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 and LinkedIn.

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.

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 and LinkedIn.

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.

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.

The war in Ukraine is massively impacting the capital markets, with volatility pervasive in every single corner of the financial markets.

Last Thursday, there was a seven percent swing in the NASDAQ from high to low, while oil prices moved about three percent on average every day.

Also last Thursday, the Ten-year Treasury fell 12 basis points at the open and then rose 10 basis points (bps) to finish the day nearly unchanged. Thirty Capital Analyst Bryan Kern says that across the curve rates are down about six to 12 basis points, depending on the part of the curve that you're watching.

“We've got a lot of folks in the market who are looking to buy caps and it seems like we have to update those every 20 minutes. The price has changed wildly,” explains Bryan. “We caution folks as they look to purchase interest rate caps to continually get updates . . . just be prepared for price swings.”

It’s going to be a wild week on the capital markets

Thirty Capital Analyst Jay Saunders says this week could be one of the wildest the markets have seen in a long time. Federal Reserve chairman Jerome Powell will testify before Congress on Wednesday and Thursday. Powell’s words will be watched very closely by market analysts, as they will likely be his final public comments on monetary policy ahead of the U.S. central bank raising interest rates to fight decades-high inflation.

And tomorrow - Tuesday, March 1 - President Joe Biden will give his State of the Union address. On Friday, employment numbers will be issued, along with a slew of other economic data.

Jay adds that while many seem to have forgotten about COVID, it’s still there and impacting the markets and the economy as a whole, as is, of course, Russia’s invasion of Ukraine.

What does all this mean if you’re in commercial real estate?

Bryan notes that this week has started with curve steepening slightly. The Two-year is down about 11 bps, while the Ten-year is down about eight, so it’s steepened by about three bps from Two-year to Ten-year.

SOFR swaps are a bit more dramatic, and Bryan details the numbers in this episode.

Thirty Capital CEO Rob Finlay says that for anyone in commercial real estate, longer term borrowing is going to be much more attractive.

Thirty Capital Analyst Jeff Lee gives the full picture on what’s happening with CMBS, which, he says, is extremely volatile right now. He says that current levels of volatility mean that deals that were in progress a few weeks ago are now being re-traded. Says Jay: “Some of the new deals . . . they don’t want to tell the borrower, but they’ve lined out probably 40 to 60 basis points.”

Rob points out that listeners should note how the credit markets have widened out. He asks people to look out for the amount of time between the credit markets widening out and when real estate assets trade.

“It’ll be really interesting to see how much of a lag there is in commercial real estate, relative to these credit markets,” Rob notes.

Will the war in Ukraine influence the Fed’s interest rate agenda?

Bryan still believes there will be a rate hike in March, but probably at 25 bps increase, not the 50 bps that the market has been anticipating. He adds that the Fed likely doesn’t want to add to current volatility.

Meanwhile, short term rates are starting to increase as the Fed March 25 meeting date nears. This is obviously going to affect everyone with floating rate debt.

Only time will reveal the true impact of the war in Ukraine

Thirty Capital Analyst Jason Kelley says that we need to wait to understand the true economic impact on the markets of Russia’s invasion of Ukraine. In the short term, the value of the ruble has fallen and the price of oil continues to increase. The oil factor is putting the  Fed in a tight spot because oil is a big part of the inflation factor.

Inflation has reached a 40-year high, with the Consumer Price Index posting a 7.5 per cent annual gain.

Panic and speculation impacting markets

The Two-year treasury actually jumped 21 basis points, mostly due to speculation that the Fed may actually hike by 50 basis points in March. Some are predicting even a 100-basis point increase by mid-summer.

Says Thirty Capital Analyst Bryan Kern: “We’re not really sure how it’s going to pan out, but there was a lot of panic, a lot of speculation.

“Then of course there was some news surrounding the potential invasion of Ukraine by Russia on Friday, so we saw rates kind of pull back a little bit,” he continues. “With all this volatility net net from last Monday to today, we're up about 6.5 to seven basis points.”

Thirty Capital Analyst Jeff Lee says that on the financial side Thirty Capital is seeing a 30 plus percent increase in requests to reprice or forecast deals. “Everyone’s forecast is definitely fluid and changing.”

Meanwhile, Thirty Capital Analyst Jay Saunders points out that last week Two-year SOFR swaps moved up 24 basis points alone on Thursday. “You just don’t see movement like that . . .  so the short-end of the curve is very volatile.”

Cap market struggling

Things were so crazy that at one point on Friday the cap market was completely frozen. “You simply could not buy a cap . . . there was not a dealer on the street,” says Jay.

For commercial real estate investors trying to understand what the cap lockup and freeze means, Jay explains that over the next six months or so “as we go through what I suspect will be this change in the Fed's policy, we'll start to see actual rate increases to the extent that you can get some flexibility with lenders as to when you purchase these caps.

“Anything that involves some kind of optionality, it’s going to be really, really hard to put a price on it,” he explains, adding that he can’t recall seeing a cap lock up and freeze ever before.

“It’s a very strange market,” Jay comments. “It may work itself out quickly when we start seeing some calm come back into the market, but right now it is very volatile.”

Looking at termination? Be aware of intraday volatility

Bryan warns commercial real estate investors to be wary of the volatility that can run through the market in an eight-hour period.

In this week’s episode he explains how Thirty Capital had to terminate a couple of swaps, and with one, a bank paid a premium to get out of the contract.

Be opportunistic through this volatility and inflation

Thirty Capital Analyst Jason Kelley says that inflation will continue for a while, but should peak this year. He notes that inflation is highest in the energy sector, but doesn’t think that gas prices will increase again.

Says Jason: “You're going to see big swings and it's a good time to be opportunistic and actually work with someone that's got the screens to see where the market's moving.”

The markets are seeing an incredible flattening of the yield curve right now - reflecting uncertainty beyond the upcoming Fed rate increases.

Thirty Capital Analyst Bryan Kern explains that the long end of the curve is very different from the short end, as expectations around Fed rate increases in the next two years come into play.

“Beyond rate increases there is uncertainty, so the Ten-year just sort of whipsaws based on some of the economic data we are seeing,” explains Bryan.

Will there be an inverted yield curve this year?

Bryan doubts there’ll be a completely flat yield curve in two years or so, but Thirty Capital Analyst Jay Saunders disagrees, saying he believes the yield curve will become very flat and perhaps even inverted.

“Clearly the market hasn’t bought into the argument that inflation is here to stay or you wouldn’t be under a two-percent on the Treasury,” Jay explains.

“I think The Fed will push short-term rates up, the curve will continue to flatten, and at some point will become very flat to inverted. That will be the signal for the Fed that they’ve pushed rates up as far as they can.”

Thirty Capital CEO Rob Finlay points out that there’s nothing better for people who are looking to refinance long-term debt than to have an inverted yield curve.

Long-term or short-term loans for CRE investors?

Bryan recommends longer term loans. “If we look at the absolute level of rates, they are still ridiculously low, historically speaking.

“Right now, if someone can lock in five-year debt versus ten-year debt, the difference is only 15 basis points. Why not?” asks Bryan.

Rob notes that prepayment penalties will be less, and as the curve flattens the financial impact might not be as bad if investors run the analysis. Of course, this all depends on how much and how fast the curve flattens.

Keeping an eye on SOFR and LIBOR

The upcoming week will be interesting - it’ll be the first time the market has seen term SOFR rates that are going to be resetting over a Fed meeting where there's an anticipated rate hike.

Jay says LIBOR will start to tick up ahead of anticipated Fed tightening.

The week ahead will see inflation numbers released, which were being impacted by ongoing supply chain disruptions.

A sea change in the market

Analyst Jason Kelley foresees a sea change in the market, with inflation impacting the world, not just North America. Jason anticipates that interest rates are set to increase and stay high for some time to come.

Listen to the full episode for all the analysis, news, and views!

Short-term borrowers are being hit hard by market volatility right now. 

Commercial real estate investors looking for bridge debt will find that two to three-year debt is up a lot more than long-term yields, such as seven to Ten-year stabilized.

The Ten-year is still experiencing volatility, moving within a 10-point range in the last week.

Meanwhile, borrowers who usually look for longer term deals have asked Thirty Capital how they will be affected by Fed rate hikes which are on the horizon. 

Thirty Capital anticipates that the rate increase set for March will be a half basis point, not a quarter. 

Will the Ten-year continue to be range-bound?

Going forward, the question is whether the Ten-year will be range-bound at around 1.75, or whether the yield curve will flatten. 

Thirty Capital Analyst Bryan Kern says he believes the flattening is temporary, but that things will change once the Fed finishes tapering in March. That, along with a rate hike, will lead to a combination of inflation and growth. By the second quarter of the year, the Ten-year will start to move higher. 

Exiting loans with longer maturity

Thirty Capital Analyst Jeff Lee gives a thorough analysis of what’s happening on the CMBS side. And Thirty Capital CEO Rob Finlay points out that for borrowers looking for exit loans, it’s probably time to look for exit loans with a bit longer maturity, because the long-term money is fairly cheap.

Jeff adds: “We had some deals that were closing that had a month or two left to maturity, but they needed to be opportunistic to close because it made sense just to not test the markets,” he explains. 

“On the other hand, on the CMBS and agency side, we were defeasing loans with 2028, 2029 maturities, and these things were just closed a couple of years ago. So we have a very wide range, but we're still averaging out to a 20-plus year average that we consume.”

Policy-side ‘frozen’ right now

Analyst Jason Kelley says not a lot is happening with government policy at the moment, with the focus fully on the markets and interest rates.

On the length of term of loans, Jason says: “We've been talking for six months about the pendulum of ‘Do I do short-term debt or long-term debt?’.

“If the Fed does push up short-term rates in the next three or four meetings, then to me it's a hundred percent long-term. If the curve gets flat, it's the perfect time to put on long-term debt.”

The erratic performance of the past few weeks has seen a low of 1.30 to a high of 1.90; it was sitting at 1.72 at the time of recording this episode.

“There are so many questions around what the Fed is going to do, that’s affecting the short-term to two- to five-year sector,” explains Thirty Capital Analyst Bryan Kern.

“That's obviously going to translate into some volatility in the Ten-year sector,” he continues. “We may retest the 1.61 to 1.65 levels. But, generally speaking, I think we'll see that trend continue on up towards our 2% target here in the first quarter.”

In the coming week rates will be impacted by fourth-quarter GDP, along with inflation numbers and consumer confidence stats.

Long-term rates going up, short-term rates even higher

Bryan says the market’s question has changed from “Will the Fed hike in March?” to “Will the Fed hike 50 bps in March?”.

He doesn’t think the hike will be that high, explaining: “There are some people who expect five total hikes of 125 basis points. I don't think we'll see that. I think the median is 100 bps. But having said that, I think that's going to create some volatility.

“We will see a lot of volatility in that intermediate term three to five-year sector.”

For commercial real estate investors, this means that long-term rates are going up, and short-term rates will be even higher.

Ukraine, COVID, Fed tightening all impacting markets

Analyst Jay Saunders points out that global events are heavily impacting the markets right now.

“You've got the Fed pivoting from easy money to tightening. You've got Ukraine and you've got COVID. There are so many things right now pulling the market in different directions.

“It’s really hard to know where it's going to go, but I think you will see a lot of volatility.”

Term SOFR now adopted in real estate transactions

Thirty Capital is seeing pretty wide adoption of term SOFR. Notes Jay: “In fact, I'd say in the last three weeks, now we’re into three weeks of no more LIBOR, on the real estate side, I think exclusively we've seen one-month term SOFR on all the hedging products that we’ve executed.”

