News

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.

Contact  

News Archive

News

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.

Contact 

News Archive

News

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.

Contact 

News Archive

News

Hurricane Helene Exposes Gaps in Flood Insurance 

October 8, 2024

The devastation wrought by Hurricane Helene, particularly in western North Carolina, exposed the stark need for far more robust flood insurance as climate events increase in frequency and severity.

To obtain Federally-backed loans, property owners in Federal Emergency Management Agency (FEMA)-designated flood zones must purchase flood insurance.

• Private insurers do not typically offer flood coverage.
• Instead, FEMA’s National Flood Insurance Program (NFIP) insures ~4.6 million properties across the U.S.

However, FEMA does not consider rain-induced (pluvial) flooding when developing flood maps; instead, it focuses largely on coastal and riverine flooding.

• FEMA flood maps are often characterized as “outdated and inaccurate, failing to depict current flood risk.”
• According to Reuters, FEMA said that approach is set by law and its maps should not be viewed as a prediction of where flooding will occur. "Where it can rain it can flood," FEMA press secretary Daniel Llargues said.
• Reuters further notes that in the region impacted in western North Carolina, “roughly 1 in 200 single-family homes is covered by the NFIP… a far lower level of coverage than can be found in the coastal and riverside neighborhoods the program was designed to serve.”

Why it matters: Insufficient flood insurance coverage will likely result in a hit to property values, significant costs from business interruption, lost rental income, and greater income inequality.

• According to experts interviewed by Politico, “struggles will be most severe in low-income communities where people have little savings and often cannot qualify for credit from banks or low-interest disaster loans from the Small Business Administration.”
• “It’s going to be a mess,” said Donald Hornstein, director of the Center on Climate, Energy, Environment and Economics at the University of North Carolina at Chapel Hill.

What they’re saying: In a Liberty Street Economics blog post, published just two days before Helene hit North Carolina, researchers at the Federal Reserve Bank of New York found that in 2021, over $600 billion in mortgages were originated in areas with high flood risk but no flood map.

• According to Moody’s Analytics, Helene probably caused $15 billion to $26 billion in property damage, and an additional $5 billion to $8 billion in lost economic output.
• Further, Trepp compiled a CMBS loan exposure list for properties within a 50-mile radius of the main metros impacted by Helene, finding that 550 CMBS loans, with a current balance of almost $60 billion, fall within this range.

As noted in CREFC’s Policy and Capital Markets Briefing last week, the House and Senate passed a continuing resolution (CR) on Sept. 25 to keep the government funded through Dec. 20, including a temporary extension for the NFIP.

However, the need for insurance reform remains acute, as evidenced by the impact of increasingly frequent, severe climate events.

• CREFC continues to work with policy makers and other trade groups to identify and advance possible solutions.
• We have also held a number of webinars and panels on the topic of insurance. Please see CREFC Sustainability Presentations for recorded sessions.

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

Contact 

News Archive

News

Election Outcome Policy Analysis for CRE

October 8, 2024

Less than a month out, the election outcome remains murky with some Senate candidates pulling away (e.g., Arizona, Montana, and Nevada) and others tightening the race (e.g., Florida, Pennsylvania, and Texas). Meanwhile, the Presidential and House contests continue to be very tight.

Why it matters: Each party has a path to victory, however narrow, for the Presidency, Senate, and House. CREFC has summarized the outcome scenarios below and in greater detail in this linked document.

Key Assumptions: Even though the election outcome is uncertain, there are key assumptions that can help shape the industry’s expectations.

• House and Senate majorities will be narrow: These chambers are currently governed by slim majorities, and few races look to be complete blowouts, so it is unlikely party leaders will have deep margins to pass partisan bills. This means that a handful of members can have the ability to shape, slow, or kill legislation, even in the normally top-down structure of the House.
• The Senate needs 60 votes to do most things: If 41 senators oppose a piece of legislation, they can usually block it with the threat of the filibuster. That is unlikely to change. Certain actions have been reformed to allow for simple majority votes (50+1). Those include, confirming nominees, repealing recent regulations (e.g., the Congressional Review Act “CRA”), and passing certain funding/tax bills via “reconciliation.”
• Regulators don’t always change over immediately: Although the President has more power to remove certain executive appointees at will than when former President Donald Trump took office in 2017, changeover at agencies will depend on term expirations, resignations, and whether the President and the Senate are governed by the same party.

