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Capital Markets Update Week of 4/21

April 23, 2024

Private-Label CMBS and CRE CLOs

In a busy week, four private-label transactions priced, including the first CRE CLO since February:

• BANK5 2024-5YR6, a $984.3 million conduit backed by 46 five-year loans secured by 54 properties. Retail (49.7%) comprises the largest property concentration, followed by hotel (16.7%) and multifamily (13.8%).
• SDR 2024-DSNY, $735 million SASB backed by two cross-collateralized, five-year loans (at full extension) for Tishman Hotel & Realty and MetLife on the leasehold interest in the 2,619-room Walt Disney World Swan & Dolphin Resort complex
• AREIT 2024-CRE9, a $678.4 million static CRE CLO backed by five whole loans and 10 loan participations on 22 properties in 11 states. Multifamily (51.1%) comprises the largest property type concentration, followed by industrial (24%) and mixed-use (13.4%).
• DATA 2024-CTR2, a $185 million SASB backed by a 10-year fixed-rate loan for Digital Realty Trust’s recapitalization of a 328,000 sf data center outside Chicago

According to Commercial Mortgage Alert, a $862.9 million five-year conduit offering is in the market and expected to be priced this week, along with a $1.3 billion SASB transaction. Year-to-date private-label CMBS and CRE CLO issuance totals $23.6 billion, well ahead of the $8.9 billion for the same-period 2023.

Spreads Mixed

• Conduit AAA and A-S spreads were wider by 5 and 10 bps to +97 and +140, respectively. YTD, AAA and A-S spreads are tighter by 19 bps and 25 bps, respectively.
• Conduit AA and A spreads were unchanged at +150 and +250, respectively. YTD, they have tightened by 75 bps and 125 bps, respectively. ­
• Conduit BBB- remained at +675. YTD, BBB- spreads have tightened by 225 bps.
• SASB AAA spreads were wider by 8 bps, ranging from +145 to +162, depending on property type. They have narrowed from +160 to +188 at the start of the year.
• CRE CLO AAA spreads held at +160/165 (Static/Managed), and BBB- spreads at +650 (Static / Managed). For the year, spreads are tighter by 40 / 35 bps and 50 bps, respectively.

Agency CMBS - By the Numbers

Agency issuance totaled $1.8 billion last week, consisting of:

• $826.6 million in Fannie DUS,
• $716.9 million in Freddie-K and Multi-PC transactions, and
• $238.8 million in Ginnie transactions.

Agency issuance for the year is $29.1 billion, 13% lower than the $33.5 billion for the same period last year.

The Economy, the Fed, and Rates…

Economic Data

• Initial jobless claims held steady at 212,000 for the week ending April 13, indicating ongoing labor market strength despite high interest rates, reinforcing the Fed’s cautious approach to rate cuts.
• Continuing claims, a proxy for the number of people receiving unemployment benefits, were also little changed at 1.81 million in the week ended April 6.

Fed Policy

• Fed Chair Jay Powell and other officials signaled a potential prolonging of high interest rates due to recent disappointing inflation data. Powell cemented that message last week when he said it would likely take “longer than expected” to gain the confidence needed to lower rates, dashing hopes for more than two cuts in 2024.
• The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is projected to remain elevated in March, according to data due this week. The measure is seen accelerating slightly to 2.6% on an annual basis as energy costs rise.
• Other data for the week include the government’s initial estimate of first-quarter GDP, which probably cooled from the prior period’s robust pace but still exceeded what policymakers deem sustainable in the long run.

Market Sentiment

• A Bloomberg article last week highlighted a radical theory spreading on Wall Street to explain the economy’s continued strength despite higher interest rates. What if all the interest rate hikes over the last two years are actually boosting the economy?
• The theory suggests that increased income from savings and bonds due to higher rates could be boosting consumer spending and corporate profitability, countering the traditional view that rate hikes slow economic expansion.