Fanny and Freddy use the 30-day in advance, and it's compound average in advance. With private lenders, it’s almost all term SOFR. The only place Jay is seeing a simple average SOFR is in the direct bank lending markets. We're seeing some of that.

Jay also discusses the differential between term SOFR and 30-day forward looking.

Confusion in the market around term SOFR

Thirty Capital CEO Rob Finaly points out that there is confusion in the market around term SOFR, not to mention that the conversion of LIBOR-based loans from borrowers has yet to happen.

Rob notes that issuers on the CMBS side and the CLS side have been having trouble trying to get people to adopt to term SOFR, because there is some arbitrage between interrelated Treasuries, term SOFR, and the 30-day compounded SOFR.

This week’s tip: Pay attention to the crypto market and the theoretical wealth some people have in crypto. It’s definitely set to be more influential in the coming months.

Be sure to follow Rob on Twitter and LinkedIn!

Thirty Capital’s rate predictions for 2021 were super close, with rates going up to 1.78 on last week’s release of the December FOMC minutes.

The minutes indicate the Fed might hike rates as early as March this year once tapering is finalized. The news pushed the Ten-year Treasury up a massive 27 basis points from its closing of 1.51, currently at 1.78 – the highest level since January of 2020.

Thirty Capital Analyst Bryan Kern says: “All of our predictions for 2021 were close - we missed it by about two or three days.”

But is 1.80 now the floor, or will we see higher than that? Bryan thinks the floor is in the 1.70 range, with some movement up and down, depending on the news. Generally, he says, commercial real estate investors can expect to see rates heading higher.

Short-term rate predictions for 2022

In this episode Analyst Jay Saunders gives an in-depth explanation of what’s happening with short-term rates and the SOFR curve. Briefly, on the short-term rate front, the curve actually steepened a little bit last year. Jay explains that this will continue in 2022.

Of interest, he adds, is that on the forwards on the SOFR curve there is not a reset anywhere going out for 50 years above 2%. Analyst Jason Kelley agrees, saying that he doesn’t see short-term rates going over 2% at any time in the future.

Long-term outlook for inflation

Jay says that he and many others aren’t convinced that the economy is in a long-term inflationary environment. Despite what’s happening now - largely due to the pandemic - the long-term fundamentals aren’t going to change.

“I think that some of the inflationary pressures are starting to ease a little bit. I don’t think you’re going to continue to see it accelerate,” comments Jay.

Rate volatility a ‘big deal’

Even so, Thirty Capital CEO Rob Finlay points out that any kind of rate spikes will be tough for investors. For example, a 25-basis point increase on an investor’s borrowing will crush a deal. Rob asks his team if rates will trade within a band of around 1.70, or will there be an increase to 2.25, with rates then coming back down?

Bryan believes rates will generally be range-bound, with occasional - but not crazy - volatility week over week, and there won’t be a repeat of the market’s last two weeks.

The Fed needs to be cautious

Jason says the Fed needs to be cautious. “There are loads of articles out there calling for Fed rate increases this year, but I think the Fed is going to realize that if they crank up rates too much, they’re going to tank real estate and the stock market.

“I think they’re going to soften a bit,” Jason continues. “I wouldn’t be surprised if we get three increases in 2022, but I don’t think there’s four behind that in 2023.”

Jason reminds listeners that even when the Fed tells the market what it’s going to do, it doesn’t always end up doing it.

Complexity in the CRE market

Rob and his team discuss the current level of complexity in the CRE market. The question a lot of investors face is should they be looking at long-term fixed rates, or floating rates. This depends on an investor’s average hold period. Regardless, the numbers need analyzing because they are very important.

Listen to the episode for the full coverage of the start of the year and what the team predicts for 2022!

The markets shocked everyone last week, with rates falling instead of increasing as expected after the Fed signaled at least three interest rate hikes in 2022.

There’ll potentially be another three increases in 2022.

“The market isn’t buying that the Fed is going to be as hawkish as they think,” observes Thirty Capital CEO Rob Finlay.

Analyst Bryan Kern says that anxiety around the Omicron variant sparked panic buying, hence no increase in rates after the Fed statement.

Worries over potential shutdowns, struggling economy

Concerns about potential shutdowns are also playing a role, with people asking what the Fed will do if the economy really starts to struggle. With inflation being high, experts are wondering if the government will start piping more money back into the economy.

“There’s definitely a lot of uncertainty right now,” says Bryan.

The Fed is in a tough spot and COVID-19 has pretty well been in control of the economy for quite some time now. The Ten-year is probably looking at around a high of 1.75, with a continued flattening of the yield curve.

What’s the impact on commercial real estate investors?

For commercial real estate investors, Rob points at the craziness with SOFR, BSBY, and long-term bonds. Lots of folks are still trying to figure out where they are going, and how to structure their assets and liabilities.

Explains Analyst Jay Saunders: “There’s a tradeoff between the simplicity of a term-SOFA rate versus the liquidity in a daily, simple average.

“But certainly, from what we're hearing, most folks that had LIBOR . . . most are going to a one-month term SOFR.”

Rob expects the market to really make some wild swings because everyone is trying to figure out what to do and doesn’t want to be the first one out the gate.

“There was an article recently in Commercial Mortgage Alert, which talked about how difficult it's going to be for a lot of these short-term lenders to all come to a consensus within the next year, within a very short period of time,” he adds.

The year of the COVID trade keeps rates low

It’s been the year of the COVID trade, says Analyst Jeff Lee of 2021. “Everyone who’s kicked the can has another opportunity right now with Omicron coming back.

“If you look back at where the Ten-year was in late spring and in the summer, when Delta was popping up, rates were pretty high. And then we hung in for a little bit until we popped back up to that 1.71, 1.75. So, everyone has a second chance right now.”

Jeff notes that there are still a lot of people on the sidelines saying ‘I waited and benefited. Why not wait some more?’.

“But you can't wait forever at this point,” Jeff adds. He is still super busy with deals closing before the end of the year.

Holding off for a deal is ‘just playing with fire’

As well, a lot of commercial real estate investors are rationalizing for next year. “But the longer you wait, it's just not going to be there,” warns Jeff.

Anyone who’s holding off for a better deal is “just playing with fire”, adds Rob. “Get your deals done if you can!”

Analyst Jason Kelley gives a full update on policy and notes that President Biden’s agenda might be dead, given what happened in the Senate last week.

Listen to the full episode for all the discussion and analysis!

The Consumer Price Index (CPI) is now at 6.8% year over year, the highest it’s been since 1982, but the markets didn’t react in a way many predicted.

Thirty Capital Analyst Bryan Kern puts this down to the fact that there is so much liquidity in the market.

“The Fed currently holds $5.5 trillion in US government securities,” Bryan explains. “Once they start de-leveraging that balance sheet . . . when that actually happens, we expect the Treasury market to act in a more normal fashion.”

For commercial real estate investors, steady rates are a relief. However, they could be short-lived. Early rate hikes are on the horizon for next year, when the Fed begins to speed up its tapering, with completion anticipated in March, 2022.

This Wednesday, the Fed is expected to make an announcement on doubling the pace of tapering, signaling that it will increase interest rates.

Will there be rate volatility before the end of the year?

Bryan and Thirty Capital CEO Rob Finlay discuss what could possibly cause volatility before the end of the year. Bryan speculates not much, while Rob observes that rates appear pegged. Right now, commercial real estate borrowers are looking at around 1.35 to 1.55 on the Ten year in the final weeks of 2021.

Thirty Capital Analyst Jay Saunders says that any shocks before year-end will be shocks to the lower side. If rates do go down, it will be due to a geopolitical issue or something related to COVID.

“The only thing that will drive rates up will be if the Fed comes out more hawkish than everyone expects,” says Jay.

Global concern about inflation

Central banks around the world are all holding meetings this week to discuss interest rates in their respective countries, and there will be decisions across the globe on rates. The outcomes will definitely impact rates in the US.

Short-term rates holding steady

Short-term rates are holding steady, with LIBOR ticking up slightly. Term SOFR is at 5.3, while BSBY is at 6.3.

Three-year swaps moved up over the week by about 8 basis points. “Interestingly enough, they actually gave up some yield on Friday on the back end of those CPI numbers, which is kind of the opposite of what you would expect,” observes Jay.

Can you squeeze in a deal before year-end?

Thirty Capital Analyst Jeff Lee says his team is starting to see the stresses on the lower bound end of their rate estimates - especially for commercial real estate investors who are closing deals in early 2022.

Jeff is originating new deals for as far away as February, 2022. He says: “As time goes on, that's when you really have to start putting that band of 25, 30, 40 basis points of rate stress in your economics.”

Meanwhile, everyone who had structured deals 30, 45, 60 days ago is probably 10% to 15% better than previously.

LIBOR legislation passed in the lower house

In a major step, the US House of Representatives passed its LIBOR bill last week. This federal legislation will address old legacy contracts that don't have workable LIBOR transition language. Once the bill passes the Senate, it will allow the calculation agents or servicers to force the ARRC’s fallback provisions on any contract that doesn't have workable fallback provisions.

This week’s commercial real estate tip

A Treasury that yields 7 percent. Listen to Thirty Capital Analyst Jason Kelley for the full details!

Listen to CRE Capital Markets Report podcast show for more on:

• Rob and Jeff’s analysis on whether the CMBS market can absorb malls, office properties, given the big loans due next year
• Rob and Jay’s full discussion of the new LIBOR legislation, and SOFR vs LIBOR
• Jason’s update on policy initiatives that could impact commercial real estate, including a bill aimed at cutting down on offshore investing in US real estate.

The wild ride on the markets and economy continues, with the Treasury dropping 16 basis points and the Ten-year falling 32 bps from Nov. 23.

This volatility is expected to continue into the foreseeable future, and nothing seems to be slowing it down. 

Thirty Capital CEO Rob Finlay points out the diverse forces tearing at the economy - Omicron and inflation, noting this makes it especially tough for policy makers. “High inflation and some really crazy rates” could happen, points out Rob, comparing it to Paul Volcker’s time as Chair of The Fed in the late 1970s.

Very real expectation of quick taper and rate increases

With a very real expectation of a quick taper and quick rate increases, three-year shorter term swaps moved up last week, contrary to long-term rates. The yield curve is flattening. 

Senior Analyst Jay Saunders observes: “Interestingly enough, the Fed Fund futures don't show a tremendous increase or pull forward in the Fed movement. The first Fed rate hike is being priced in around June of 2022. The December Futures show two plus rate hikes in 2022. So it hasn’t changed a ton.”

But will rates increase?

However, Jay believes that rates may not necessarily increase. He says that the market always acts aggressively when there is a hint of an increase, with something coming along to keep rates down. Most recently, this has been the Omicron variant. The market has its own way of demanding policy changes, which of course don’t always happen.

How flattening of the curve affects CRE borrowers

For some commercial real estate borrowers, there could be tough questions ahead. Should you borrow short-term or long-term. And how does a flatter curve impact you?

Explains Jay: “Long-term rates are coming down, short-term rates will come up. The economics of floating rate transactions, particularly if you're hedging buying a cap or something of that nature - which has gotten significantly more expensive - the economics might not look as good as the longer-term CMBS-type structure.”

