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CREFC Publishes C-PACE Primer

January 9, 2025

The CRE Finance Council on January 9 published a comprehensive Commercial Property Assessed Clean Energy (CPACE) Primer to serve as a valuable resource for our members.

The Primer provides an in-depth overview of the key features, stakeholders, and market trends associated with C-PACE financing, one of the tools used to drive sustainability and resiliency in the CRE sector.

Key topics include:

• Financing Mechanics: Understanding how C-PACE enables CRE owners to implement energy efficiency, renewable energy, and resiliency upgrades.
• Stakeholder Roles: A breakdown of responsibilities for property owners, mortgage lenders, legal counsel, and program administrators.
• Market Trends: Analysis of the growing C-PACE market, with over $7 billion in cumulative financing and nearly $2 billion in 2023 alone.
• Important Considerations: Insights into underwriting concerns, lease implications, and compatibility with CMBS transactions.

Why it matters: As the CRE industry continues to prioritize sustainability, C-PACE financing is one avenue for property owners to enhance asset performance while meeting environmental and resiliency goals.

• This Primer equips CREFC members with the insights needed to navigate and leverage this growing market segment effectively.

CREFC would like to thank the group of investors, bankers, rating agencies, lawyers, and lenders who contributed to the development of the Primer.

Please contact Sairah Burki (sburki@crefc.org) with questions.

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Capital Markets Update Week of 1/7

January 7, 2025

2024 Issuance Recap

• Private-Label: 2024 CMBS and CRE CLO issuance totaled $112.8 billion, 145% ahead of the $46 billion in issuance for 2023 and 12% higher than the $100.5 billion in 2022.
• Agency: 2024 Agency issuance totaled $124.1 billion, 3% higher than the $120 billion in 2023 and 24% lower than the $162.4 billion in 2022.

The Economy, the Fed, and Rates…

Economic Data

• Initial Jobless Claims Show Labor Market Resilience: Initial jobless claims declined to 211,000 in late December 2024, reaching an eight-month low, signaling resilience despite the holiday-season volatility. Continuing claims, while trending higher earlier, also fell to a three-month low, indicating a less tight labor market but not one in distress. The unemployment rate stood at 4.2% in November, with December data due on January 10.
• Manufacturing Activity Shows Mixed Signals: The ISM Manufacturing PMI rose to 49.3 in December, the highest level since March, though still indicating contraction. The improvement was driven by increased production and accelerating new orders, suggesting potential stabilization in the sector.
• Mortgage Rates Approach Critical Level: Home mortgage rates approached 7% again, threatening to squeeze buyers. The average 30-year mortgage rate rose to 6.91% as of January 2, potentially exacerbating the ongoing "lock-in" effect in which homeowners with low-rate mortgages are reluctant to move.
• Consumer Resilience through 2024: The economy defied expectations for a slowdown throughout 2024, with Bloomberg Economics estimating household outlays advanced 2.8% - faster than in 2023 and nearly double their projection at the start of the year. However, pandemic savings have largely been exhausted, and spending is increasingly driven by higher-income households benefiting from wealth effects in housing and stock markets.

Federal Reserve Policy

• Fed Officials Signal Continued Vigilance: Despite three rate cuts in 2024 totaling 100 basis points, Fed officials emphasize the fight against inflation isn't complete. Core PCE inflation stands at 2.8%, still above the Fed's 2% target. Fed Governor Adriana Kugler stated explicitly:

"We are fully aware that we're not there yet... No one is popping Champagne anywhere - not close to us." 

• Housing Inflation Remains Key Concern: Officials are particularly focused on housing inflation, which measured 4.8% year-over-year in November despite showing month-to-month improvement. The situation is complicated by what Kugler describes as the "unusual" dynamic of homeowners holding onto low-rate pandemic-era mortgages.