Go deeper: For commercial real estate and multifamily finance, we analyze below some of the key issues for Democratic or Republican sweeps, as well as each presidency in a divided government.

CRE and Multifamily Opportunities and Risks Summary

• Tax: In scenarios in which a party sweeps, tax bills can be passed with simple majorities with reconciliation, which heightens the risk for certain partisan provisions. See analysis page 4 for additional detail.
• Bank Capital: Basel Endgame capital rules are most sensitive to who wins the White House. Under a Harris presidency, we expect the capital rules to be finalized in some form, as Harris would likely veto any Congressional attempt at repeal and appoint regulators more likely to support higher capital requirements. A Trump presidency would likely stall or scrap the Endgame proposal, as Trump could support a repeal via the CRA and appoint regulators skeptical of raising capital requirements.
• Housing and GSE Reform: Trump has indicated he would move to exit the GSEs from conservatorship, likely via administrative action. Harris has not commented on conservatorship, but she could follow the Biden administration and continue to use FHFA to enact various tenant protections or rent controls. Both parties have shown support for creating housing and public/private programs such as the low-income housing tax credits (LIHTCs).
• Regulators: Presidential appointees who win Senate confirmation will be key in shaping the regulatory agenda. Trump has pledged to repeal 10 rules for every new regulation, similar to his previous two-for-one pledge. The FHFA, Department of Housing and Urban Development (HUD), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB) would likely see immediate changes in a Trump win. The Fed, FDIC, and SEC would see more gradual changes as terms expire, though SEC chairs often offer their resignation with a change in the presidency.

The bottom line: CREFC will continue to monitor the election developments and inform members on likely policy actions that stem from the election results.

Contact David McCarthy (dmccarthy@crefc.org) with questions. 

Contact  

News Archive

News

Recent Research Demonstrates Investors’ Growing Focus on the Climate Transition 

October 1, 2024

Recent reports highlight investment managers’ growing focus on the climate transition.

According to a recent report from the sovereign wealth fund of Singapore and S&P Global, properties represented in the S&P Global REIT Index could suffer climate change-related losses of more than $500 billion by 2050 via the following channels:

• Loss of revenue due to business interruption;
• Rising operating expenses such as higher cooling costs and productivity impacts; and
• Higher capital expenditures related to cleanup and repair, accelerated asset degradation, and asset replacement.

The report notes that certain perils, including extreme heat, will be more widespread, while others, such as tropical cyclones and floods, are more acute in certain regions.

• Just this weekend, Hurricane Helene led to the deaths of at least 100 people with over two million homes and businesses still in the dark across the Southeast on Monday. Hundreds of water rescues have taken place across Florida, Georgia, the Carolinas, Tennessee and Virginia since Helene's brutal landfall in Florida's Big Bend area late Thursday.

By the numbers:

• On a macro basis, 89% of S&P REIT Index constituent assets are estimated to be materially exposed to extreme heat by the 2050s.
• 1%, 9%, and 13% of assets are expected to be exposed to coastal flood, pluvial flood, and fluvial flood, respectively.

However, the authors stress that climate change also creates opportunities for asset owners to invest in adaptation, including green or cool roofs and wet or dry floodproofing.

• Cumulative net benefits of these specific adaptation measures are projected to total $45 billion by 2050 (8% of the total projected cumulative costs of climate hazard exposure) under a medium-high climate change scenario.
• The annual demand for these solutions is estimated to reach $29 billion globally through 2050.

Morningstar released a report this past week, noting that 67% of asset owners globally say that “ESG has become more material in the last five years.”

