Short-term Rates: LIBOR is continuing to trade around eight basis points. One-month SOFR is slightly lower than one month LIBOR, trading at 5.¾ basis points. BSBY (the only credit-sensitive rate with any liquidity in the market) is trading on top of Term SOFR, at six basis points. 

Looking at where these indices would swap to, for clients looking to hedge exposure to a floating rate, one-month LIBOR and BSBY are trading right on top of each other at about 83 basis points for a five-year swap. SOFR swaps in the five-year sector are trading around 71 basis points, which is about 10 to 12 basis points lower than the new credit-sensitive rates.

CMBS and CLO Markets: Strong volume coming up towards the end of Q3 and Q4. The big part of the curve that Thirty Capital is looking at is the five-year end range, which really impacts the exit costs for fixed-rate, yield rate, and defeasance. The market is at the highest level it’s seen over the summer and around 50 to 60 basis points higher year on year. 

Retail and Hospitality: Around 1.85 to 2.10 over ten-year swaps, so investors can get in at around 3% for first and retail deals. Hospitality is around the 2.25 to 2.50 range. 

Overall, there’s a lot of flexibility for lenders at fairly attractive rates. 

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Banks moving off LIBOR. What does this mean for CRE?

In-Depth CRE Capital Markets Report

The market is anticipating December will be the time tapering begins, so there will be movement in rates around that time. The question is, how fast? Analyst Bryan Kern is revising down from his earlier 2% projection to the 1.75% range. Expect some rate volatility if tapering does begin as expected.

Debt Ceiling

Analyst Jason Kelley describes the conversation and commentary around the debt ceiling as politics.

“The Democrats have their $3.5 trillion spending bill but the Republicans don’t want to really support it. So they are saying they are not going to approve the debt ceiling, so you can pass whatever you want, but you’re not going to have any money to pay for it.”

Jason says observers have to wait and see how it plays out, adding that it’s why the market is seeing such a high amount of cash in the repo market. 

Jason and Thirty Capital CEO Rob Finlay dig into this issue in detail during their discussion and explore what this means for commercial real estate investors and the larger economy.

The economy sees strong growth

Rob and the team explore how the economy’s performance is impacting the commercial real estate market.

Bryan explains the economy is seeing some strong growth, but the huge disparity between jobs wanted and jobs needed is concerning. 

“Once the Delta variant spike calms down and this whole year is in the rear-view mirror, we’ll see those align a little better,” explains Bryan. “We will see some of those gains that the market has been waiting for in the next few months, hopefully.”

President Biden’s tax plan and real estate capital gains

The markets are keeping an eye on President Joe Biden’s tax plan. He wants it to be retroactive to Jan. 1 2021, whereas the House Bill will make it retroactive to Sept. 13. For people taking capital gains and hoping the president’s tax plan doesn’t go through as is, it will be interesting to see what it does to the real estate market if it goes through. 

Defeasance calculations for and commercial real estate 

Rob and the team of analysts discuss defeasance in-depth and explore what it means for borrowers. 

“If you look at all of the deals that you all are doing on the defeasance side, people are understanding that a bigger penalty sucks right now. And you think it does but it’s actually really a better thing. You’re, you’re basically swapping out for lower-cost capital for longer. I know it’s hard . . .  everybody struggles with this calculation and, at the end of the day, it is a calculation.”

Rob likes the CMBS market right now, and says that there is so much demand for returns right now that CMBS and CLOs are going to be great for lenders.”

Banks moving off LIBOR

Beginning Jan. 1, 2022, banks cannot originate products in LIBOR. Rob and his team explore this, the fall-back language, borrowing, liquidity, and indices in depth. 

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“If you’re looking at forward exposure, I like 18-months to 24 months forward for six and seven-year tenors”   says Bryan.

“I think we’re going to see two things. I think we’re going to see rates go up, but the Fed’s not going to mess with the short end of the curve for a while. So we’re going to see the yield curve steepen. We’ve even got some clients that are looking at four-year forward two-year [swaps].”

Bryan and Rob then discuss borrowing examples that they are currently recommending to clients, along with attractive offers from banks.

Why So Much Focus On The Short And Long Curve?

Some listeners have asked why Thirty Capital’s CRE Capital Markets Report discusses the short and long curve so much, and who cares about the Ten year? After all, the Fed is controlling both the short end and the long-term curve, so it’s pegged.

Thirty Capital Analyst Bryan Kern agrees that the Fed does buy across the curve, so to some extent they do manage the long end.

