July 29, 2020
Comments from Fed Chair Powell today reiterating the Fed’s commitment to accommodative policy for as long as it takes. The Fed policy statement held few surprises, extending commitments on swap lines (through March 2021), bond buying ($120 billion a month in Treasuries and Fannie/Freddie), corporate bond buying, emergency lending programs (extended to Dec 31). Unprecedented programs to purchase municipal and corporate bonds also will continue. Powell noted the recent “leveling off” in the economy after May/June job gains were “sooner and stronger” than expected. But subsequent surges in COVID cases around the country have partially derailed that recovery. He noted debit and credit card spending, hotel occupancy and other consumer metrics are slowing, and future trends are unknown due to the unpredictability of the virus.
Interesting comment: “The two things are not in conflict. Social distancing measures and a fast reopening of the economy actually go together. They’re not in competition.” Spoken like a true analytic banker. He sees no danger of inflation and actually seemed to warn of deflation as he indicated that the pandemic is lowering prices (except for the notable exception of food prices). Watch the data: tomorrow’s 2nd quarter GDP announcement will be unprecedented, predicted to be minus 35% (!) Remember this is annualized, so it will show about a 10% drop in the 2nd quarter, still very significant. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
July 22, 2020
Headlines this week:
- Washington DC: Congress and the White House struggle to create yet another COVID stimulus package costing about $1.5 Trillion.
- European leaders agree on a nearly $900 billion stimulus package after difficult negotiations.
- U.S. Dept of HHS makes a deal to purchase 100 million doses of a promising vaccine from Pfizer with an option for 500 million more doses(to be distributed free of charge).
- Negative economic trends continue in July as virus spikes cause re-closing of many small businesses, predictive statistic trends start to trend downward after rising in May/June (airline and hotel bookings, Apple map searches, etc).
- Businesses that received PPP funds can soon layoff workers without having to pay back the loans. National Federation of Independent Businesses survey showed 653,000 businesses plan to lay off workers near end of July without further assistance (70,000 businesses said they plan on laying off 10 or more workers).
- Federal unemployment benefits expire next Friday.
- As commercial flight passenger volume decreases, speculation mounts that the major airlines will lay off huge chunks of their workforce on October 1. That’s the first day they are allowed to layoff workers and keep the billions of dollars of aid they received in an early Covid stimulus bill.
- Home loans with FHA guaranteed mortgages are in a foreclosure and eviction moratorium that was extended from June 30 to August 31. This could hurt landlords, homeowners and tenants. Eviction moratoriums put huge pressure on landlords. Note that the CRE Council is working on a $400 billion proposal to allow the Federal Reserve to take a preferred equity stake in commercial properties by advancing troubled borrowers of hotels, malls, etc one year of debt service, taxes, and operating expenses.
All of these deadlines or “cliffs” expiring during a rough patch for the economy could result in a wave of evictions, layoffs and foreclosures. Federal Government aid and/or legislation will be necessary to extend these deadlines. When will the economy be able to function without these extraordinary measures?
It seems that the calculus is as follows: the virus is proving difficult to control until an effective vaccine is widely available and the fall/winter flu season is only 2 months away. “Normal” consumer behavior (movie theaters, malls, conventions, normal business travel, hotel occupancy) is most likely completely dependent on said vaccine. The question in Washington this week and next is how much and how long? Will it be enough to carry the water until the vaccine? And even after the vaccine comes, there are long term and permanent effects that will affect commercial real estate for years to come. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
July 15, 2020
All eyes on Washington as positive June data cannot be considered “forward guidance” as July’s numbers will most likely be shaky. Congress reconvenes next Monday for a 3 week session before recessing until Labor Day. Elements of the “final” COVID stimulus bill are taking shape. For example, a 5-year liability shield (2019-2014) for businesses and governments relating to COVID claims, some “targeted” aid to state and local governments and an extension of $600/per week of Federal unemployment benefits that are now set to expire July 31. Note that about 33 million Americans are receiving the Federal unemployment benefits. All of these measures are controversial and contentious. If the unemployment benefit is replaced with a “return to work bonus” from the government, is that putting workers into danger? Ben Bernanke (who knows a thing or two about a financial crisis) strongly urged billions of aid to state and local governments, indicating that there should have been more stimulus to states and cities following the Great Recession.