Treasury & Bond Markets

• Treasury Yields Defy Rate Cut Impact: Despite three Fed rate cuts since September, the 10-year Treasury yield has climbed ~90 basis points since the initial easing move (ending 2024 at 4.57%). Market forecasts show divergence, with the median analyst prediction expecting yields to fall to 4.15% by end-2025, while market-implied forecasts suggest 4.67%.
• Debt Sustainability Concerns Mount: The federal deficit reached $1.8 trillion (over 6% of GDP) in fiscal 2024, matching World War II-era debt-to-GDP levels. With nonpartisan CBO projections showing continued high deficits and potential additional tax cut costs under the incoming administration, analysts increasingly warn about risks to America's last remaining triple-A credit rating.
• Tight Corporate Bond Spreads Persist: Corporate bond valuations have reached their most extreme levels, flashing their biggest warning in almost 30 years as an influx of money from pension fund managers and insurers boosts competition for assets. Spreads, the premium for buying corporate debt rather than safer government bonds, can remain low for a prolonged period, partly because fiscal deficits have made some sovereign debt less attractive. As Christian Hantel of Vontobel notes: 

"You could easily make a call that spreads are too tight, and you must go somewhere else, but that's only part of the story...When you look at history, there are a couple of periods when spreads stayed tight for quite some time. We are in such a regime at the moment."

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

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Forum Spotlight: Alternative Lenders and High Yield Investors

January 7, 2025

Samir Tejpaul (Chair), Samantha Rotchford (Chair-Elect) and Rachel Hunter-Goldman (Chair Elect) make up the Leadership Working Group for CREFC’s Alternative Lenders and High Yield Investors Forum. This working group sets agendas and priorities for the Forum and represents their constituencies on CREFC’s Policy Committee.

Why it matters: Each industry Forum addresses issues critical to their business sector and works to achieve solutions that serve a common purpose.

CREFC works closely with Forum leaders and members to:

• Ensure all voices are heard,
• Assist in finding consensus amidst disparate and converging views,
• Share those views when appropriate with regulators and legislators, utilizing CREFC’s experienced Government Relations Team and our CEO Lisa Pendergast,
• Develop new best practices and monitor old ones.

What they’re saying: There have been significant opportunities for high yield investors and alternative lending platforms, including bridge and mezzanine loans, preferred equity, and special/distressed situations.

By the numbers: Market trends that impacted this constituency last year include:

• Floating rate coupons tightened ~160 basis points due to:
• Spread compression of 50-75 basis points (depending on property type and quality)
• One-month SOFR rate falling nearly 80 basis points
• Participants expect further spread tightening amidst heightened investment-sales activity.
• “De-bankification” accelerated in 2024 as bank balance sheet lenders remained on the sidelines:
• Banks provided fewer direct loans and focused more on structured finance (repo / note-on-note / participations / syndications) due to better capital treatment.
• For now, direct lending in the bank market is not expected to return to pre-COVID levels.
• As long as that dynamic persists, alternative lenders will continue to gain market share.
• The construction financing pipeline has slowed materially as buyers and sellers of land re-assess yield-on-cost (YoC) requirements to attract LP capital.
• Student housing and data centers have filled the void, while industrial and multifamily development has slowed.
• The bridge lending pipeline improved moderately with several construction loans originated between 2020-2023 nearing completion and requiring bridge financing for take-out.
• Existing borrowers of bridge financing returned to the marketplace to source “bridge-to-bridge” financing vs. taking on fixed-rate debt as they awaited Fed rate cuts, the results of the presidential election, and any new policies from the incoming administration.
• Competition in the “lower-yielding” and “lighter-transition” bridge space is robust, further driving down spreads going into 2025.

What’s Next?

• Forum leaders will present an update on their Forum at the upcoming CREFC conference in Miami.
• Planning is in full swing for CREFC’s High Yield, Distressed Assets & Servicing Conference on March 4, in New York.
• Soon after, the chairs will seek nominations for the next Chair-Elect to join their leadership slate.

To join the Alternative Lenders and High Yield Investors Forum, please register here.

Contact Rohit Narayanan (RNarayanan@crefc.org) for Forum-related questions.

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Winter 2025

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