Last week’s Fed rate hike increased floating rate indices in lock step with the Fed’s pace. The 30 day LIBOR is almost at 1.00% (up 0.75% since Dec 2015 after sitting at nearly 0.25% for years in the wake of the financial crisis). The bank prime rate is 4.00%, also up 0.75% from a longtime low of 3.25%. However, the 10 year Treasury yield has dropped from a high of 2.62% last Monday to 2.40% today. Why? (1) Washington: The uncertainty and political wrangling over the first major piece of legislation by the new administration, the highly anticipated health care overhaul, has cast doubt on Washington’s ability to execute major fiscal policy such as infrastructure investment and tax reform. The rise in Treasury yield’s was largely predicated on the stimulative effects of the policy. (2) Inflation expectations are dampening: Not only is the 10 year yield dropping,but the yield curve is flattening. This is an indicator that markets do not expect much inflation. This month’s survey of U.S. Consumer Inflation expectations indicated a record low this month. Oil prices stubbornly remain low below the $50 benchmark yet again as stockpiles rise and cooperation among producers to limit production wanes. Note that the Fed’s preferred inflation gauge (Personal Consumption Expenditures) is still below 2.0%. Notes from GSP’s Staff Meeting: George Smith Partners’ weekly staff meeting often includes comments and observations from our brokers based on their conversations with lenders, investors, sales brokers, etc. A major subject this week: transaction slowdown. The cost of capital for construction and bridge financing is rising and rent growth is seemingly stagnating in several markets (especially for apartments as the recent boom in construction sees new units coming on line). Also, we are seeing labor and subcontractor costs rising in some major markets due to a combination of political issues, labor shortages, supply/demand dynamics, etc. The result is a lot of deals “don’t pencil” and there is a lull out there in the marketplace. Cap rates remain very tight in a “seller’s market” on stabilized assets, but buyers are now underwriting higher fixed rate debt and causing a pause and reconsider their offer. The logjam should “break” when sellers start to capitulate on price. There is still plenty of capital (both equity and debt) looking to transact. stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.
