Real Estate Finance Intelligence 4.21.17
Interest rates and bond yield
With money flowing into the bond market, the 10-year bond has fallen to yields not seen in 6 months. The 10-year bond has wiped out all appreciation in the yield seen since the election, as the yield is now at the same level it was just after the November election, falling to 2.23% this week. Thus, the bond has lost close to 30 basis points since the Fed hike of March. It is hard to tell if this contraction in the rate is foretelling doom in the economy or signaling investor concern over the state of world affairs. At this point, no part of the yield curve has inverted, but the spread between the Fed’s Funds Rate and all bond maturities remains narrow. In fact, if the Fed raised rates 25 basis points, with where the yield curve stands today, the short end of the curve would invert.
Commercial Real Estate and CMBS
The CRE and CMBS markets were quiet, but in fair shape this past month. In fact, future CMBS activities for the second quarter of 2017 were much more optimistic than the first quarter. As foretold by the amount of loans in the pipeline, the first 2 months of the second quarter will be $5 billion more than all of the loans developed for all three months of the first quarter. Since the CMBS risk retention rules went into effect in December, the market is continuing to evolve how best to implement loans under these rules. This past month saw the first “L” spread of risk retention developed. While it is too early to tell how this will be received by the market moving forward, so far, the process was moving smoothly. On the regulation front, former Fed Chair Greenspan has come out in favor of a repeal of the Frank-Dodd act to spur economic growth. Although current regulators are continuing to examine and propose measures to control actions in the marketplace. One current proposal focuses on legal off-balance sheet loans, ensuring that banks who enter into these transactions are examined and prepared to take on these loans, even if they are under no contractual reason to do so. The hope is that even in the worst-case scenario the bank will remain solvent even if they are forced to take on these loans. Retail has remained the main bugaboo for the CRE market this past month. More retailers across the country have closed stores, filed for bankruptcy, or gone out of business altogether. Today the talk in the industry is of the “triple threat,” which means a mall that has as its anchor stores- Sears, JC Penney, and Macy’s. In fact, a new estimate released a few weeks ago indicated that there were over 1 billion square feet of retail space currently available in the US market. However, some E-commerce businesses are considering taking up some of this space as they continue to expand operations to meet consumer demand.A