• Every asset owner surveyed is allocating at least a portion of their assets to strategies that take ESG factors into account; and
• The percentage of asset owners with more than half of their total assets reflecting ESG considerations has increased each year, from 29% in 2022 to 34% in 2023 and 35% in 2024.

According to Morningstar, climate transition readiness remains the “most material environmental factor, with labor practices and business ethics headlining material concerns for social and governance, respectively.”

Additionally, asset owners “increasingly recognize data as the most critical component” for their investing strategies.

CREFC continues to focus on the identification of climate-related data most relevant for the CRE finance sector and is developing a climate due diligence resource for investors and lenders.

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

Contact 

News Archive

News

Government Funding Extended to Dec. 20

October 1, 2024

As we previewed last week, the House and Senate passed a continuing resolution (CR) on Sept. 25 to keep the government funded through Dec. 20. The CR also includes temporary extensions for key programs, including the National Flood Insurance Program (NFIP).

Why it matters: Lawmakers avoided an embarrassing government shutdown close to an election and will have a chance to shape funding after November when lawmakers will (hopefully) know who will be in power in 2025.

By the numbers: Once again, Speaker Mike Johnson (R-LA) relied on Democratic votes to pass the CR 341-82, with only GOP opposition.

• However, a majority of the House Republican Conference ended up supporting the bill.
• In the Senate, the bill did not face delay tactics from individual senators before passing 78-18.
• Notably, Sen. Ted Cruz (R-TX), a previous instigator of shutdowns and delay tactics, voted for the CR. Cruz faces a close re-election race.

Contact David McCarthy (dmccarthy@crefc.org) with questions. 

Contact  

News Archive

News

House Hearing with SEC Includes 15c2-11 

October 1, 2024

Last week, the House Financial Services Committee held a hearing with commissioners from the Securities and Exchange Commission (SEC). The Senate Banking Committee’s counterpart to the SEC hearing was abruptly canceled for unclear reasons.

Why it matters: Such hearings often serve as a venue for messaging from lawmakers and offer a chance for regulators to defend or advance their own priorities.

The full committee hearing featured all five of the SEC commissioners and covered a wide variety of topics, including digital assets, capital formation, equity market structure reforms, proxy advisor firms, AI, incentive-based compensation rulemaking, and climate disclosures.

For CREFC members there were a few moments of note:

• Congressman Andrew Garbarino (R-NY) questioned SEC Chair Gary Gensler on whether the SEC would conduct a rulemaking on applying broker-dealer rule 15c2-11 to fixed-income products. Gensler declined to comment on a rulemaking. More detail on that below.
• GOP members teed up questions on the SEC’s authority to issue climate and ESG focused rules.

15c2-11 Discussion: For CREFC members, Rep. Garbarino’s exchange with Chairman Gensler highlights the upcoming 2025 compliance deadline for public fixed-income securities.

• Background: The 15c2-11 rule requires broker-dealers to verify that certain issuer information is publicly available prior to quoting a price on over-the-counter (OTC) securities. The rule always has been interpreted to apply to equities until a 2021 staff “no action” letter clarified that the rule includes fixed-income, including CMBS.
• 144A Exempted: The SEC staff had previously tried to apply 15c2-11 to 144A bonds, which do not have public reporting requirements. The SEC issued an exemptive order in November 2023 that clarified broker-dealers did not have to verify public information for 144A bonds.
• January Deadline: But the exemptive order purposefully did not include public fixed-income bonds, and the 2022 no action letter expires on January 4, 2025. This means broker-dealers will have to verify certain public issuer information in order to quote bonds next year.
• Industry groups have been seeking relief on the 15c2-11 requirements for fixed-income, as the SEC has never addressed how key components of the rule apply to fixed-income.

Rep. Garbarino highlighted potential consequences of SEC inaction:

“Letting no action relief expire could significantly disrupt those markets which are critical to funding businesses across the country, funding consumer lending like auto and home loans and supporting everyone's 401k pension or other retirement savings plans. To avoid this unnecessary harm to investors in our financial markets, can you commit to a permanent extension of this no action letter, or at least an extension until the SEC can propose a rule that is tailored to how fixed-income markets work?” - Rep. Andrew Garbarino

What they're saying: Gensler referenced the 144A exemption, but declined to commit to any rulemaking during the hearing.