The Fed is “all in” based on speeches from Fed officials this week. To summarize: “No” on negative interest rates in the U.S. Officials cited, “structural issues”. Possible “Yes” on Yield Curve Control (now being practiced by the Bank of Japan) whereby the Fed buys enough short term treasuries to set a ceiling on the yield. A big “YES” on further asset purchases across the board (Treasuries, Mortgage Backed Securities, and Corporates). There is room for this as the Fed’s balance sheet is actually declining due to lower utilization of its swap lines with foreign banks (a very good sign because that means markets are less stressed). And also, “Yes” to the end of LIBOR remaining on schedule for Jan 1, 2021. Fed Governor Williams issued a robust defense of the replacement index (SOFR) during a speech on Monday to regulators. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
July 1, 2020
As we enter the second half of this unforgettable year, both positive and negative news abounds. Today’s announcement of positive results in trials of a potential vaccine from Pfizer offers hope. Will the “warp speed” process bring the vaccine to the public by year end or in early 2021? Meanwhile, virus infection spikes in highly populated bellwether states such as California, Texas, Arizona and Florida which is very troubling. Businesses that just opened are shutting down again and many workers are being “laid off again”.
The data: June economic reports released yesterday and today (Manufacturing & ADP employment) have been positive but they are trending up from the unprecedented drops from recent months. Tomorrow’s unemployment report is expected to also show positive trending. With the recent spikes and “re-shutdowns”, the trend we have seen for July, the specter of a “W” shaped recovery is looming. The upcoming corporate earnings from a quarter unlike anything we have ever seen in history should be fascinating, “A Tale of Two Cities”.
One of the biggest questions facing the commercial real estate industry is the future of office as an asset class, during and after the pandemic. Recent years have seen a boom in supply and demand as tech, media, and financial services have all embraced the collaborative nature of the office environment. Today, entire industries are working from home and meeting virtually. What’s the future? I noticed an interesting contrast last week as Barry Sternlicht issued a dire prediction for the massive NY office market. He noted that without a vaccine, workers are reluctant to ride trains and buses to the city, not to mention the densely packed sidewalks, lobbies, elevators, etc. He predicts a “tipping point” leading 25% drop in rental income, increased expenses due to new procedures, and a 40% drop in values. Meanwhile, here in Los Angeles, a Canadian developer announced plans to build two of the tallest office towers outside of downtown in the Miracle Mile district. The spec office development will total over 2 million square feet. The combination of hope, fear and uncertainty today brings to mind the opening words of the Dickens’ classic referenced above: “It was the best of times, it was the worst of times”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
June 24, 2020
This week saw Blackstone CEO Stephen Schwarzman forecast a “big V” recovery this summer, easily the best case scenario among the possibilities. Meanwhile, the IMF downgraded its forecast to a 4.9% global contraction in GDP this year, with the U.S. at an 8% contraction. They lowered their 2021 positive global GDP estimate to 5.4%. Schwarzman is optimistic as he predicts treatments or a vaccine will emerge soon, while most predictions are for a longer wait. This week’s data points should offer some clarity. After the recent bigger than expected increase in the May jobs report: will the trend continue on Thursday (Durable Goods) and Friday (consumer spending)? Both of those reports set record lows in April, and positive increases in May could auger well for the recovery. The data will be critical as Congress and the administration contemplate a possible 4th Covid stimulus bill.
Upcoming “cliff” dates to watch:
- July 31 – end of supplemented unemployment insurance (as vast numbers are still unemployed, the end of these benefits could hinder the recovery).
