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Capital Markets Update Week of 10/8

October 8, 2024

Private-Label CMBS and CRE CLOs

Five transactions totaling $3.5 billion priced last week:

• FSRIA 2024-FL9, a $858.5 million CRE CLO from FS Credit REIT, advised by Rialto Capital and FS Investments, comprised of three whole loans and 14 loan participations secured by 62 properties in 15 states and Washington, D.C. Multifamily (43%) and industrial (30.2%) represented the largest property types.
• BANK 2024-5YR10, a $837.8 million conduit backed by 42 five-year loans secured by 83 properties from Wells, Morgan Stanley, JPMorgan, and Bank of America
• NX 2024-STOR, a $750 million SASB backed by a fixed-rate, five-year loan for NexPoint Advisors to refinance a portfolio of 61 self-storage facilities in 21 states
• BX 2024-BRBK, a $600 million SASB backed by a floating-rate, five-year loan (at full extension) for Blackstone and Worthe Real Estate to refinance four creative-office properties in Burbank, CA
• ARES 2024-IND2, a $475 million SASB backed by a floating-rate, five-year loan (at full extension) for Ares Management to refinance a portfolio of 25 industrial properties in 12 states

According to BofA Global Research, last week marked the tenth week of 2024 in which at least five private-label transactions were priced, while in all of 2023, there was only one such week.

By the numbers: Year-to-date private-label CMBS and CRE CLO issuance totals $83.1 billion, more than double the $32.5 billion for the same period last year.

Spreads Hold Steady

• Conduit AAA and A-S spreads were unchanged at +91 and +140, respectively. YTD, AAA and A-S spreads are both tighter by 25 bps.
• Conduit AA and A spreads were unchanged at +185 and +235, respectively. YTD AA and A spreads are tighter by 40 bps and 140 bps.
• Conduit BBB- spreads held steady at +540. YTD, BBB- spreads have tightened 360 bps.
• SASB AAA spreads were wider by 2 bps to +127 to +157, depending on property type. They have narrowed from +143 to +212 at the start of the year.
• CRE CLO AAA and BBB- spreads remained constant at +165 / +170 (Static / Managed) and +450 / +475 (Static / Managed), respectively.

Agency CMBS

• Agency issuance totaled $3.5 billion last week, consisting of $1.8 billion in Freddie K and Multi-PC transactions, $1.1 billion in Fannie DUS, and $585.7 million in Ginnie Mae transactions.
• Agency issuance for the year totaled $78.5 billion, 15% lower than the $92.8 billion for same-period 2023.

The Economy, the Fed, and Rates…

Economic Data

• Robust Job Growth in September: The economy added 254,000 jobs in September, far exceeding expectations of 140,000. The unemployment rate fell to 4.1%, down from 4.2% in August, suggesting strength in the labor market. Upward revisions added 72,000 more jobs to July and August figures, indicating stronger momentum than previously thought.
• Initial Jobless Claims Remain Low: Applications for unemployment benefits rose slightly to 225,000, consistent with a tight labor market and limited layoffs. The four-week moving average fell to 224,250, the lowest since June 1.
• Inflation Outlook: The CPI for September is projected to rise by only 0.1%, bringing year-over-year inflation to 2.3%, its smallest increase since early 2021. Core inflation, which excludes food and energy, is expected to rise 0.2% month-over-month, indicating continued progress in cooling price pressures.

Fed Policy

• The strong September jobs report likely cements a smaller, 25-basis-point cut at the Fed’s November meeting. The central bank is increasingly focused on balancing its dual mandate of maximum employment and price stability, with inflation now less of a concern and the health of the labor market taking center stage.
• Fed Chair Jay Powell reinforced caution last week, saying the Fed is "not in a hurry to cut rates quickly.” Powell indicated that further reductions will depend on sustained economic performance, particularly in the labor market.
• Austan Goolsbee, President of the Chicago Fed, called the September jobs report “superb,” but warned the Fed should not "react too much to one month's report." He noted that while the labor market is strong, there are risks that inflation might undershoot the central bank’s 2% target.
• Mohamed El-Erian, President of Queens’ College, Cambridge, cautioned that the robust jobs data remind us that "inflation is not dead." He suggested that the Fed should "push back much harder against pressure from the markets" to focus solely on maximum employment.
• The Fed is reassessing the neutral rate (r*), with estimates among governors ranging from 2.3% to 3.75%. Divergence in estimates highlights uncertainty about long-term interest rates consistent with full employment and stable inflation.
• Economists and traders adjusted their expectations, now anticipating quarter-point rate cuts rather than larger cuts in upcoming Fed meetings. The market is pricing in about 100 bps of rate cuts over the next four meetings, aligning more closely with the Fed's projections.