CRE borrowers ‘stomaching’ a longer term to maturity

For 2021 to-date, with a CMBS product, Senior Analyst Jeff Lee has looked at average coupons of 4.75 with a weighted average maturity of roughly May or June of 2024. For Freddie Mac, we're looking at 4.04 coupons, and a little bit shorter term to maturity at March of 24.

Jeff says that the interesting thing is that looking back through October to November, Thirty Capital has pushed out some of those terms because people are trying to be more opportunistic. He has seen those terms bump out over the last couple of months, with a CMBS average coupon of 4.65.

He says: “We're down 10 bps, but we're pushing the maturity range out to six or seven months. So people are stomaching a longer term to maturity. But they're offsetting that with some lower coupons. So you're probably averaging out to a 10, 12, or 15 percent exit cost.”

Listen to all the details, including market analysis and economic updates on this week’s episode. And follow Rob on Twitter for regular news and insights.

Next year is set to be “ugly” when it comes to rates, predicts Thirty Capital Senior Analyst Bryan Kern.

Supply chain issues are pushing inflation higher, and rates will increase significantly by February, says Bryan.

The markets are set for a very rough ride, as experts wonder if the new Omicron variant will lead to yet another shut-down.

This week’s employment numbers and the next round of inflation numbers are guaranteed to rattle the markets before Christmas.

Treasury’s “crazy” moments

Thirty Capital CEO Rob Finlay describes the Treasury’s “crazy moment” right before Thanksgiving. Earlier, President Joe Biden re-appointed Jerome Powell as Fed Chair, and the economy posted relatively strong data.

However, all this was wiped out with bad news that Omicron is classed as a COVID variant of concern - and is spreading. The Treasury reacted with a drop of 16 bps, and the week finished at about 1.48.

By Monday morning things were starting to normalize, with a return to around 1.56.

Now could be an expensive time to be underwriting deals!

The Thirty Capital team still predicts a 20-point range for the Treasury, between 1.50 and 1.70 up until the end of 2021.

Some market analysts even predict a low of 1.30. Regardless, Rob points out that commercial real estate professionals have about a 20 basis point swing either way - making it an expensive time to be underwriting deals.

Confusion and questions as LIBOR nears end

Senior Analyst Jay Saunders notes a slight increase in short-term rates as LIBOR nears its end. One-month LIBOR hit 10 basis points. BSBY is up a touch at 6.5. One-month term SOFR is at about 5.2.

The caps market is volatile, notes Jay, who gives a full review of all short-term rates in the episode.

The end of LIBOR - set for Dec. 31 - is bringing up a lot of questions from Thirty Capital clients, with commercial real estate investors wondering what their index will be a year from now. If you have questions, contact the team soon.

Who will lead the next generation index? BSBY? SOFR?

A listener asks which index is evolving in the next generation index. Jay says it’s definitely going to be SOFR. Even so, BSBY hasn’t gone away, but uptake is slowing.

Fall in consumer confidence set to impact rates

Consumer confidence is taking a hit, says Senior Analyst Jason Kelley. President Biden’s approval ratings are falling. And while this hasn’t fed directly into rates yet, there’s a very real chance it will soon.

Adding to market volatility is a big week on The Hill, with heated debate and questions hanging over what actually gets done by the end of the year.

The Thirty Capital Team explores the impact of volatility on year-end deals, and how the team is working to support borrowers right now.

Listen to the full episode for all commercial real estate investment and economic news.

And follow Rob on Twitter for daily updates!

Volatility at the short-end of the market will continue to cause concern for commercial real estate investors, says Thirty Capital CEO Rob Finlay. 

“When you think about doing deals at 20 bips on the Ten-year, and with the volatility within the five-year as well . . . the volatility at the shorter end the mid-term makes it very difficult,” observes Rob. “There's not a lot of margin for error on underwriting deals these days when you have such volatility.”

The capital markets and the government have opposing views on rates, with the markets adding pressure for rate increases to contain inflation, while the government appears not to want to act. 

“Who wins here?” asks Rob.

CRE subject to volatility for some time to come

Analyst Jay Saunders explains that: “If you look at Fed Fund futures they're significantly higher than the dot plots. At some point those are going to come together, you would assume.

“And that's when you'll probably start to see a little bit less volatility . . . When the market acquiesces towards an estimate of these are these rate moves,” Jay explains. “But right now, it's really hard to know what's going to drive that, and what's going to get some of this volatility out.”

In fact, it’s likely that when the Fed does eventually act, there will be even more volatility. 

Thirty Capital is focusing on staying on top of all client transactions it has in the market; it is keeping abreast of rate movement because obviously pricing is changing. 

Jerome Powell reappointed as Fed Chair

President Joe Biden announced on Monday that he will nominate Jerome Powell to serve as the chairman of the Federal Reserve for a second term. 

In response to the announcement, three swap rates were up about seven basis points already today. This puts the third recurrent three-year swap at a 1.14, which is a, a 52-week high.

On this month’s market volatility, Rob observes: “In November alone, we've had probably 20 basis points between the high and the low. People are convinced that we're not going to hit the two percent we have been talking about,” says Rob. 

He says there is a potential of rates as high as 1.77 and as low as 1.40. The Thirty Capital team believes that this will be the range for rates in the coming few months. 

Rates will eventually increase

Jay says that over time rates will go up. He notes that some people think that rates should go up quickly, while others say that they should stay lower for longer. Eventually, rates will increase, and economic and capital markets news will continue to cause volatility. 

Ten-year swap rates actually came down a couple of basis points last week, about two and a half basis points lower at a 1 59 - so about five basis points continued flattening the front-end of the curve.

Listen to the full episode for all the news and analysis. Send any questions you have to Rob, and follow Rob on Twitter!

Rising energy prices are pushing inflation up, with some economists predicting it could reach eight percent by December this year.

The Consumer Price Index (CPI) is at 6.2 percent year over year. The last time it was this high was in 1990. The CPI could hit a 40-year high in the coming months.

The Ten-year fell below 1.51 for a couple of days recently. Analyst Bryan Kern thinks it could go as high as 1.74 or even into the 1.80s by the end of the year. 

Expect huge volatility

Thirty Capital CEO Rob Finlay says that commercial real estate investors and borrowers can expect huge volatility in coming weeks and months. 

“We’re talking 25 to 35 basis points movement. Those are big movements off our 1.54,” he says.

Rob alludes to the Fed’s difficult position, noting that tapering is limited and that they can’t do more about inflation because that will stop the economic recovery. 

 Just to illustrate the growth in inflation, Analyst Jeff Lee points out that the Treasury’s 30-year savings bond was at 3.56 on the reset in May, and is now at 7.12 - a doubling, showing how inflation is ballooning.

LIBOR date reminders!

Short-term rates haven’t changed much since last week. Analyst Jay Saunders gives a full overview of LIBOR, SOFR, and BSBY rates. 

He also gives an overview of major economic and Fed news, and a reminder of the dates of the cessation of LIBOR. If you’re in commercial real estate and wondering how to handle the end of LIBOR, Jay has the answers. 

Listen to the full discussion of the capital markets, and all the news and analysis. You can follow Rob on Twitter!

Employment ‘stuck in a rut’

Bryan recalls that the focus at the start of the year was on employment. 

“I think we’re just stuck in a rut'' on employment, he says, noting that employment numbers will continue to have an impact, but Bryan doesn’t think employment numbers will shift significantly.

“If anything, the big numbers will be in the inflation arena,” he adds.

The Five-year has gone up, flattening out the curve somewhat. 

In-depth episode:

Thirty Capital CEO Rob Finlay was asked by a listener for the team’s assessment of inflation, and how much of a concern it will be in coming months.

Analyst Jeff Lee notes that the answer listeners are looking for will have many variables, and depend on “where you are in your commercial real estate project or loan life cycle.

“Truthfully, if we had a crystal ball and knew exactly, I don't think any of us would be on this call . . . we might be on CNBC making some bigger, bolder predictions!”

“It’s a very important question and there’s a big question mark over it,” he adds.

Analyst Jay Saunders points out that Jerome Powell, Chair of The Federal Reserve, has been less dovish about inflation. However, more recently, Powell seems to be leaning towards inflation being transitory.

Despite the concerns about inflation, the market is seeing ten-year swap rates and ten-year treasuries for 1.5 percent. 

“Clearly there is a disconnect between anticipated inflation and interest rates. If you’re a borrower and have concerns about inflation you sit on the opposite side of the table from investors. If you really have inflation concerns, you would want to be a fixed rate-borrower,” says Jay.

He reiterates Rob’s position - which is that a borrower should lock up a loan for low and long, and ride out that wave of inflation. If you’re an investor and you're concerned about inflation, you want to loan out on a floating rate basis.

Inflation may continue for a while

Meanwhile, Analyst Jason Kelley says that he thinks inflation is going to continue on for a while. He notes that the Fed is in a difficult position when it comes to inflation.

“Their mandate is to keep inflation inflation down, but to keep the economy on a good path. So If they start raising rates too much, they'll crash the economy, but if they don't raise rates enough, inflation is going to keep going rampant. It’ll be very interesting to see where things go in 2022.”

Bank of England holds rates at record low

Commercial real estate borrowers will be happy to hear that despite the Fed announcement of tapering of $15 billion a month, rates did not go up last week. They fell across the curve.

Jay says a Bank of England announcement last week may have influenced rates in the U.S. On Thursday, the Bank of England said that it would not increase short-term rates, contrary to expectations. And that really started a fall in rates in the U.S.

The Ten-year swap rates closed the week at 1.48, down nine basis points on the previous week. So there’s a bit of a steepening of the curve. Jay also presents LIBOR, BSBY, and term SOFR rates during his segment of the podcast episode.

Rates to increase at a very slow rate?

Jay also explores current economic circumstances and explores whether the market may be entering a period of very slow rate increases, as happened back in 2015.

“The market is taking a more dovish approach to rates; we saw it in the drop across the curve last week,” adds Jay. 

Swap rates reached a one-year high last week after starting to come down towards the end of last week.

Economic data was fairly positive last week, with higher-than-expected jobs numbers.

Jay says when you dig into those numbers, there was actually a decline in governmental jobs, which makes the increase in private payroll even more impressive.

Expect choppiness and volatility

Jeff agrees with Jay, adding that commercial real estate borrowers can still expect some volatility in the markets in the coming year.

Jay says that Thirty Capital is seeing tremendous volume in the short-term hedging interest rate caps, driven by some CLO products. He adds that a lot of commercial real estate borrowers are trying to get a product originated this year before LIBOR goes away - giving about two or three more weeks to really get the process started.

CRE investors holding off as long as they can

Jeff says the Thirty Capital office is super busy with calls for year-end and month-end closings. He says the pull back in rates means that some borrowers can take a deep breath and take advantage of an opportunity to lock and proceed.

If you have questions about borrowing or investing, send them to us! We’ll be happy to answer them on an upcoming episode of the podcast!

Snapshot report

Bank of England holds rates at record low

Commercial real estate borrowers will be happy to hear that despite the Fed announcement of tapering of $15 billion a month, rates did not go up last week. They fell across the curve.

Jay says a Bank of England announcement last week may have influenced rates in the U.S. On Thursday, the Bank of England said that it would not increase short-term rates, contrary to expectations. And that really started a fall in rates in the U.S.

The Ten-year swap rates closed the week at 1.48, down nine basis points on the previous week. So there’s a bit of a steepening of the curve. Jay also presents LIBOR, BSBY, and term SOFR rates during his segment of the podcast episode.

Rates to increase at a very slow rate?

Jay also explores current economic circumstances and explores whether the market may be entering a period of very slow rate increases, as happened back in 2015.

