may need to reset. Stay Tuned. David R. Pascale, Jr.
