CRE Capital Markets Report With Thirty Capital

Great opportunities in CRE for right assets, despite Fed jacking up rates

There are some excellent opportunities in commercial real estate if you select the right assets, says Thirty Capital CEO Rob Finlay. In today’s podcast roundtable with his team of analysts, Rob explains that while commercial real estate is facing some headwinds, “there is a tremendous upside for the right assets.” Meanwhile, rates are moving upwards following last Wednesday’s Fed meeting, during which the board agreed to let around $90 billion run off the balance sheet every month. That, along with strong employment numbers on Friday, led to a mini bear market. Two-year swaps moved up about nine basis points. Ten-year SOFR swaps moved up 31 basis points. Hard to draw parallels between today and 2018 Analyst Jay Saunders said the markets saw this back in around 2016 to 2018, during the last Fed tightening cycle. “We saw long-term rates generally move up in line with the Fed until we got to 2018, which was the last time we saw these yields 2.75 to three percent on the Ten-year.” Rob says the market is still around 50 to 60 basis points off pre-pandemic levels. Back then, the market was around 3.30 before it started to sell off. However, Jay says it’s hard to draw parallels with economic circumstances four years ago. There was no inflation, no coronavirus, and today employment is very strong. A transition from floating to fixed Analyst Jeff Lee says Thirty Capital is seeing a big transition from floating to fixed rates. He cautions that commercial real estate borrowers may need to get a little creative with their borrowing. “With some of the steepening, you can make it back up on the curve a little bit to drop a few basis points here and there. But it’s not as big as that move used to be before,” explains Jeff. “But on the flip side we’ve heard a lot of people say they have to go interest-only to keep monthly payments similar to what their prior loan was.” Local banks will be beneficiaries of ‘weird’ market Both Jeff and Rob discuss how commercial real estate borrowers are leveraging relationships with their local banks to get loans. Say’s Rob: “I think regional banks are going to be the beneficiaries of everything that’s going on in this market. You can’t underweight a deal in Vero Beach Florida without really knowing the market and knowing the dynamics.” Adds Jeff: “It’s the relationships and the local pulse. It’s got to be what fuels us through this weird kind of time.” This episode includes: * Jay’s analysis of the SOFR market and rate increases. * Figures coming out this week are CPI and PPI. * Get deals done early this week because the markets close early this week due to Good Friday. The team also gives its prediction on the Ten-year in coming months. Listen to the full episode for their conclusion! Follow Rob on Twitter [https://twitter.com/FinlayRob] and LinkedIn [https://www.linkedin.com/in/rob-j-finlay/].

Recession may happen in 2023 and won’t be deep

Five out of the last six times there’s been an inverted yield curve, a recession has followed. But the team of analysts at Thirty Capital thinks that if a recession does occur, it won’t happen in the very near future. Says Thirty Capital Analyst Bryan Kern: “The Fed has only hiked 25 bps, so they haven’t really done anything yet, outside of providing commentary that’s sent the market into a tailspin.” Talk of a recession is premature, overblown Bryan does note that there are some signs of slowing growth, particularly in retail sales. The question now is if the U.S. does have a recession, when will it happen? He thinks if a recession does occur it will be in 2023, and it won’t be severe. Of course, no one can predict the future, but Bryan believes the current narrative about an impending recession is premature and overblown. He adds it's important for the markets to focus on what’s at hand right now - high inflation and a war in Ukraine. 80 percent chance of a half point hike The markets are expecting a full half point increase announcement at the Fed’s meeting next month. Analyst Jay Saunders points out that there is a fairly significant inversion in the SOFR swap curve, with the three-year point being the highest. He says that short-term rates will head north of one percent in the next few months. Listen to the full episode for Jay’s details of SOFR rates and what’s happening with SOFR in the episode. Caps much more expensive Despite the volatility, commercial real estate borrowers are busy and completed a lot of deals ahead of the end of the first quarter. Jay says borrowers need to think about how they will purchase a cap for any upcoming deals and how they intend to address their caps, given that they can be so expensive. Jay says the next thing the markets can watch out for is the Fed and its balance sheet. “I think the Fed would like to see long-term rates quite a bit higher than they are. They don't like inverted yield curves. And the way to do that is to start accelerating how quickly they unwind their balance sheet.” In the past, people could go for a five- or seven-year loan. But this flatness wipes all that out. Forward Fed funds predicting high rates Analyst Jason Kelley says that forward Fed funds are predicting much higher rates, up to three percent next year. His analysis is that the market believes the Fed is going to overdo it and “just blow through, then we’ll have some kind of recession and rates will come back down.” He says Thirty Capital is looking at putting some hedges on internally. They are going to skip the ‘23 and ‘24 tranche and lock in some of the ‘25 and ‘26 rates. Jason gives an analysis of the current market conditions and their impact on the commercial real estate market. Listen to the full episode for the team’s full analysis on market activity and how this impacts commercial real estate investors.