“The market is taking a more dovish approach to rates; we saw it in the drop across the curve last week,” adds Jay. 

Swap rates reached a one-year high last week after starting to come down towards the end of last week.

Economic data was fairly positive last week, with higher-than-expected jobs numbers.

Jay says when you dig into those numbers, there was actually a decline in governmental jobs, which makes the increase in private payroll even more impressive.

Expect choppiness and volatility

Jeff agrees with Jay, adding that commercial real estate borrowers can still expect some volatility in the markets in the coming year.

Jay says that Thirty Capital is seeing tremendous volume in the short-term hedging interest rate caps, driven by some CLO products. He adds that a lot of commercial real estate borrowers are trying to get a product originated this year before LIBOR goes away - giving about two or three more weeks to really get the process started.

CRE investors holding off as long as they can

Jeff says the Thirty Capital office is super busy with calls for year-end and month-end closings. He says the pull back in rates means that some borrowers can take a deep breath and take advantage of an opportunity to lock and proceed.

If you have questions about borrowing or investing, send them to us! We’ll be happy to answer them on an upcoming episode of the podcast!

There’s no let down to rate volatility, with the financial markets anticipating the Fed meeting on Wednesday. That day, it is set to announce the timing and pacing of tapering.

An employment report is due on Friday this week, which will likely reveal disappointing numbers. All this means that the Ten-year is expected to be range-bound 1.51 and 1.74 until the end of the year.

The one-month LIBOR still sits at 8 basis points, BSBY is at 6.5, while a one-month term SOFR is at about 4.5 basis points. 

However, Analyst Jay Saunders notes the slight fall in inflation in the U.S. means the Fed may just talk about tapering instead of implementing, while continuing to monitor economic indicators. 

Rate volatility for the Ten-year

Jay discusses in detail what is available from commercial real estate borrowers, noting that three-year treasuries traded in a range of about 11 basis points last week, in what was a very volatile week. Jay notes that as rates increase the economy is beginning to slow. 

Jay predicts: “We're going to continue to see that as people grapple with the timing of the fed taper, which has now been pulled forward to June of next year.”

CRE borrowers desperate to close deals

Within Thirty Capital, Analyst Jeff Lee says he’s seeing “Continued craziness. We’re still getting emails over the weekend saying: ‘Hey, got clients, can you help them with a year-end deal?’.

“We're kind of falling within the final week or so to even have a shot (at finalizing a deal). But I think a lot of these transactions on the other side of the defeasance might be hindered by third-party reports and appraisals, and all the things that probably aren't going to get done in time.”

Thirty Capital CEO Rob Finlay says that right now the company is seeing a lot of refinancing instead of selling, and an approximately 40 percent refinance rate in the last week alone.

Rate hikes coming sooner than expected

In the in-depth portion of the roundtable podcast, Rob Jay and Analyst Bryan Kern discuss the fact that the Fed is now highly likely to increase interest rates soon - probably in June 2022.

“The thought is that once tapering is done, we immediately get a rate increase,” explains Bryan. 

Stay away from locking in deals in the coming week?

Rob asks that given all the announcements that are due in the coming weeks, should commercial real estate borrowers hold off on locking at the moment? Should they be wary of large ranges and volatility?

Jay says: “I’m not sure the market is going to go crazy. This is the most anticipated announcement from the Fed ever. But I think it’s mostly priced in. I’d be surprised if you see a tremendous amount of volatility after this announcement.”

Bryan’s view is that the market won’t see the 2012 taper tantrum, but the rates may move slightly with some volatility. He predicts 1.75 by the end of the year and says this will be the peak on the Ten-year.

Listen to the full episode with predictions, analysis and more!

Snap-shot report: There’s no let down to rate volatility, with the financial markets anticipating the Fed meeting on Wednesday. That day, it is set to announce the timing and pacing of tapering.

An employment report is due on Friday this week, which will likely reveal disappointing numbers. All this means that the Ten-year is expected to be range-bound 1.51 and 1.74 until the end of the year.

The one-month LIBOR still sits at 8 basis points, BSBY is at 6.5, while a one-month term SOFR is at about 4.5 basis points. 

However, Analyst Jay Saunders notes the slight fall in inflation in the U.S. means the Fed may just talk about tapering instead of implementing, while continuing to monitor economic indicators. 

Rate volatility for the Ten-year

Jay discusses in detail what is available from commercial real estate borrowers, noting that three-year treasuries traded in a range of about 11 basis points last week, in what was a very volatile week. Jay notes that as rates increase the economy is beginning to slow. 

Jay predicts: “We're going to continue to see that as people grapple with the timing of the fed taper, which has now been pulled forward to June of next year.”

In-depth episode: Commercial real estate (CRE) borrowers are taking advantage of an apparent window of opportunity before rates start to increase significantly.

However, if you haven’t started working on a deal and want to close before year-end, it’s definitely going to be a challenge.

Market volatility has brought an abrupt end to a long summer season of tire kicking just to see what deals are out there, and suddenly CRE borrowers now want to lock in deals.

Says Thirty Capital Analyst Jeff Lee: “I don't think anyone's going to really, truly turn one down if it's a good deal. If you can get all your third-parties and everything done.

“But it's hard to just flip a switch right now and just say, ‘Let’s get this done by the end of the year’,” he adds. “It’s definitely going to be an uphill climb.”

The frenzied activity is being driven by rate increases as tapering nears. Short-term rates started a rapid move upwards on Oct. 15. So the CRE world is busy with a high number of contracts being signed.

Analyst Jay Saunders says market volatility will continue as tapering draws near. The Ten-year was up to about 1.70 last week, before dropping a bit. Tapering is expected to be sooner rather than later, but it’s not likely to be an aggressive taper as was first predicted.

With the next Fed meeting set for next week, it’s expected that tapering will be formalized, beginning with bonds first.

Tapering should be complete in around six months, with one rate increase forecast for 2022, and then two in 2023.

Jay notes that the one-month LIBOR is still pretty consistent, just shy of nine bps. One-month BSBY is just shy of six bps.

SOFR, which is probably where the lion’s share of LIBOR-based contracts are going, dropped a bit and is back to three bps. Accordingly, one-month SOFR has dropped to 4.3 basis points.

If you are borrowing variable rate short-term products, and are looking to hedge via a cap or potentially a swap, stay on top of those rates. Cap prices in the three-year range have almost doubled in the past couple of weeks.

With policy making, Analyst Jason Kelley says with the current House and Senate, there’s no negotiating - it’s all what can get pushed through at the last minute.

Within the industry, Jeff says market volatility means their processing pipeline is as full as it ever has been.

“The whole industry, from our processing side, is backed up. We've got these lenders and all their third parties with their attorneys really assigning pecking orders for how and when to kick deals off because everyone's pipeline is just maxed out.

“And I think everyone has staffing and pipeline flow management issues,” said Jeff, adding that this extremely busy period is set to stay for a while.

Snapshot report: Thirty Capital Analyst Jay Saunders says market volatility will continue as tapering draws near. T

The Ten-year was up to about 1.70 last week, before dropping a bit. Tapering is expected to be sooner rather than later, but it’s not likely to be an aggressive taper as was first predicted. 

With the next Fed meeting set for next week, it’s expected that tapering will be formalized, beginning with bonds first. 

Tapering should be complete in around six months, with one rate increase forecast for 2022, and then two in 2023.

Jay notes that the one-month LIBOR is still pretty consistent, just shy of nine bps. One-month BSBY is just shy of six bps. 

SOFR, which is probably where the lion’s share of LIBOR-based contracts are going, dropped a bit and is back to three bps. Accordingly, one-month SOFR has dropped to 4.3 basis points.

Cap prices are increasing

If you are borrowing variable rate short-term products, and are looking to hedge via a cap or potentially a swap, stay on top of those rates. Cap prices in the three-year range have almost doubled in the past couple of weeks. 

With policy making, Analyst Jason Kelley says with the current House and Senate, there’s no negotiating - it’s all what can get pushed through at the last minute. 

Processing pipeline is full

Within the industry, Jeff says market volatility means their processing pipeline is as full as it ever has been.

“The whole industry, from our processing side, is backed up. We've got these lenders and all their third parties with their attorneys really assigning pecking orders for how and when to kick deals off because everyone's pipeline is just maxed out.

“And I think everyone has staffing and pipeline flow management issues,” said Jeff, adding that this extremely busy period is set to stay for a while.

In-depth report

As inflation increases and the economy seems more uncertain, many commercial real estate borrowers are asking themselves if they are optimized to weather whatever lies ahead.

Some borrowers are wondering if they should wait until their prepayment penalty gets lower to refinance, but Thirty Capital CEO Rob Finlay points out that they will lose out in the long-term.

“I understand this short-term psyche of having a lower prepayment penalty or a defeasance cost, whatever it may be. But you're losing that in the long-term because you're replacing a shorter-term instrument,” explains Rob. “Just getting people to understand that math is so critical. This is a purely mathematical equation.“

Rob says it’s hard to believe that rates will remain where they are.

“Just look at the numbers . . . look at the technicals, the fundamentals, you’d be hard pressed to think that rates are going to stay here, but crazier things have happened.”

However, Rob notes that there is always an excuse around rates. “It's either a hurricane that's causing this problem or COVID, or the debt ceiling,” he says. “But I think the natural inclination of the economy and where we're heading is going to result in higher rates.”

Treasury rates increasing

Stronger-than-anticipated retail sales boosted the Ten-year Treasury up 11 basis points to 1.6 percent.

Term SOFR is still trading slightly higher than five basis points, while BSBY is at six, and one-month LIBOR at 8.5.

Two-year government Treasuries have moved up 22 basis points in the last month, and increases will be frequent as tapering and interest rate increases become more likely around the end of 2022.

Our Capital Markets Report gives a full review of what’s happening as rates increase, flattening out the short end of the curve.

Across spreads, volume at Thirty Capital continues to be very strong and the market is aggressive. As rates increase, exit costs decrease slightly.

On the policy front, the debt ceiling bill passed last Thursday, but when it comes to tax policy, a lot of it is in limbo.

Rent inflation not sustainable

Thirty Capital CEO Rob Finlay commented on rent inflation, which is the highest it’s been in a long while. Rob says there’s no way the economy can support a 20 or 30 percent increase in rents, as it’s just not accessible for renters.

Meanwhile, home start stats will come out this week. Currently, home builders cannot keep up with demand as they just don’t have the supplies or the labor.

However, Rob and his team recognize that inflation isn’t transitory, so this is creating a push-pull scenario, with commercial real estate professionals wondering if a recession is coming, or when the Fed will raise rates.

The analysts also explore what’s happening with the end of LIBOR and how things might play out. Surprisingly, a lot of deals are still being created in LIBOR, and the team discusses examples and what will happen when LIBOR ends.

Listen to the in-depth version of the show for all the discussion and analysis! And follow Rob on Twitter and Medium.

Snapshot report

Stronger-than-anticipated retail sales boosted the Ten-year Treasury up 11 basis points to 1.6 percent.

Term SOFR is still trading slightly higher than five basis points, while BSBY is at six, and one-month LIBOR at 8.5.

Two-year government Treasuries have moved up 22 basis points in the last month, and increases will be frequent as tapering and interest rate increases become more likely around the end of 2022.

Our Capital Markets Report gives a full review of what’s happening as rates increase, flattening out the short end of the curve.

Across spreads, volume at Thirty Capital continues to be very strong and the market is aggressive. As rates increase, exit costs decrease slightly.