Materiality, Climate Disclosures, and ESG

• Rep. Bill Huizenga (R-MI) touched on the topic of materiality, asking Commissioner Hester Peirce why the SEC has diverged from the materiality standard toward “decision-useful language.”
• Commissioner Peirce contended that the shift opens the dialogue to a “wide range of stakeholders who have any list of non-essential, non-economic interests in the company.”
• Rep. Andy Barr (R-KY) focused on the SEC’s climate rule, asking if the SEC has the authority to issue regulations that “compel companies to disclose general and immaterial information about environmental or social issues.” Peirce expressed her concerns about going beyond materiality, emphasizing that materiality serves as the foundational principle for her agency.
• In response to Rep. Barr’s comments, Rep. Sean Casten (D-IL) argued that there are inconsistencies in rating methodologies and weighting systems, emphasizing that there should be a regulatory regime for ESG ratings providers. “We have clear accounting rules for other issues,” he argued. “We should have clear accounting rules there as well.”

Contact  

News Archive

News

Vance’s and Walz’s Dueling Visions for Housing Policy

October 1, 2024

Debate night: At tonight’s VP debate, Sen. JD Vance of Ohio and Minnesota Gov. Tim Walz will be looking to make an impact on voters during their first and final prime-time televised pitch to voters.

Housing costs and availability have been critically important this election, and each candidate’s record on these topics remains relevant. Below is a brief overview of each candidate’s past positions and actions related to housing.

Tim Walz, who has served as Governor of Minnesota since 2019 and was a representative in Congress from 2007-2019, pushed through significant changes in housing policy during his time as Governor. Walz’s playbook resembles Democratic initiatives on the national level by focusing on increasing funding for certain programs and implementing renter protections.

Walz signed a $1 billion housing omnibus bill into law in 2023. This legislation was the largest housing investment in Minnesota's history and allocated funds for various programs:

• $200 million for down payment assistance,
• $200 million for housing infrastructure,
• $135 million for workforce housing initiatives, with a strong emphasis on affordable housing; and
• $45 million for homelessness prevention.

In addition to financial investments, Walz reformed landlord-tenant laws in Minnesota, enhancing tenant protections. Key changes include:

• Requiring landlords to provide 14 days written notice before eviction for nonpayment of rent.
• Allowing cities to implement stricter notice requirements, and streamlining the expungement process for eviction records.

JD Vance, the junior senator from Ohio since January 2023, does not have the same lengthy public record as his counterpart.

However, Vance does sit on the Senate Banking, Housing and Urban Affairs Committee. His statements in housing related hearings can give us some insight into his priorities and what he might do as Vice President on these issues.

A summary of his comments in these hearings is outlined below.

• Immigration: Vance has argued that increased immigration can exacerbate housing affordability issues, particularly in areas with limited housing supply. He has encouraged regulations to ensure that federally subsidized housing is only offered to U.S. citizens.
• Overly burdensome regulations: He has argued that overly complex and burdensome regulations often slow the development of new housing projects, exacerbating the existing housing shortage.
• Empowering local communities: Vance has advocated for local communities to take the lead in addressing their specific housing needs, arguing that localized solutions could be more effective than one-size-fits-all federal mandates.

Vance took issue with the “Housing First” policy and argued that sober living requirements for residents should be incorporated. Vance has said that drugs and substance abuse are issues in subsidized housing developments that hold back many individuals from breaking out of a cycle of homelessness.

• You can watch this hearing at the link here in full. (Vance speaks around the 1:39 mark).

The bottom line: Tonight’s debate will reintroduce both men to millions of Americans and is likely the last nationally televised joint event before the election. While there have been a handful of memorable VP debate moments in history, they rarely overshadow the top of the ticket.

Please contact James Montfort (jmontfort@crefc.org) with questions.

Contact 

News Archive