No recession on the horizon, despite flattening of the curve

The Ten-year Treasury has been all over the place in the past few days, as the yield curve continues to flatten. There have been wild intraday swings as well as - of course - movement within the past few days. Thirty Capital Analyst Bryan Kern says: “We’ve seen a ton of volatility, but obviously the general trend is upwards.” The Two-year was up 16 bps and the Ten-year 18 bps, briefly touching 2.50 on Friday. In the last two weeks the Ten-year is up about 32 bps and about 42 bps on the Two-year. Ten-year artificially low because of quantitative easing Bryan believes that the Ten-year should be much higher than what it is, given all the qualitative easing that happened during the pandemic. Bryan says he doesn’t see a recession in the next 12 to 18 months, despite there being a lot of talk about an impending recession in the news. “I believe the Ten-year is artificially low because of quantitative easing,” he says. “Realistically, we shouldn’t be anywhere near an inverted curve with what’s going on. “Once the Fed stops buying treasuries, and if they actually quantitatively tightened, we'll see that Ten-year spike,” Bryan continues. He adds that there is a 75 percent chance of a 50-bps hike in May, and that it is likely the Ten-year will head higher, with the floor for the next quarter at 250. Sticker shock on some SOFR pricing Thirty Capital analyst Jay Saunders says some clients are experiencing sticker shock on some of the pricing of deals. Looking at SOFR swap rates, three-year SOFR swap rates were up 36 bps last week. The highest point on the SOFR swap curve right now is a three-year SOFR swap. It's the high-rate, high benchmark on the curve. From there, it goes downhill, all the way out to 30 years. Jay adds that the Three-year treasury has increased 144 bps in the first quarter of 2022. That’s the largest move up in the Three-year treasury in 50 years. The short-end of the rate curve is very reactive to the Fed Jay says commercial real estate borrowers can expect to see all the rates creep up as the next Fed meeting nears. Short-term rates have pulled in the last Fed increase. One-month LIBOR is now trading at 45 bps, one-month SOFR at 31 bps, while the three-month LIBOR is one percent. He adds that while many analysts are predicting high rate increases, he believes the Fed will be more measured with interest rate hikes. “Clearly the market's anticipating short-term rates going up quite a bit and that's forcing the short-end of the curve up. The long-end is just not keeping up.” He adds that commercial real estate clients are concerned about where rates are going, and are prudent when it comes to buying rate protection. You can hear the full update, news, and analysis by listening to the full episode. Be sure to follow Thirty Capital CEO Rob Finlay on Twitter [https://twitter.com/home] and LinkedIn [https://www.linkedin.com/in/rob-j-finlay/].

Should commercial real estate investors be concerned bout the inverted yield curve?