On the policy front, the debt ceiling bill passed last Thursday, but when it comes to tax policy, a lot of it is in limbo.

Rent inflation not sustainable

Thirty Capital CEO Rob Finlay commented on rent inflation, which is the highest it’s been in a long while. Rob says there’s no way the economy can support a 20 or 30 percent increase in rents, as it’s just not accessible for renters.

Meanwhile, home start stats will come out this week. Currently, home builders cannot keep up with demand as they just don’t have the supplies or the labor.

However, Rob and his team recognize that inflation isn’t transitory, so this is creating a push-pull scenario, with commercial real estate professionals wondering if a recession is coming, or when the Fed will raise rates.

The analysts also explore what’s happening with the end of LIBOR and how things might play out. Surprisingly, a lot of deals are still being created in LIBOR, and the team discusses examples and what will happen when LIBOR ends.

Listen to the in-depth version of the show for all the discussion and analysis! And follow Rob on Twitter and Medium

In-depth report

The Ten-year rose 15 basis points last week, in a time when pricing pressure is driving yields up, and the world sees increases in oil prices and other products.

“We’re probably pushing against a bit of resistance in yields on Treasuries,” explains Thirty Capital Analyst Jay Saunders, who added he’s still dovish on rates.

The next rate increase is now expected in 2023, and Jay says rates aren’t likely to increase until employment numbers improve.

Inflation, jobs, impacting rates

“It’s really hard to get a grip on what’s going on with the job market,” says Jay. “The jobs market isn’t growing as quickly as people thought, and that’s going to keep the Fed sidelined for longer than people anticipated.”

Thirty Capital CEO Rob Finlay says he thinks 1.60 could now be the floor and the rates band will likely be between 1.55 and 1.70.

For borrowers, the window is starting to close

Thirty Capital Analyst Jeff Lee notes that borrowers have only had a few weeks of higher rates, so it’s too early to note the impact.

“But there is talk of maybe a little softening here from CMBS appetite. But they just released year-to-date numbers for all those securitization products and we're up 65% from last year, year-on-year,” he says.

He estimates that borrowers have until sometime next year to optimize deals.

However, Rob says that for borrowers, the window is starting to close. Rates are “in a band where they are going to stay.”

Market in transition phase

Analyst Jason Kelley notes that the Government's still fighting over the debt ceiling, which leaves a lot of uncertainty. He says the market's starting to transition from growth to value.

The market is in a transition phase, which means it’s impossible to predict, and no one knows how long it will be, says Jason.

COVID brings uncertainty to commercial real estate’s office sector

The office sector is the one everyone is struggling with, because a huge swath of employees have not returned to the office.

“Even here at Thirty Capital, our hiring practices have changed. We’re not just hiring locally, but across the country,” says Rob. “Office is the one that’s become really hard to underwrite.”

Analyst Jeff Lee agrees, although he does note that it can depend very much on location.

Rob believes that the volatile markets will cause some real struggles for investors. For deals that are priced low, a Treasury rate increase could have an nasty impact.

This week’s episode explores SOFR and BSBY deals, the current capital markets, upcoming numbers due next week, and what’s happening with deals right now.

Snapshot report

The Ten-year rose 15 basis points last week, in a time when pricing pressure is driving yields up, and the world sees increases in oil prices and other products.

“We’re probably pushing against a bit of resistance in yields on Treasuries,” explains Thirty Capital Analyst Jay Saunders, who added he’s still dovish on rates.

The next rate increase is now expected in 2023, and Jay says rates aren’t likely to increase until employment numbers improve.

Inflation, jobs, impacting rates

“It’s really hard to get a grip on what’s going on with the job market,” says Jay. “The jobs market isn’t growing as quickly as people thought, and that’s going to keep the Fed sidelined for longer than people anticipated.”

Thirty Capital CEO Rob Finlay says he thinks 1.60 could now be the floor and the rates band will likely be between 1.55 and 1.70.

For borrowers, the window is starting to close

Thirty Capital Analyst Jeff Lee notes that borrowers have only had a few weeks of higher rates, so it’s too early to note the impact.

“But there is talk of maybe a little softening here from CMBS appetite. But they just released year-to-date numbers for all those securitization products and we're up 65% from last year, year-on-year,” he says.

He estimates that borrowers have until sometime next year to optimize deals.

However, Rob says that for borrowers, the window is starting to close. Rates are “in a band where they are going to stay.”

In-depth report

Jobs, tapering driving markets and rates

Jobs and tapering are the key elements driving the markets right now.

All eyes will be on Friday’s employment report, which will definitely impact the markets. If employment numbers are strong, this will lead to higher Treasury numbers.

There’s been some volatility in the Treasury market. The last two weeks trading range has been from a low of 1.3 percent, to about 1.54, so up almost 25 basis points. 

“I expect to see a slow upward trend,” observes Thirty Capital Analyst Bryan Kern. “I’m expecting the range to be around 1.60 or maybe even as high as 1.65 for the next two weeks.”

Bryan reminds listeners that tapering is expected to begin next month.  

On the one-month BSBY and one-month term SOFR, both are trading at around six basis points. One-month LIBOR continues to trade a couple of basis points higher, close to eight basis points.

Analyst Jay Saunders says rates will likely remain where they are until the Fed is through with its tapering. He notes that a single Fed rate increase is predicted for next year, 2022, with two increases anticipated for 2023.

Jay says even with inflation, the short end of the curve is not moving upwards at all. He advises that if borrowers have caps or shorter-term hedges, watch them very closely.

The CMBS-CLO market is as hot as ever, Analyst Jeff Lee reports. 

“We are in that 45 to 60-day window now, before year end, when a securitization starts” he explains, adding that good pricing is available.

“A lot of lenders I've spoken with say even though there's maybe 30 CMBS players right now in the industry, it feels just like five or six years ago, when we had, what, 50, 55, 60 super competitive players.”

Analyst Jason Kelley notes that President Joe Biden has signed a temporary stop-gap bill for the debt limit, which buys them another nine weeks. 

What happens to your loan when LIBOR goes away?

Listeners have been contacting Thirty Capital CEO Rob Finlay with questions about how to handle loans now that LIBOR is going away. 

“This is the first time borrowers have had to really think about what their index is, since the late 90s and early 2000s,” explains Rob. 

Rob says that some borrowers say lenders have communicated with them, indicating that their loans will automatically convert to SOFR. 

What the borrowers want to know is should they actively push for SOFR now as their index, given that SOFR rates are lower than LIBOR?

Can I go to SOFR right now?

Rob points out that borrowers are being told by lenders which replacement index they will be moved to when coming off LIBOR. 

However, Jay says his understanding is that lenders can’t go from LIBOR to SOFR. They will go from LIBOR to SOFR, plus a spread. 

Says Jay: “If a borrower has a loan that goes from LIBOR to SOFR then you’ve got yourself a good deal, because SOFR will always yield lower than LIBOR.”

Jay adds that the ARRC recommends spread adjustment in the transition from LIBOR to SOFR. All language the analysts have seen to-date indicates a spread adjustment is recommended.

On the technicalities, Jay explains that banks are still originating loans in LIBOR, which is surprising given that LIBOR ends Dec. 31, 2021. 

For borrowers who have a line of credit in LIBOR, you can still draw on that credit. But new loans cannot originate based on LIBOR. 

Even so, LIBOR will continue to be quoted by the banks that quote it from now until June 30, 2023. This gives borrowers a window to transfer loans.

Jay stresses borrowers must know what their fallback is. When LIBOR goes away, what do you go to? You should know your LIBOR fallback right now, or very soon!

Rob and Jay explore this issue in our in-depth episode. Listen to the full episode for the full analysis and more!

Snapshot report

Jobs and tapering are the key elements driving the markets right now.

All eyes will be on Friday’s employment report, which will definitely impact the markets. If employment numbers are strong, this will lead to higher Treasury numbers.

There’s been some volatility in the Treasury market. The last two weeks trading range has been from a low of 1.3 percent, to about 1.54, so up almost 25 basis points. 

“I expect to see a slow upward trend,” observes Thirty Capital Analyst Bryan Kern. “I’m expecting the range to be around 1.60 or maybe even as high as 1.65 for the next two weeks.”

Bryan reminds listeners that tapering is expected to begin next month.  

On the one-month BSBY and one-month term SOFR, both are trading at around six basis points. One-month LIBOR continues to trade a couple of basis points higher, close to eight basis points.

Analyst Jay Saunders says rates will likely remain where they are until the Fed is through with its tapering. He notes that a single Fed rate increase is predicted for next year, 2022, with two increases anticipated for 2023.

Jay says even with inflation, the short end of the curve is not moving upwards at all. He advises that if borrowers have caps or shorter-term hedges, watch them very closely.

The CMBS-CLO market is as hot as ever, Analyst Jeff Lee reports. 

“We are in that 45 to 60-day window now, before year end, when a securitization starts” he explains, adding that good pricing is available.

“A lot of lenders I've spoken with say even though there's maybe 30 CMBS players right now in the industry, it feels just like five or six years ago, when we had, what, 50, 55, 60 super competitive players.”

Analyst Jason Kelley notes that President Joe Biden has signed a temporary stop-gap bill for the debt limit, which buys them another nine weeks. 

In-depth report: The Ten-year is at around 1.50 as of this morning. But what will it be by the end of the year?

Analyst Bryan Kern predicts 1.75. “We're 25 basis points away. I think we'll see a lot of volatility, but I don’t think it's going to be a runaway train as I did a bit earlier in the year.

“We finally got the word taper out of the Fed's mouth and, and it did have an impact, but I think we're going to be range-bound for a little bit. We’ll definitely see some volatility before year-end.”

For clients looking to exit in the next six to nine months, Analyst Jay Saunders said it’s difficult to predict how things will look in spring 2022.

However, he does think it will be a low-rate environment until this time next year. He adds that when rates do move, it’s often too late for investors to start the exit process.

Jay looked back at the last Fed tightening cycle in around 2016, the markets didn’t see long-term rates run up in advance of the increase in short-term rates.

“The Fed went through the same process. Then they tapered on their asset purchases prior to raising rates,” he explains.

“We saw long-term rates trend down. They didn't really start to move up quickly until the Fed started raising rates.

“So, depending on what your timeframe is, if you believe the Fed will start to increase full term rates late in 2022, that's probably when you start to see acceleration in long-term rates. Until that time, I'm not sure you're going to see it, but it's a different market, right?”

The team also analyses cap products, the curve shape, who will step into the Fed’s shoes when they stop buying, the debt ceiling issues, and how unfulfilled jobs may impact the holiday season at the end of year.

Snapshot report:

The Fed has finally mentioned tapering, so it looks as though it will begin by year-end.

In the last week, from Sept. 20 to today, Sept. 27, rates are up about 20 basis points.

Rates this week will likely be volatile, says Analyst Bryan Kern, because key figures will be released, starting with consumer confidence numbers tomorrow, Sept. 28. GDP and core PCE are released on Thursday, and then PCE deflator on Friday.

Analyst Jay Saunders says the anticipated increase in short-term rates has moved forward a bit. He discusses expected rate increases going forward. Jay also presents current rates, including the one-month LIBOR, SOFR and BSBY rates.

Currently BSBY is trading at a lower rate that SOFR, and Jay says he’s not sure what’s driving that.

For Analyst Jeff Lee in defeasance, there’s a lot of end-of-month activity as his team prepares for the fourth quarter. Next week Jeff will have August data for his industry sector.