However, he adds that the Treasury market is a big one, and it’s not just the Feds who are buying. And that’s why the show focuses on this issue.

Feds Interfering In Open Market

Right now though, at this point in time, all eyes are on the Fed as they are essentially in control of the Ten-year.

“They can pretty much do what they want with it,” says Bryan. That’s why tapering is such a big issue right now. The question is, when do the Feds stop buying?

“When do they stop what I consider interfering in the open markets? The big thing is that at next week’s meeting (will) they mention taper? There’s a lot of people who are pressuring the Fed to actually implement the taper this year and finish it pretty quickly . . . some are saying by June of next year, which would be a really quick timeline.”

Rob added that The Wall Street Journal reports that tapering will begin in November.

The Feds will likely begin dialing back spending at that time and reduce their buying, so that over time they will no longer be the biggest buyer in the market. This could result in a two percent rate by year-end, although Bryan’s prediction is closer to the 1.75 to 1.80 range.

Economy Rebounding, But Job Numbers Low

Last week Bryan said numerous people have posed the question:  what impact do Treasury and mortgage purchases have on employment?. The answer is “None”.

Bryan says there’s nothing that the Feds are doing with Treasury and mortgages that’s affecting employment. “The economy has rebounded significantly and inflation, transitory or not, is extremely high.”

Thirty Capital CEO Rob Finlay observes that the jobs market isn’t as robust as people assume.

“The thing is that small businesses can’t find people. I haven’t seen this in a long time where you drive down the street and there are big signs saying: ‘We have work’ or ‘Help wanted’.

Bryan added, the August job numbers were much lower than expected. The economy was anticipating 700,000 new jobs, but only produced around 200,000. There was some slight wage growth.

Explains Thirty Capital Analyst Jay Saunders: “We’re hitting our employment goals. We’re hitting our inflation goals. At this point what changes the market is sentiment. And that’s really, really, really hard to put timing on.”

Jay explained that even when the market changes in this kind of environment, it’s actually hard to pinpoint exactly what brought about the change.

“The long end of the curve is getting a lot less liquid right now from an investor perspective,” he continued, adding that there is certainly some concern over rates.

Today’s roundtable episode included updates on the types of deals Thirty Capital is working on overall market activity. 

Predicting the Ten-year

Since the start of the CRE Capital Markets Report, the team of analysts, led by Thirty Capital CEO Rob Finlay, has been refining its predictions on the Ten-year rate for the close of the year. 

They believe that for a two-per-cent Ten-year to be realized, employment will really need to pick up and inflation will need to slow down somewhat. 

Of course, no one can be sure that these two things will occur, and so the team’s revised forecast for the Ten-year rate towards the end of the year is now between 1.50 and 1.75. 

Fed tapering is on the horizon, while the analysts don’t foresee a rate hike until the end of the year. 

When Rates Move, Volatility Will Be Severe

Rob raised an issue the team has discussed frequently this year: That when rates move, the volatility of those movements will be severe, and no investor wants to be on the wrong side of that. 

“When you think about it, 20 bps plus 10 bps on a Treasury move, that’s a 30-basis point movement on a loan . . . it’s a 10 percent rate movement,” observes Rob. 

“When you’re talking about these numbers, that kind of volatility is huge. And so a deal, that makes sense that at, you know, maybe 20, 30 bps lower, does it make sense that 30 bps higher? A lot of people are looking at it as a longer-term.”

Could the BSBY Index Go Away?

Rob fielded a question from a listener who wanted to know if BSBY, which is a private index, could ever go away, forcing borrowers to fall back onto SOFR.

Jay’s response was that if BSBY did cease to exist (and there’s a risk it could), Bloomberg would determine the fall-back index. And if Bloomberg didn’t do that, then the Feds would determine the fallback. Jay noted that the Feds aren’t fans of BSBY.

Analyst Jay Saunders said: “If you have an option your lender is going to tell you what the index should be, or what the lender wants to use.

“To the extent that you have options, you really need to look at your plan of finance,” Jay continues. “If you are a hedging entity, SOFR is going to be a better index for you; BSBY is not.”

Jay pointed out that there isn’t any options market in BSBY. “So if you’re a floating rate borrower and you intend to buy a cap, you can’t buy a BSBY cap . . . keep that in mind, at least for the moment.”