- Oct 1 – The first day airlines and other major employers are allowed to lay off employees per the federal assistance guidelines and possible government shutdown.
Capital Markets: The secondary markets (CMBS and CLO) continue to function as pools with the right product type mix are being well received. Spreads are tightening in the fixed rate debt markets. CMBS will compete for strong properties with interest only and sub 4% rates. Bridge lending is coming back with 75% LTC for well underwritten multifamily loans being offered. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
June 17, 2020
Fed Chair Powell’s testimony to Congress this week was more highly anticipated than usual. The big news for financial markets was his pledge for the Fed to purchase corporate bonds for individual companies. This is part of the unprecedented massive bond purchases by the Fed in the wake of the COVID crisis. Powell’s reason was also very interesting. Many noted that the corporate bond market is very liquid today with spreads almost back down to their pre-COVID levels. Part of this was due to the Fed’s promise to purchase corporates on March 23 during the worldwide panic. Powell stated that the Fed’s duty was to follow through on that promise and make the purchases. The takeaway is that the immense influence of the Federal Reserve is based on its integrity. As corporate bond spreads tighten, look for real estate credit spreads to follow suit in the fixed rate markets.
CLO Update: Collateralized Loan Obligations in the commercial real estate market are pools of floating rate loans sold in the secondary market. It’s a major underpinning of the bridge loan sector. It has been virtually shut down since early March as no bond buyers were active. Activity has started up again in the past few weeks as some pools of selected pre-COVID originated loans are being successfully securitized. Spreads are wider, for example: pre-COVID pricing for AAAs was approximately LIBOR + 100. Those bonds are now selling at about L + 235 with oversubscribed buyer interest. Look for bridge loan programs offering 80% LTC loans at L + 275-300 pre-COVID to now offer 60-70% LTC at L + 450 – 550. And the now familiar stratification of product types will be in effect: multifamily and industrial in favor, with office needing a good story, retail very selective and no hotels. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
June 10, 2020
These emphatic words from Fed Chair Powell today along with a “dot plot” showing no rate increases until after 2022 indicate the level of commitment from the central bank to stabilize the economy. This will create an unprecedented extended era of near zero rates that span from December 2008 and continue until 2023, with the exception of Dec 2015 to March 2020. Between the zero rates, trillion dollar annual deficit spending, and the explosion in the money supply, the fact that these measures aren’t spurring inflation or higher borrowing costs is astounding and goes against all 20th century economic theory. Last week’s blockbuster positive employment report was encouraging and briefly led to a spike in Treasury yields. Powell noted it as a single data point and reminded us that we have a long way to go. The Fed predicted an economic contraction this year of 5 to 10% and unemployment at year end of 9%. Last Friday’s Treasury yield increase was a product of the bullish jobs report and some uncertainty about the Fed’s rate of treasury purchases. Note that the Fed was purchasing over $300 billion per day (!) during the panic week of March 24-27, and then slowed to as low as $2-3 billion per day. Today they announced that bond buying will continue at the rate of $80 billion per month of Treasuries and $40 billion of MBS. Ex Fed President William Dudley predicts these measures will expand the Fed’s balance sheet to over $10 Trillion (remember that the “normal” balance sheet level for the Fed, pre-2008 was considered to be just under $1 Trillion). These assurances brought the 10 year T down to 0.74%. The calls within the Fed to institute “yield curve control” are growing stronger, but for the shorter maturities. The thought is that the longer end of the curve is more difficult to control and there is some hazard in trying to control the 10 and 30 year maturities. With risk spreads tightening and lenders picking and choosing “winners” among the product types and markets (no hotel, yes multifamily, etc.), borrowers can lock in historically low rates. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
May 27, 2020