The debt ceiling is still looming, notes Analyst Jason Kelley. Experts are looking to see its effect on the overall market if terms aren’t agreed upon.

In-depth 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 the commercial real estate investors and the larger economy.

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 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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CRE Capital Markets Snapshot Report

Ten-year Treasury: Range-bound last week 1.28 - 1.38. Will likely continue this way until news on tapering begins. Also, a dozen central banks are meeting this week.

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 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. 

For commercial real estate (CRE) investors looking to lock in rates, the time is now.

Thirty Capital Analyst Bryan Kern foresees the market being range-bound for up to the next four weeks—at least until the Feds start tapering.

“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 Thirty Capital CEO Rob Finlay 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.

Bryan 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.”

Rob 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.

Listen to the full episode for all the detailed discussion.

The market is sentiment-based right now, and that means that it’s difficult to predict what might happen in the coming weeks and months.

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, and overall market activity. 

Predicting the Ten-year

Since the start of CRE Capital Markets Report, the team of analysts, led by Thirty Capital CEO Rob Finlay, has been refining its predictions for 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 bips plus 10 bips 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 bips lower, does it make sense that 30 bips 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 fall-back. Jay noted that the Feds aren’t fans of BSBY.

What kind of incremental risk does an index pose to a commercial real estate investor who’s set to borrow?

That’s the question Thirty Capital CEO Rob Finlay posed to his team of market analysts at this morning’s CRE Capital Markets Report roundtable podcast.

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 an 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 discuss 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 per cent 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.

The markets took a downward turn in response to US withdrawal from Afghanistan, and lackluster consumer spending.

In today’s Thirty Capital market roundtable discussion, the team had different views on how Afghanistan will impact the markets going forward, and the prospect of tapering.

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 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.

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 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.”

GDP is well below expectations, but the market reaction to last week’s figures was muted, down seven basis points on Friday.

Thirty Capital Analysts at this morning's meeting commented on the lack of discussion around tapering at the recent Fed Meeting. In fact, the Fed is still purchasing bonds. 

However, the analysts expect that tapering will almost certainly occur in the fourth quarter, and that will certainly send rates up. 

As mentioned in past episodes, a lot of factors are at play in the economy at the moment: Inflation, employment, tapering, and evictions, so the potential for market volatility remains. 

Rates Impacted By Vaccines and Virus News

“Right now, the two Vs—virus and vaccines— seem to drive rates,” commented Analyst Bryan Kern. “We're going to be range-bound for the next few months. It’s primarily because there's just not a lot going on. 

“I don't see anything for the next few months. August and September . . . I think we are going to be slow with regard to the ten-year. We'll have some intraday volatility. But we're going to be range-bound for the next few months.”

Tapering Dependent On Employment Numbers

The team agrees that tapering will be dependent on upcoming employment numbers. Without some big numbers coming out this week and in September, there likely won’t be any tapering in 2021. 

Will Evictions Impact Consumer Spending?

Some states are now allowing landlords to evict tenants who are not paying rent. This opens up the question of impact on consumer spending, and whether renters will spend less now that they must pay rent. 

Analyst Jason Kelley says it will be several months before analysts see the effect of evictions. “On the landlord-side, there’s plenty of backfill if they kick tenants out,” he says. “For the people who are evicted, do they start over and find something a little bit cheaper, are they in a tough spot? It’ll be interesting to see.”

Thirty Capital CEO Rob Finlay says it’s likely that the threat of eviction will prompt some renters to look for work. 

Whether the financial safety net offered by some States is required, or something people take advantage of remains to be seen, comments Jason.

Jason notes that the safety net ends for everyone next month, so the answer will be apparent in Q4. 

SOFR First Initiative Kicks Off

Analyst Jay Saunders noted that the SOFR First initiative has kicked off with the dealers starting to quote dealer-to-dealer screens in the SOFR market. 

The ARRC, which is the committee formed by the New York Fed to see SOFR as a replacement for LIBOR, now has approved SOFR rates, so one- three- and six-month SOFR rates. 

Notes Jay: “The market is trying to figure out how that’s going to be used in derivatives in a limited sense in hedging items and swaps.”

Also In This Episode! A detailed discussion on SOFR and LIBOR-based loans What’s happening with short-term markets The level of market volatility Inflation concerns.

This week Thirty Capital CEO Rob Finlay took questions from listeners and had the team of analysts respond to them.

The questions are extremely relevant given the current economic climate and announcements anticipated in coming days and weeks.

A listener emailed Rob, asking specifically when is the best time this week to lock in rates. Another listener emailed Rob to ask if rates will go lower. 

Rob put these questions to the team, also asking if they foresee a one percent ten-year Treasury within the near term.

Lock In Before Chairman Powell Addresses Fed

Analyst Bryan Kern took on the first question and said the choice for the listener was whether they should lock-in rates before or after the Fed meeting this week. 

“Given what we know about the Fed, and what Federal Reserve Chairman Jerome Powell is going to say . . .  I think he’s going to be pretty dovish,” observes Bryan. “We could pick up 10 basis points towards the end of the week versus where we are now.”

Analyst Jay Saunders says he recommends making deals and transactions ahead of Chair Powell’s speech on Wednesday. He says: “We could certainly see significant moves (based on the Fed) so why would you put yourself at risk?”

Analyst Jason Kelley agrees, saying his approach would be to recognize when you have a good deal instead of chasing a few basis points. 

Focus Is On Delta Variant And Economic Data

Incoming data on the Delta variant, along with GDP data on July 29 will definitely impact rates. Bryan foresees economic growth coupled with a lot of volatility in the stock market.

He notes: “That (volatility) just tells me no-one has a clue, and we just need to wait for these numbers.”

However, Jay downplays the impact of COVID on the economy, saying what people are really looking at is employment numbers, which kicked off a rally last week. 

COVID certainly plays into it, agrees Jay, but the big question people are asking is can the US expect the growth the economy had in the pre-COVID days, which was around two percent. 

Jay does, in fact, anticipate long-term growth for the economy.

Fed Is Concerned With Where Rates Are Headed

Jay is currently pricing a big transaction and says he aims to get this done before the Fed meeting this week. He adds that the Fed is starting to show concern about where rates are going. 

“It wouldn’t surprise me if Chairman Powel reiterates that the Fed is still on track to start tapering, at least asset purchases, some time in the not too distant future,” says Jay. “The Fed and a lot of market watchers would like to see rates come up a little bit.”

In this episode, the team explores:

What’s happening with rates, and what could happen in coming months Why borrowers looking at floating rates need to look at SOFR or BSBY, not LIBOR What kinds of factors borrowers should consider when getting quotes Economic analysts’ focus on jobs and job creation.

The Treasures fell by more than seven basis points today, highlighting fears around the Delta variant and inflation. 

Short-term rates are up slightly from last week. However, the Consumer Price Index (CPI) and Producer Price Index (PPI) both released figures last week that were higher than estimates, indicating inflation in both categories. 

Enhanced Child Tax Credits will soon lead to an increase in consumer spending, keeping inflation relatively high. 

Meanwhile, oil prices are at their highest level since 2008. Economic growth is slow, while inflation continues to impact the economy. The big question is: For how long? 

Concerns Around Long-Term Growth

While plenty of recent headlines have focused on the Delta variant of COVID, Thirty Capital’s Analyst Jay Saunders believes: “I think we've got a grasp on COVID. I don’t think we're going into another lockdown that's going to slow the economy. This is really a concern over long-term growth outlook.”

Feds Not Raising Rates Anytime Soon

Meanwhile, Federal Reserve Chairman Jerome Powell’s semi-annual report to Congress on the state of the U.S. economy was actually quite dovish, observes Thirty Capital’s CEO Rob Finlay. “He’s basically saying that we don’t need to raise rates anytime soon.”

However, cautions Rob, the market has clearly shown this morning that there’s a flight from equities to Treasury bonds, and the ten-year is at 1.210. 

This sense of caution or possibly even fear is a combination of concern around inflation and also the impending impact of the Delta variant of COVID. 

Analyst Bryan Kern also notes that the market is still trading on technicals. “Our next Fibonacci retracement level is a 1.18, so we're only a few basis points away from that,” says Bryan.

Lock In Rates Or Refinance Loans

Rob reiterated the message he’s delivered to borrowers in the last couple of episodes. “No matter what we see or what we discuss, it’s still a very bright time to think about refinancing or locking in rates.

“What we're facing then is rates that are at an all time low. We're not quite sure why, other than we feel that the Fed believes that this is just a blip and that inflation is going to calm itself and consumption is going to calm itself and we're all going to go back to regular happy, but time will tell,” observes Rob, adding that he believes current conditions are short term. 

Jay adds that the volumes being traded in the Cap market are down, noting that this shows borrowers are grabbing longer-term rates.

GDP Slightly Lower Than Forecast

The Thirty Capital team note that GDP will be slightly lower than originally forecasted, although it’s still incredibly robust. 

Thirty Capital’s Forecast For The Fourth Quarter

The team gives its predictions for rates in the fourth quarter or 2021. Analyst Jason Kelley says that in a recent article it noted that the ten-year forecast is still 2.6 percent. “So having a 10-year forecast for inflation at 2.6 percent and a ten-year Treasury at 1.2 just doesn't make sense and at some point the market is going to close that gap really fast,” he predicts.

Listen to the full episode for team member’s predictions on rates in the fourth quarter of this year!

The July 4 weekend kicked off what Thirty Capital CEO Rob Finlay described as a "crazy week," with a big drop in Treasury yields.

Rob repeated what he said in the last episode that this is a time for borrowers to lock in deals before inflation increases borrowing rates.

Thirty Capital Analyst Bryan Kern observed that the market seems to agree with the Feds—that inflation is transitory, and tapering of quantitative easing may not be in the cards for 2021.

"On the week, we’re only really down eight basis points, but there’s definitely a trend of Treasury buying," says Brian. "We’ve got a ten-year Treasury option, so we’ll see how that goes."

'PERFECT OPPORTUNITY' BEFORE INFLATION RISES

Rob believes that market conditions make it difficult to identify emerging inflation. He says this is a perfect opportunity for borrowers before the cost of money becomes expensive.

Current conditions are, says Rob, "Short-term. This is all just smoke and mirrors. "We're trading say 20 to 30 basis points below our 100-day, 50-day moving averages. It's just now we're getting very close to the 200-day.

"I think this is short-term. This is a perfect opportunity right now before people start to realize that we do have inflation, and it's not just small stuff. You can go around and see stuff that costs more."

THIS WEEK’S INDICES WILL IDENTIFY INFLATION

Bryan continues: "Folks who are looking at inflation who don’t think it’s there, we’ll definitely find out this week.

"We’ve got the Comparative Tracking Index (CTI), Producer Price Index (PPI), and retail sales due to report this week."

In addition, all eyes will be on Federal Reserve Chairman Jerome Powell, who is scheduled to deliver the Fed’s semi-annual report to Congress on the state of the U.S. economy starting on Wednesday.

POLICY DELAY WHILE FEDS GRAPPLE WITH DATA

Rob thinks policy makers are kicking the can until they figure out what exactly is going on with the economy.

"They don't want to do anything with the policy," says Rob. "I think they're trying to figure out what's going on. Is it short-term supply and demand issues? Is it people getting back to work? People getting back to work?"

LONG SLOG OF SLOW GROWTH AHEAD

Analyst Jay Saunders says the markets are responding to the Fed sounding a little bit more hawkish.