Jay explained that pure cash borrowers not concerned about hedging need to understand the index they are offered. If you are an entity that chooses to hedge some amount of that exposure, then you really need to think about what the banks are offering you, because some of those indices may be either unhedged or are much more expensive to hedge than others.

CRE Borrowers Locking In For Six Months

Analyst Jeff Lee says that right now a lot of CRE investors are kicking the can down to Q1 of 2022 and locking in rates. This can potentially change an investor’s finance plan and because a jump in an index could make some deals go sideways. 

Jeff says Thirty Capital is talking to a lot of clients about the operational band of where things make sense now versus where they might start not to make sense, even if they go out to six months to a year. 

“I think the big thing is that the national average for multi-cap rates was down almost 50 basis points,” he noted. “So you’ve got this pocket right now of super-low cap rates.”

Jeff says commercial real estate borrowers need to try to know what their threshold is in terms of basis points and the Ten-year, vs cap rates coming back up a little bit. 

The market is seeing a lot of issues at play right now, and investors need to know where their threshold and band are, and plan for it. 

Floating rate borrowers are likely still comfortable through the end of 2022. 

Keep An Eye On The CMBS Market

Rob believes the CMBS market will be really interesting because there are a lot of securitizations getting ready to price not just single borrower CMBS, but also multi-borrower in September. 

“If they get good execution, that means that you can expect them to be fairly aggressive going forward, especially before the year-end,” observes Rob.

“We’re in the market right now for a deal and Freddy really wasn’t a player, but Fannie was. This was a multifamily deal that I own outside of Boston and Freddy wasn’t really aggressive on it. Fannie was. 

“There’s lots of sources of capital out there, but it’ll be really interesting to see if the CMBS market can go,” adds Rob. “I know that CLS are also very aggressive right now and they have a great execution on the secondary market. So it’ll be really interesting to see if CMBS can unload all these bonds. They’re on track for a record-breaking year.”

Tapering Talk Continues

In this episode, the analyst also discusses tapering, which is rumored to begin in November. 

Analyst Jason Kelley points out that tapering is on the long end of the curve. The Fed doesn’t want to make an inverted curve where short-term interest rates would be higher than long-term interest rates. They are still buying $120 billion of bonds a month now. They’re going to start really small. 

“Cutting it from $120 billion to $110 billion or $100 billion . . . if it’s more than the market thinks, then there’s going to be a reaction in the market,” explains Jason. 

“Once that long end of the curve starts going up, then they’ll start raising short-term interest rates. It’s gonna be a long process on the short end before rates rise.”

Wednesday will see GDP and PCE deflator announcements. 

Analyst Bryan Kern points out that the market has been range-bound really since the middle of July, between Fibonacci retracement levels of 50% and 61.8% which, on the Ten-year yield, would be a 1.19 and 1.32.

Changes could depend on the next round of employment numbers, but Bryan adds that a two percent by year-end is certainly doable. 

In other news, the FDA fully approved the Pfizer vaccine, and Jay notes that anything that increases vaccines and gets people back to the office is going to be good for the markets. 

Analyst Jay Saunders says the turmoil in Afghanistan could play out for some time. Analyst Jason Kelley said it’s really a watch-and-see time, noting there is an unwillingness on the part of politicians to step in and take action. 

Tapering May Come In November

Some Fed members have indicated that tapering will come in Q4, but some analysts are doubtful, saying it will happen when it happens. 

“I’ll buy that the Fed’s going to start tapering when it starts tapering, and not before,” says Jay. “They’ll find lots of excuses to keep a lot of stimulus in place.”

Jay notes that there is a lot of talk about the Fed cutting back on the issuance of Treasuries, which could play well into a tapering by the Fed.

“It will be beneficial to the market if the Treasury starts issuing a little bit less debt,” Jay concludes. 

Inflation Down Slightly, Very Low Consumer Spending

Inflation numbers are down slightly, although some prices including oil are up, while lumber is down. 

But the biggest shock came with Consumer Price Index (CPI) numbers, which are the lowest in a decade, revealing very low consumer sentiment. 

This week, retail sales figures will be released, and the team will be watching closely to see how these figures play out with low consumer sentiment, especially given that stimulus checks have played out.

Meanwhile, the Producer Price Index (PPI) was a little higher than anticipated, noted Analyst Bryan Kern.

Eviction Moratorium Extended

Evictions won’t happen in the near future, with the extension of the eviction moratorium. This will push back some of the pent-up flow of empty housing. 

The impact will, of course, be felt once the moratorium is gone.