Today’s remarks by New York Fed President John Williams were illuminating as he discussed the possibility of “yield curve control” to aid the economy. This will involve the Fed buying and selling long-term bonds in order to “set” long term rates. This has not been implemented since WW II. Other countries have attempted this strategy recently, most notably Japan in setting long-term rates at 0%. The Fed continues to search for stimulative tools as they have already dropped rates to 0% for an extended period. Meanwhile, the Fed is rolling out four new previously approved facilities this week: $600 Billion Main Street Lending Program, Primary Market Corporate Credit Facility, Municipal Liquidity Facility, and Term Asset Backed Securities Loan Facility. This will place the Fed in the center of the corporate, municipal and MBS bond markets as buyer of last resort. The Main Street Lending Facility is highly anticipated, and will allow the Fed to lend (at approximately 300 over LIBOR) to companies with employees of 15,000 or less, hoping that this access to capital can help act as a springboard back to “normality”. Secretary Mnuchin indicated last week that the Treasury expected to “take losses” on these programs, implying they are almost like grants. The issue will be whether these capitalized businesses will be able to attract customers and thrive in the the present economic environment. Will customers (corporate or individual) still spend? The Treasury is “fully prepared to take losses in certain scenarios” on these programs implying that they are almost like grants. This gets back to solvency issues and whether more government grants are in order, ie. another stimulus package. After lots of hemming and hawing about “wait and see” it seems there is some new sense of urgency to pass another bill in early June. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
May 20, 2020
There is some level of reopening in all 50 states this week. Monday’s hopeful news about a potential vaccine rallied stock and debt markets. The rally may have been an overreaction, time will tell. But, both news items illuminate the situation. Various phases of restarting business is under way, with new guidelines that hopefully will prevent a second wave of infections. We are entering another “new normal” of “cautious commerce” until a medical solution is reached. Economists, politicians, policy makers, business leaders and all of society are grappling with the obvious questions about the speed and shape of the recovery. These issues were very starkly raised in yesterday’s fascinating appearance before the Senate of Fed Chair Powell and Treasury Secretary Mnuchin. First off, the CMBS market was mentioned multiple times. Senators asked about “empty malls” and the securitized loans that back them. Powell was asked by Senator Tim Scott, “Why aren’t you doing more for CMBS?” Senator Ben Sasse asked if the Fed was taking “Too much risk in CMBS?” Powell said he is supporting and monitoring CMBS, which is an “important market” but “not every problem can be addressed”. The Fed is only buying AAA bonds and he doesn’t anticipate any haircuts. After the highly watched 60 Minutes appearance, Powell continued to challenge Congress. He reiterated the tough road for the economy ahead and a potential slowing recovery. Powell called on Congress for further stimulus and reiterated the limits of the Feds power. It comes down (again) to monetary policy and fiscal policy. With the major shock to the economy over the past few months, many businesses (small and large) and governmental entities (states and cities) are reeling. If the Great Recession was basically a massive credit crisis, today’s issue is a solvency crisis. Powell reiterated that the credit markets are flush with liquidity and there is money to lend. But, many potential borrowers are not creditworthy and/or insolvent. Powell has clearly stated many times that the Fed cannot “make grants”. That puts the pressure back on Congress to provide fiscal aid in order to help with solvency. These policies are controversial as the terms “bailout” and “moral hazard” are likely to come up. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
May 13, 2020
Some good news on lending as the first CMBS securitization since pre-crisis (early March) executed better than expected on Friday. The pool consisted of above average quality loans originated pre-crisis, with no hotels and very little retail. There was oversubscribed demand and spreads were tighter than expected throughout the bond classes. CMBS originators are cautiously optimistic as new loans are being quoted. Look for leverage in the 65% range, some reserves may be required at loan closing and extra scrutiny on sponsorship. Underwriting standards will be more conservative. As CMBS originates, we have seen some life companies narrow their spreads to win business on good quality real estate.