"This is the market saying that it doesn't believe we're in for long-term inflation concerns. And the Fed is going to do what it needs to do to hit those off. And likely we're getting back into a long slog of slow growth and low inflation that we had prior to COVID," explains Jay.

"But yes, seeing the ten-year drop through the 150 level and just keep on falling is a little concerning."

In this episode, the Thirty Capital analysts also discuss:

• Whether the Fed will bail out residential homes facing foreclosure
• Overseas banks initiating tapering
• Construction activity
• Supply and demand issues.

It’s an ideal time to borrow money, because the cost is relatively low. So, says the Thirty Capital team of analysts, if you can get money, get it now.

In today’s CRE Capital Markets Report, Thirty Capital CEO Rob Finlay says anyone with a loan that has less than four years and some liquidity in it should be running an analysis and thinking about refinancing the loan.

“You’ve got low rates and hungry lenders,” observes Rob. “We are seeing new ones in the market and ones that have been on the sidelines are out there financing.”

EXPECT A TURBULENT 4TH QUARTER

There are many factors at play in the market right now, including the end of unemployment enhancement, supply chain issues, tapering, and the potential of rising inflation in coming months.

Explains Analyst Bryan Kern: “With 50% of the States ending federal unemployment enhancement by July 10 we should start seeing some employment reports tick back up. Remaining states end in September, so that trend should continue.

“If we get the beginning of a taper or mentions of a taper in the 4th quarter, that fourth quarter or even the last two months of this year could be extremely volatile.”

Rob agrees, noting that right now supply chain issues are contributing to rising inflation.

MARKET ANTICIPATING RISING INFLATION

Analyst Jay Saunders notes that the market is trading on consumer confidence right now. The Feds continue to push the line that inflation is transitory, but most market analysts think otherwise.

“The Fed speak is to continue to have patience in rates and movement,” Jay observes. “But I think for the market as a whole it gets harder and harder to buy it. Right now the whole market is just trying to figure out where, when, and by how much the Fed will move.” Layering On Forward Hedges

Bryan believes that the market has tested the bottom of the reading range for the ten-year.

“We're now hovering around this 150 level, and we actually had a few clients take advantage of the depth by layering on some forward hedges. This is something that folks should be looking at, if they feel like rates are going to pop up towards the end of the year.”

He adds that July tends to be slow when it comes to rate moves, and things are expected to pick up in August and September.

Rob notes that forward hedging requires collateral, so it’s really only for investors with deep pockets and liquidity.

INCREASE IN MOVE TO SOFR

Jay notes an uptick in SOFR continues as more banks originate loans in that index. SOFR is trading at five basis points following the Fed’s move to increase the reverse repo rate.

But right now, says Jay, all eyes will be on the employment numbers, set for release on Friday.

Thirty Capital CEO Rob Finlay says current market conditions are ideal for real estate investors to optimize debt and reallocate their portfolios.

"Clearly, it's time to reallocate your portfolio," he says. "You can optimize debt right now very efficiently. Now, with this 1.50, even at 1.46, or 1.50 ten-year, it’s still an opportune time."

TAPERING AND RATE HIKE SPECULATION DOMINATE HEADLINES

The two big themes in our recent reports continued to play out in last week’s markets: Tapering and rate hikes.

The short end of the curve moved up after Fed officials indicated they expect two rate hikes by the end of 2023. 

However, the most interesting reaction came from the ten-year, which dropped 13 basis points and flattened by 23 basis points by the end of the week.

Thirty Capital Analyst Bryan Kern maintains that with increasing inflation, the economy can expect to see some reversal of quantitative easing by the end of 2021.

SHORT-TERM OR LONG-TERM FOR BORROWERS?

Thirty Capital CEO Rob Finlay says the question facing commercial real estate investors is should they borrow short-term or long term?

Analyst Jeff Lee predicts that we’re in the current rate range for the short-term.

He says: "Come Q4 or maybe in Q3, we are going to see some spikes, and people need to be aware of that."

Rob observes that it’s a very interesting time for the short-term rates market, and that borrowers and lenders should use the months ahead to educate themselves on replacement and fallback rates so that they understand what will happen to their loans and the true cost of capital on their deals.

SOFR RATES INCREASE

Analyst Jay Saunders notes that the Fed raised the rate on the reverse repo facility. "Pretty much lock-step we’ve seen overnight SOFR pick pup to about five basis points."

Jay notes that existing legacy LIBOR contracts will convert to SOFR plus 11.4.

Bryan adds that there’s an interesting convergence between LIBOR and SOFR caps, with the gap starting to close slowly.

"That’s something we should hopefully continue to see. It may still be though, another year, year and a half before SOFR prices sub LIBOR prices on caps."This week the Thirty Capital team discusses: * Tapering and Rate Hike Speculation Dominate Headlines * Short-term or Long-term for Borrowers? * SOFR Rates Increase

For investors who are looking for longer term deals, now is a good time to get into the market.

In Thirty Capital’s CRE Capital Markets Report today, Analyst Bryan Kern said the 10-year has pulled back to about 1.45, which is a good opportunity for people to get into the market for long-term financing.

RANGE-BOUND TRADING

Clients are working within a daily narrow basis point band at the moment. Analyst Jeff Lee says: “Even though we are five to ten basis points less than the prior range that we've seen, we're still kind of within a narrow 20 to 25 or 30 basis point band here.

“Talking to clients, we're hearing from people that they're expecting it (an interest rate increase) . . . it's just a matter of how fast and when.”

SHORT-TERM RATES EXPECTED TO REMAIN LEVEL

Short-term rates aren’t expected to move anywhere soon. The Fed will meet on Tuesday or Wednesday this week, but Thirty Capital does not expect a short-term rate hike until 2023, two years from now.

LIQUIDITY PUSHING UP INFLATION

Tapering is still being discussed but the question is when it will begin. There is so much liquidity in the market right now, that it’s expected soon. The Consumer Price Index has shown a 5% increase in the past month, which indicates that inflation is running “really hot,” says Bryan.

UNEMPLOYMENT IN SPOTLIGHT AS BENEFITS END SOON

Unemployment numbers are still the focus for economists because unemployment benefits will cease at the end of June or early July in a lot of states. Federal unemployment benefits run out at the end of September.

Says Analyst Jason Kelley: “There are 23 states that will cut off benefits in the next six weeks. Some of them started over the weekend.

“I think it’s an economic experiment over the next quarter to see if those states are having a different outcome than other states that are leaving benefits on, because it's going to run through September, unless the state makes the change,” notes Jason. “We'll get to see a little bit of how those states respond. The data is a little delayed; you're reporting on a previous month. So it really won't see any outcome until August.”

MAKING MAXIMUM EMPLOYMENT THE GOAL

The Fed is focused on “This concept of maximum employment, which is the largest amount of employment the economy can withstand while maintaining a stable rate of inflation. So, you know, what does that number mean? I think the problem is, we're not really sure where that number lies anymore,” explains Bryan.

RECORD NUMBER OF PEOPLE RETIRED IN PAST 16 MONTHS

More than 2.6 million Baby Boomers have retired since February, 202. However, they won’t be factored into unemployment numbers.

The question on every analyst’s and economist’s mind is will employment pick up, and how quickly.

Borrowers need to understand exactly what product they are getting from a bank before LIBOR goes away at the end of 2021.

Explains Thirty Capital Analyst Jay Saunders: “Understand what your lender is proposing. Pay a lot of attention to what your fallback index is . . . what your index will be once LIBOR goes away, because it will go away at the end of the year.”

Currently, there are a number of competing indexes for LIBOR. Lenders need to understand what the indices are, and what each one represents.

“Try to get a grasp on that pretty early in the process and know what your options might be. I think a lot of people talk about this like there is room to negotiate that with your lenders,” Jay cautions.

Chances are, there won’t be room for negotiation. A bank will pick an index and go with it.

Hedging entities need to determine whether they can hedge the index. If they can hedge it, what kind of liquidity will they have in the market for those hedges?

Jay acknowledges that there are lenders who don’t like SOFR because they believe it does not represent their true cost to fund loans. He thinks such lenders will likely acquiesce around a SOFR alternative—most likely Bloomberg’s BSBY index.

THE FLOATING RATE MARKET

Banks are starting to originate SOFR-based products, and are also trying to scope out what’s happening in other banks.

Jay believes some new products are adding more confusion and noise to the market.

“Last week we had yet another entrance into the short term rate market. IHS Markit came out with a credit-sensitive, LIBOR-like index,” he explained. “They call it a CRITR. They also published a credit-sensitive add-on that they say can be tacked on top of SOFR to create something that looks like LIBOR.”

INFLATION AND EMPLOYMENT

The two big indicators influencing much of the economy at the moment are inflation and employment.

But both have been impacted heavily by the pandemic, and so there are no easy solutions - or predictions.

Thirty Capital Analyst Bryan Kern says: “I don't think inflation is going to be a focus for the Fed until these supply chains are fully restored. This may not be until the fourth quarter of this year, maybe even the first quarter of next year.”

FED FOCUS ON EMPLOYMENT NUMBERS

Friday, June 4 saw a tremendous rally in Treasuries, indicating the fixed income market is buying into the Fed being much more focused on employment numbers right now, rather than inflation, explains Jay.

Employment is improving slowly, and the economy is anticipating around 650,000 new jobs. But the unemployment rate came in slightly lower, at about 5.8%.

TIGHT TRADING BAND

This focus on employment and inflation is keeping the trading band tight, with a range of between 1.55 and 1.62. At most, the band range is 20 basis points, between 1.55 and 1.75.

Observes Bryan: “I don't really see anything on the horizon that’s going to make things break lower. It looks like all pressures to the upside. It’s just when does it happen?”

DEMAND FOR CMBS

Thirty Capital CEO Rob Finlay says there is a lot of demand for CMBS right now. “There's a couple deals that are being priced this week. And the market CMBS spreads have widened slightly across the curve.

“Freddie and Fanny has actually tightened a little bit. But asking spreads for CMBS products are basically flat where they were.

“There are some opportunities for borrowers to get some pretty good, all-in lower coupons,” notes Rob.

The commercial real estate market is experiencing an extended slow down until the Fed pulls back on its quantitative easing strategy.

In the current market, the advice from Thirty Capital is that investors have to wait out the range-bound market until the Fed makes its moves. After that, the CRE market will pick up pace.

Analyst Jason Kelley says “Everyone's waiting for the Fed to crack and for tapering to start. We're in that little bit of lull before there's movement. But once that movement comes, it'll move pretty fast.”

IS INFLATION A LONGER TERM ISSUE?

Despite Thirty Capital’s observations about inflation in previous episodes, it appears the Fed doesn’t view inflation as a longer term concern.

Notes analyst Bryan Kern: “The Fed has stated it believes inflation at the moment is transitory. They're probably more focused on employment right now.”

Next week will see the employment report issued. This week, reports due are new home sales, consumer confidence, and GDP. From this perspective, there’s not a lot of news that will impact the markets significantly, unless there are significant changes in weekly jobless claims numbers.

Adds Bryan: “I expect we’ll remain range-bound until maybe as late as the third quarter. It just depends on when the Fed starts whispering taper.”

CRE DEALS MOVING SLOWLY

Thirty Capital is starting to see some deals come through, but they are really one-off deals.

Analyst Jeff Lee says: “We're starting to see some deals open up and trickle in. We're definitely quoting some here and there. But it's still a lot of  investor demand. And that drives BP sentiments, too.