Treasury Yields

• Following the strong September jobs report, yields on Treasuries surged, reflecting reduced market expectations for aggressive Fed rate cuts. The two-year Treasury yield, sensitive to interest-rate changes, surged 36 bps last week, reaching 3.92%, its highest since August 26.
• Long-term yields also continued to trend upward, fueled by persistent inflation expectations and strong economic data. This highlights the bond market’s realignment with the Fed’s more cautious stance on rate cuts. The 10-year yield was up 22 bps last week to 3.97%, the highest since August 8.

Go deeper: You can download CREFC’s one-page MarketMetrics with statistics covering the economy and the CRE debt capital markets here.

Contact Raj Aidasani (raidasani@crefc.org) with any questions.

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Presidential Election Polling Reveals Tight Race

October 8, 2024

With 28 days left to the Presidential Election, polls in swing states suggest the race for the White House remains a toss-up. This is quite a different scenario from late-July when President Joe Biden was the Democratic Party’s nominee.

The table below notes three key snapshots in the race, the day President Biden dropped out, polling post Labor Day, and today, with less than a month to go.

Vice President Kamala Harris gained 4.2% in the seven swing states from July-September, but her momentum has stalled since and ever so slightly reversed in some states.

• Nevada is the only state where Harris has continued her momentum since September, with a +0.5 % gain. Since then, former President Donald Trump has gained +1.6 % in Georgia, +0.7% in Wisconsin, and + 0.5% in Michigan.
• North Carolina and Arizona have been slight changes to each candidate’s polling, but not enough to measure a change in voter sentiment.
• The most important swing state has always been Pennsylvania due to its 19 electoral college votes, the highest of any swing state. Polling in the state has remained even since September, as the rolling average remains a tie.
• The polling website 538 gives Pennsylvania an 18% chance of determining the winner of the election, demonstrating just how crucial this battleground state is to both campaigns.

Why it matters: As every state’s polling is within the margin of error, the race remains a true toss-up.

• This is different from late-July when Biden was the nominee and Republicans appeared to be clear frontrunners.
• Harris’ candidacy has brought the race back to dead even.

Contact James Montfort (Jmontfort@crefc.org) with any questions.

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Senate Polling: Are Split Tickets Back?

October 8, 2024

Ticket splitting for federal races, where voters in a state pick a president from one party and a senator from another when both candidates are on the same ballot, has been declining since the 1980s. But current polling trends indicate that some states may be on track to revive the practice.

• Federal ticket splitting reached a historical low in 2016 when zero states had a party mismatch between the presidential and Senate candidates in those states.
• In 2020, Maine was the only ticket splitter with Sen. Susan Collins (R-ME) winning re-election and President Joe Biden winning the statewide presidential vote.
• Click here to read more about the history and trends of ticket splitting.

Why it matters: Seven races this cycle will decide which party controls the Senate come January. As shown in the table below, Democratic Senate candidates continue to outpoll Harris when comparing the polling averages of the leader in the presidential election.

If the polling carries through to election day, states like Ohio and Arizona could vote for Former President Donald Trump in the presidential election, while simultaneously sending Senators of the opposite party to Congress.

This trend is manifesting itself in different ways depending on which region of the country you study.

• The Sun Belt states of Arizona and Nevada have Democratic nominees that are polling between seven and nine points ahead of Harris and Trump’s lead in their states.
• In the Midwest/Mid-Atlantic region, the states of Ohio, Wisconsin, Michigan and Pennsylvania have candidates polling about three and four percent ahead of Harris’ lead.
• In Montana, Sen. Jon Tester (D-MT) is running nearly 10 points ahead of Trump, but it may not be enough to re-elect him. The Montana race had been rated competitive at the beginning of the cycle, but in recent weeks it has shifted decisively for the Republican candidate, Tim Sheehy, as Tester is running almost 7 points behind him.

There is not one single data point to explain this phenomenon, but one fact is shared between all these candidates.

• Every incumbent Democratic candidate has name recognition with voters as they have all won statewide federal elections previously. This may be one of the reasons they are polling ahead of the presidential ticket.
• Democratic Senators Tester, Sherrod Brown, Bob Casey and Tammy Baldwin are running for re-election, having served two or three terms; voters know them well and are aware of their records.
• The open seats in Michigan and Arizona are more complex. Rep. Elisa Slotkin (D-MI) and Rep. Ruben Gallego (D-AZ) are running as newcomers to the Senate after having served multiple terms in Congress. Their success may be more on the individual dynamics of their races or a dissatisfaction with the Biden administration.

The bottom line: The famous maxim “all politics is local” may still hold true, as these Senate candidates have been able to carve out a lane for themselves separate from the top of the ticket.

Contact James Montfort (Jmontfort@crefc.org) with any questions.

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