Some more “green shoots” are visible as the bridge lenders are starting originations also. The warehouse lending market (big banks lending to debt funds) has started up again, with more cautious leverage. The warehouse lenders will also monitor loan collateral more closely. Multifamily, office, industrial bridge lending is back with leverage in the 65-70% range with spreads in the L+350-450 range (as opposed to 80+% stretch bridge loans at L + 275-325 pre-COVID). As credit becomes more available, the focus will be on property specifics (location, resilience of the income, etc). Fundamentals going forward in this environment will be critical, and many of the fundamentals are dependent on the virus spread and hopes for treatments/vaccine.
Fed and Data: Fed Chair Powell’s remarks today shook markets. He called on Congress and the Administration to authorize further “fiscal support” or risk “long term damage” to the economy. He contextualized the recent unemployment reports with a stark statistic from the Fed’s recent survey, “40% of U.S. households making less than $40,000 per year lost a job in March”. Powell also (again) pushed back on suggestions that the U.S. implement negative interest rates.
Other Data: Yesterday’s CPI report contained unprecedented numbers: negative 0.8% CPI from March to April, the lowest since December 2008. However, food prices saw there biggest one month jump since April 1974 at 2.6%. The overall CPI was down due to big drops in clothing, energy and other categories. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
May 6, 2020
This morning ADP Private Sector Report was sobering to see 20.2 million people lost their jobs in April. By far the largest number since the survey began in 2002, the previous record was 835,000 in 2008. The loss represents all of the jobs created since the financial crisis. As America starts to open, there is hope that April was the bottom and we are climbing out of it. However, the daily human tragedy cannot be ignored or minimized. My heart goes out to all the families that have been affected by this virus. If the economy can be restarted safely, many analysts (including the Fed), believe that the job market can rebound over the next few quarters. However, the days of 3.0% unemployment may be at least a year away. This Friday’s unemployment figures will be closely watched. After all the major volatility in March The 10-year T is now trading in a tight range, in the .60-.75% range and is at 0.70% today. As oil rebounded from negative prices into positive territory, the Treasury yields have increased accordingly as threats of deflation have subsided for now. The CMBS market is thawing as spreads throughout the capital stack are narrowing. New originations at 60-65% LTV with all in rates in the 4% range and many loans will require a 6-month interest reserve. Expect originators to as “CMBS 3.0” begins, expect originators to be about strong collateral and strong sponsors but no hotels currently. We are seeing some bridge lenders start to quote again on well underwritten multifamily transactions. Rates are lower than “hard money” rates, but leverage has been dialed back. The 80+% of cost loans pre-COVID are now 60-65% LTC, but it’s a start. The reinstituting of bank lines to lenders and/or a restart of the CLO market will greatly help. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
April 29, 2020
Today’s Fed meeting and subsequent press conference by Fed Chair Powell was like no other in history. First off, Powell said, “We are going to see economic data for the 2nd quarter that is worse than any data we have ever seen”, this after the 1 quarter GDP contracted at a 4.8% annualized rate, the worst reading since 2008. Also, Powell’s speech and Q&A was virtual, with reporter questions being asked via a webinar. He expressed some hope for a significant bounce back in the 3rd quarter as stay at home measures are gradually rolled back. Of course, so much is dependent on the virus. Markets rallied significantly today on positive news regarding a potential treatment.
Full Range of Tools: The Fed Funds rate will remain at near zero for a while (possibly for 2-3 years) and the Fed continues to purchase about $10-15 billion per day in Treasuries and $8 billion in mortgage bonds, daily injections of capital into the repo markets.
Up next: A Main Street Lending Program will provide 4 year loans to businesses too large to benefit from the PPP program and more purchases of corporate debt. But, Powell noted that the Fed is authorized to “provide loans not grants” and the most vulnerable American individuals and businesses are not in a position to pay back loans as they have been hit so hard by this crisis. “This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible”. Powell declared in a direct message to Congress to provide this aid. He is implying that the fiscal policy so far is good but not enough and he is continuing to push monetary policy to the limit. Focus on central banks continues tomorrow with the ECB’s policy announcement. Bank of Japan opened the week on Monday pledging unlimited bond buying, as the international adoption of Modern Monetary Theory continues. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners
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