“Some of the lenders and originators that we talked to are still saying: ‘Yeah, there are sweetheart deals out there that make tons of sense. They have a T-36, strong financials, good fundamentals, everything, but they just can't get past the B buyer.

“Once the first couple of deals have been up, and the optics for contributing more of these deals start to look a little better, then we'll see more sweetheart deals come through versus just the real one offs.”

CME GROUP TO ADMINISTER FORWARD-LOOKING SOFR TERM RATE

Analyst Jay Saunders notes that the Alternative Reference Rates Committee (ARRC) has named the CEM Group as the administrator for a term SOFR rate.

“This is a big step forward,” he observes. “A lot of people have been clamoring for this.”

As of now, the term SOFR is only licensed for cash products. The term SOFR published by CME in derivative products.

The markets and economists see inflation as transitory, due to temporary supply and labour issues.

But the team of analysts at Thirty Capital sees a deeper, more serious problem, with inflation set to increase towards the end of the year.

Says Thirty Capital CEO Rob Finlay: "We called it earlier. I'm seeing 2% or 2.25%. That’s where I'm putting my forecast."

Analyst Bryan Kern says the market hasn’t responded to inflation numbers. "Rates stayed right where they were. That shows that the market believes this inflation to be transitory and due to temporary supply and labor issues."

Bryan predicts rates will be range-bound for the foreseeable future, sitting between 1.50% and 1.70%, at least until the Fed begins tapering later in the year.

FED CANNOT CONTROL INFLATION

Analyst Jay Saunders expresses concern around the Fed seemingly believing that it can turn inflation on or off with the flick of a switch.

"Clearly, history says it can't, and they have very little control over inflation," says Jay.  "They have a very high bar when it comes to employment if they're trying to get  close to pre-COVID employment numbers. That's not going to happen quickly, even with the service sector opening back up again."

Jay notes that while everyone knows that the Fed liftoff is the most important number for the economy, most economists are struggling to get a grip on what's going on, particularly as the economy starts to transition away from a goods space back to a service-based economy as people return to work.

IN TIMES OF UNCERTAINTY FOCUS ON OPTIMIZING DEPT

Says Rob: "Right now in periods of uncertainty, it's time to optimize debt. I still personally think that the market is not nearly as strong as what some indications are. I'm very, very, very nervous about the third and fourth quarters."

Rob continues: "People are just stocking up on goods and services, which will increase inflation. But the thing is, there is $35 billion of rent that people have not paid, and they're not going to pay; so you've fake money in the system right now."

There are also more than seven million homeowners that are in debt and will be foreclosed on in the not-too-distant future.

CAP RATES ARE COMPRESSED

Rob explains: "We're seeing our multifamily customers are talking in the threes, and not just for super premium stuff. Decent office and decent product is still trading at a tight cap rate.

"The credit tenant lease space is a phenomenal space right now, because of the spread to actual debt yield. So I think it's a pretty good bond yield."

Analyst Jeff Lee notes that the sub five-year is where Thirty Capital is seeing the bulk of its exit calculations.

"Most of the guys who are kicking tires are averaging probably 2017 originations, which means we're sub five-years and all those yields are compressed," explains Jeff. "All the exit costs are so high. People are looking at 15% to 18% exit costs. Until that short-end comes up a little bit and reduces some of those exit costs, that's when you will see a little more action."

CLO MARKET HOT

Rob notes that compressed yields have in part produced a hot CLO market. "I'd be all over if I wasn't a long term holder. Short-term money is cheap right now because it's abundant. Everyday there are more and more CLOs being issued. I'd definitely be thinking about that."

Listen to the full podcast episode to hear a comprehensive discussion and analysis about market indicators and opportunities in commercial real estate.

A mixed economic outlook, fallout from the pipeline cyber attack, and chip shortages are all leaving investors uncertain about the future.

And for commercial real estate, the question continues to be whether to select floating or fixed rates, or simply ride out the uncertainty.

The answer depends on your outlook, says Thirty Capital advisor Jay Saunders. “If you're  planning on holding assets, it's unarguable that long-term rates are attractive. But we see anecdotally a lot of folks going into floating rate debt at the moment.”

Thirty Capital CEO Rob Finlay agrees, noting a degree of nearsightedness, based on longer position. Rob says: “You can look at an absolute coupon . . .  but a long-term debt actually provides a lot on a risk-adjusted return basis. To me, these are very good and strong opportunities.

The calculation volumes on Thirty Capital’s website have doubled in the last week, indicating people are definitely feeling things. Says Rob: “Right now, I don't think you could go wrong. It's either low floating rate or low fixed rate.”

Rob cautions that it may well be a different story after Q2. He anticipates that when Q2 figures arrive later in the year, businesses will be reporting peak earnings for 2021. But it could be downhill from there if inflation takes off and interest rates increase in response to increasing costs.

Analyst Jason Kelley believes that the Fed will have a lot to do on the tapering side before short-term rates start going up. “On the short side of the curve, we're going to wait and see, and we think the market is probably a little overpriced.”

In the next few days, all eyes will be on figures from the Consumer Price Index (CPI) and the Producer Price Index (PPI) for an answer to what’s happening with inflation.

Analyst Bryan Kern says employment stats and worker shortages are capturing headlines at the moment. The employment report anticipated an additional one million hires in April; yet only 266,000 workers were hired.

In stark contrast, companies across the US are complaining about a shortage of workers. Yet there's still an abundance of unemployed people.

Observes Bryan: “I think many workers make more on unemployment benefits than they would by going back to work. There was an  article in The [Wall Street] Journal  this weekend, which said several states are going to tighten unemployment reporting requirements.”

In some states, access to federal pandemic unemployment payments will end all together soon.

The economy has a positive vibe about it this week, with more optimism from the Fed. People across the country are starting to travel and get out more after more than a year of COVID-19.

A lot of strong economic data was released in the last week, headlined by a GDP of 6.4 percent year over year. Economic data due this week includes non-farm payrolls and unemployment reports.

However, concern about unchecked inflation remains. Says Analyst Jason Kelley: “Everyone knows inflation is coming. It’s just how hot does it get?”

Experts anticipate that the Fed will intervene, but nothing has been hinted at so far.

“I think that's probably the first step before we start seeing short-term rates rise,” notes Jason. “They'll have to start tapering because they're really driving down that residential market now with the $120bn bond buying every month.”

Inflation is already present in the residential property market, and was running at about six percent in February, as market activity jumped.

In fact, the housing sector is hot, and new home sales and housing starts have reached their highest levels since 2006. The supply of homes available for sale is down to the lowest level since the 1970s, says Analyst Bryan Kern.

On the floating rate hedging side, activity is very busy. Analyst Jay Saunders points to the fact that variable rate products are popular

Will this positive activity and outlook lead to an increase in investor demand? Analyst Jeff Lee says this remains to be seen.

“I think the general optimism from last week's Fed meeting, it's kind of to be seen. The whole trend and theme is long-term. Once that starts to trickle back, we might be seeing more of the retail, office, and hospitality properties contribute more,” Jeff observes.

The economy’s fundamentals may not be as good as everyone believes they are, says Thirty Capital CEO Rob Finlay in Monday’s CRE Capital Market Report.

In the regular weekly meeting with his team of analysts, Rob commented on a range of numbers, including interest rates and some over-leveraging of assets, and indicated that the market could overheat in the near future.

The corporate bond spreads are as tight as they’ve been since 2007 and, with the overall struggle to find decent yields for investors, an asset bubble could be on the horizon.

Overall, the last week was quite on the data front, with very little change in interest rates. The ten-year closed last week at 1.56%.

This week will be very busy, with durable goods stats being released on Monday. Tomorrow, consumer confidence figures will be issued, and on Wednesday a Fed meeting.

Thursday sees GDP figures and initial jobless claims updates. On Friday, a lot of data will be released, including personal spending stats, Chicago PMI, PC deflator, and consumer sentiment.

Comments Bryan Kern: “We've been rate-bound between around 1.55% and about 1.70% for the past three weeks now, so we'll see if some of this week's data changes any of that.

“The other thing we want to look at is following the discussion around President Biden's capital gains tax.”

Rob notes that it appears the Fed’s stance is not to do anything on rates.

“I’ve noticed the yield curves come back a little bit, it's gone down a little bit, as well. So I’m still not sure if we're going to get that big of a spike with the data that's coming out on the ten-year rates.”

There has been a bit of pressure on short-term rates, with the lack of SPE issuance, and short-term issuance. Eurodollars are starting to price higher, which isn’t inline with the Fed guidance.

Observes Jay Saunder: “I think the market anticipates the Fed moving a little more quickly than what the Fed’s are guiding towards.”

April has been a busy month for Thirty Capital. Analyst Jeff Lee notes that the firm will probably complete double the monthly averages from the first quarter. “It’s good to see, but how that sustains through 2021 will be interesting,” says Jeff.

Rob ads: “CMBs are pricing wider. Fannie and Freddie deals are priced a little bit wider. But I think we're where the main hiccup is for all of those are just the, the underwriting constraints are pretty tough on those and on debt service reserve.

Listen to the full episode for a comprehensive discussion on the economy, including what’s happening in commercial real estate.

This week on the CRE Capital Markets Report with Thirty Capital, the team of analysts explores the combination of an improving economy, and increasing inflation, and a fragile commercial real estate market. Analyst Bryan Kern highlights strong economic data, with an unexpected increase in retail sales and a strong GDP forecasted for 2021. A decrease in jobless claims numbers since the start of the COVID-19 pandemic in early 2020 added to the good news.

However, Bryan notes that last week also saw the 10-year Treasury drop by about 10 basis points, probably pointing to the fact that the Federal Reserve isn’t planning on responding to increasing inflation anytime soon. This is partly due to the fact that no other major economy has attractive yields. So fixed income investors took advantage of a spike up to about 1.72% on the ten year. Bryan predicts that investors and consumers can expect minimal volatility or rate changes in the near future.

Thirty Capital’s CEO Rob Finlay points out that the big commercial market alert last week led to many consumers selecting floating rates instead of fixed rates on loans, even though fixed rate is currently inexpensive. A two-per-cent 10 year Treasury rate is possible by the end of the year.

However, Rob notes that in spite of the bright economic outlook, the picture for commercial real estate is uncertain. He doesn’t foresee workers returning to officers anytime this year, so there’ll be no increasing footprint in commercial real estate.

Explains Rob: “People still aren't paying their mortgages and people still aren't getting kicked out of apartments. The real estate market is really going to be very fragile. So I think, quite frankly, people are liking floating rate loans because they can really get dinged hard on a fixed-rate loan.”

Going forward, the economy is expected to experience massive growth in 2020, with predictions for GDP at around seven percent in Q1, ten percent in Q2, and well over five percent for the remainder of the year.

Analyst Jay Saunders points to historic trends, especially the period right after the Great Recession. “Everyone's trying to figure out the Fed at the moment. That's clearly the only game in town - who's buying bonds. They're going to let the rates run for a long time for the foreseeable future.”

Analyst Jason Kelley sees rates moving a little bit higher, but not taking off. I don’t see the old days of three and fours. There is going to be some pressure to move up with the short-term inflation. But I think we're going to hit a plateau once we get there.”

The team analyses and shares their views on:

• What actions the Feds may take on rates in 2021
• The likely potential for low floating rates for a long time to come
• Whether borrowers should be looking for floating-rate deals
• What kind of rate deals may appeal to borrows seeking a longer-term loan
• The potential for most consumers to select floating rates over fixed in the foreseeable future.
• Despite the lack of volatility, market conditions will be very interesting for some time to come.