Part of the yield curve has inverted, and this has been all over the financial markets headlines in the last few days. In this week’s Capital Markets Report podcast, The Thirty Capital team takes a look at this and what it means for commercial real estate borrowers. Explains Analyst Jason Kelley, the curve is “Continuing to get more and more flat. There's really no difference between a Five-year and a Ten-year treasury . . . about one basis point (bps) difference.” Meanwhile, the Two-year continues to creep up. In the last year, it has moved up more than 186 bps, compared to the Ten-year’s increase of 52 in the same time period. What do commercial real estate borrowers need to know? Thirty Capital CEO Rob Finlay says commercial real estate borrowers need to remain aware that rates have winded out and spreads have winded out as the capital markets are repricing loans and other products in the space. “From an underwriting perspective, make sure you widen out a little bit and be a little bit more conservative with your pricing assumptions,” Rob cautions. Market thinks the Fed’s getting it wrong There were a few days last week where the curve went inverted for intraday trading, with shorter yields passing the long-term yields. What’s happening now is a continuation of the same story we’ve had for a while. Jason explains that “The market's thinking the Fed's going to get it wrong; that the Feds will force rates up, force a bit of a recession, and then they're going to have to backtrack.” Inflation is real, not transitory Rob agrees with Jason, saying: “There's no way to do a soft landing here. I think it's a fantasy world to think that this inflation is just transitory and not real.” Thirty Capital Analyst Jeff Lee cautions that the inflation numbers from last week don’t account for the Ukraine situation, so consumers can expect eight points or more in the next inflation numbers. What’s a commercial real estate borrower to do? Jeff says his team is closely watching a lot of deals in progress right now. Many of them have to be repriced or re-traded and investors are getting double whacked from spreads in the Ten-year. Only a couple weeks ago, Jeff talked about spreads widening by around 40, 50, 60 bps. That, along with the increase in the Ten-year, means a borrower could be looking at 150 basis points from where they were a month or two ago Rob says that borrowers should look at the current situation and see that long-term is the way to go. “For the most part, short term debt is off the table. “Even where the capital markets have widened out a little bit, long-term is still a pretty smart play.” No end to the volatility just yet Market volatility is expected to increase for the next six months or so as the Fed marches ahead with rate increases. “Until they indicate that they are going to pause, we’re going to continue with this volatile correction,” Jason notes. Listen to the full episode for the team's complete analysis and guidance on how commercial real estate borrowers should be responding to today’s market conditions.

CRE borrowers must look out for rising cap prices as market volatility continues

The Fed is expected to raise interest rates by a quarter of a basis points (bsp) this week. The futures market is actually expecting about 165 basis points and tightening in 2022. So there are many who think the Fed will go for a .50 bps increase, but Thirty Capital Analyst Bryan Kern says the consensus around .25 is probably right. For commercial real estate borrowers, this means more of the same, with high volatility and thinner markets, says Bryan. Commercial real estate borrowers must watch out for cap prices! If you are in the market for hedging products, get regular updates on cap prices, because they are going up due to market volatility. Says Thirty Capital Analyst Jay Saunders: “We have a client who did not execute a cap Friday. It’s $10,000 more expensive today than it was Friday.” He warns borrowers to really think about strike rates on these gaps. “I know borrowers want leverage. They want low strike rates so they can lever up these projects. “But when three-year, two-percent caps cost 65 to 70 basis points per annum you’ve got to start thinking about the math . . . where (the numbers) do and don’t make sense.” Watch out for intraday movement on the markets To add to Jay’s warning, Bryan cautioned commercial real estate borrowers to be vigilant for intraday movement. On interest rate caps there can be a swing between 16 and 17 bps in a matter of minutes. COVID spike could impact supply chain Jay points to the news out of China that COVID cases are at a new high since the outbreak just over two years ago. Jay asks if this is going to be a body blow to international supply chains, and just how much it will impact business in the U.S. What’s happening with short-term loans? LIBOR legislation has passed in Congress. This allows allowing Federal calculation agents to force a transition from LIBOR to the preferred fall-back, which would be either one- or three-month term SOFR rate for contracts that don’t have workable fall-back language. The AARC is likely done with the transition now that this legislation has passed. BSBY is still lagging behind the SOFR and LIBOR, coming in at about 32 bps for LIBOR’s 43, notes Jay. So LIBOR has obviously priced in the Fed increase coming on Wednesday. Jay notes that the curve continues to flatten, and he believes that “Clearly the market anticipates the Fed plowing forward with its rate increases. Market tries to anticipate Fed behavior “But the market also seems to be anticipating a very 2019-esque overdoing by the Fed, to be followed by Fed rate cuts within the next couple of years. After this month’s increase, the next Fed meeting is in May, and rate cuts are expected for the next six meetings, although Thirty Capital believes the Fed may get derailed on those plans.