The US economy is being driven by opposing forces, making it difficult to predict in the long term.
Employment numbers are strong, and the capital markets reacted positively to the news that more Americans are returning to work.
However, the Delta variant is spreading like wildfire across the US.
“Everyone is clearing watching payrolls. That’s what’s driving the Fed, and that’s what’s driving the market. People are going back to work,” says Thirty Capital Analyst Jay Saunders.
“We saw a big rally on Friday based on jobs. The market came down a bit today. Commodity prices, oil prices are all coming down and it’s all being driven by this virus.
“People will look at this and say ‘We’ve got to get a grip on COVID before the economy is going to open up again’.”
Jay adds that the market likely won’t respond much to the Consumer Price Index numbers this week, as all eyes remain on virus news.
Low Rates, Refinancing Loans, Commercial Defeasance
Thirty Capital CEO Rob Finlay reiterated what he’s said in past episodes of CRE Capital Markets Report: “This is a very opportune time to refinance long-term debt.”
Rob then posed the question of the pros and cons of refinancing commercial property loans, and the issue of commercial defeasance.
Analyst Jeff Lee responded: “There’s a lot of history behind that sentiment. Volatility drives a lot of calls and questions.”
Look At Remaining Term-To-Maturity On Loan, Not The Ten-Year
“Whether the Ten-year moves from 1.10, 1.12 or up to 1.30 within a week, if people are going to ask what is that going to do to my defeasance costs or my yield maintenance or whatever fixed-term, early-exit scenario they’re looking at . . . The big thing to always remember is everything is pegged off of your remaining term-to-maturity on your specific loan,” explains Jeff.
“Going back to basics, you’re not looking at the Ten-year as a driver of your extra costs. That is generally mismatched to the longer end where the Ten-year resides.”
He explains: “So many people are reactionary to longer moves on the Ten-year, thinking it’s going to impact their costs. But in reality, it really doesn’t.
“We’re looking all across the maturity curve to do some justifications, but it comes in all different forms. Right. Everyone’s deal is different and structured differently.”
In this scenario, Thirty Capital is buying bonds at around two to three-year to maturity, several years off the Ten-year.
What’s Your Exit Cost?
Both Rob and Jeff explore the process the team uses when clients want to refinance their loans.
Jeff emphasizes that it’s important to run the numbers and explore all possible scenarios, penalties, tax savings, and cost-saving opportunities with clients.
Economy In Uncharted Waters
With unemployment benefits falling in some parts of the country and evictions on hold, Thirty Capital Analyst Jason Kelley believes that the US economy is in uncharted waters.
“There’s a lot of excess cash in the economy right now,” he explains. “If the moratorium ends on evictions, there’s so much liquidity out there I don’t think we’re going to see a lot of movement in asset prices.”
Adds Rob: “There’s a huge division between people who have money and those who don’t, and it will be interesting to see how the economy operates when it’s the top wage earners who are creating all the supply or demand.”
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