Treasury Yields

• Treasury yields have climbed in recent weeks amid the disappointing inflation data. The 10-year yield reached its highest level of the year last week at 4.67%, following Powell’s comments conveying a lack of urgency to adjust rates. The 10-year T-note yield ended the week at 4.62%, up 10 bps from the prior week, while the 2-year yield ended the week at 4.99%, up 9 bps from the preceding week. The curve clearly remains inverted.
• According to an article by ING Bank NV, a revival in the so-called term premium in Treasuries would pave the way for the benchmark 10-year yield to return to the key 5% level. The term premium is typically described as the extra yield investors demand to own longer-term debt instead of rolling over shorter-term securities as they mature. “Currently there is virtually none,” noted the article.

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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NY Renews Affordable Housing Tax Program; Other Housing Provisions

April 23, 2024

Last week, New York Governor Kathy Hochul (D) announced an agreement with the NY legislature on the FY 2025 budget, which will include a new tax incentive for affordable housing and extend the 421a tax credit for existing projects. The law also will introduce new tenant protections. The legislature passed Hochul’s agreement over the weekend.

• Click here for an analysis of the housing provisions from The Real Deal.

Why it matters: The 421a program, which provided tax exemptions for NYC multifamily construction projects with 30% of affordable units, expired in June 2022 amid criticism the program benefited developers and wealthy individuals.

• Rent Caps: The bill also included a watered-down version of “good cause eviction”, which can effectively limit rent increases. The legislation allows renters to challenge an eviction due to annual rent increases over 10% or 5% plus inflation (whichever is lower).
• Limited Scope: The good cause eviction automatically applies in NYC while other communities can opt in. The protections are limited to buildings constructed before 2009 and renters under a 245% area median income metric for affordability.
• Office Conversions: The law will allow NYC to rezone buildings and teak the residential floor area ratio (FAR) above 12 times the lot size, though the changes come with limitations and some affordability requirements.

The big picture: Click here for a New York Times story on the recent history of the tax incentive. The topline housing items touted by Hochul include:

• A landmark plan to build more housing in New York City, including establishing the new 485-x tax incentive to construct affordable housing, extending the 421-a tax incentive for six years for projects already in the pipeline, changing the outdated 12 FAR density cap, creating incentives to convert unused office space into affordable housing.
• New initiatives to spur housing creation statewide, including a new 421-p tax incentive to construct housing outside NYC, mandating that $650 million in discretionary funding goes to Pro-Housing Communities, allocating $500 million to build up to 15,000 new homes on state land, and incentives for Accessory Dwelling Units (ADUs).
• Historic protections for tenants and homeowners, including anti-price gouging measures for renters, stronger protections from evictions, new enforcement and preventative measures to protect homeowners from deed theft, and reinforcement of the law that squatters are not tenants.
• More than $600 million in capital funding to support housing statewide.
• Combating housing discrimination against Section 8 voucher recipients and affordable housing providers.

Go deeper: Hochul has been working to revive the incentive and deferred to the real estate industry, city officials, and unions on how to structure the new program, known as 485x. According to The Real Deal, the 485x program:

• Provides a 40-year exemption on taxes, up from 35 years, and requires income-restricted units remain permanently affordable;
• Includes wage requirements for 100+ unit projects; and
• Affordability requirements depending on the size of the building.

The program expires in June 2034.

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

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Presidential Election: RFK Jr. - A Spoiler?

April 23, 2024

Robert F. Kennedy Jr. has been drawing outsize attention in his campaign, as he seeks to follow in the footsteps of his father Robert F. Kennedy and uncle, John F. Kennedy.

Why it matters: RFK Jr. is unlikely to win any individual state but could be a spoiler for Trump or Biden in November, as he is averaging 7.9% in polls.

• Kennedy has been running for president since April 19, 2023, though he initially challenged President Biden for the Democratic presidential nomination. This past October he changed course and announced he was running as an independent.
• On March 26, 2024, Kennedy announced his running mate, Nicole Shanahan. For her background click here, for RFK Jr’s biography click here.

By the numbers: Is RFK Jr. drawing more votes from Trump or Biden? The answer is unclear, but a few polls have tried to gauge Kennedy’s strength in key swing states.

In polling done by The Wall Street Journal, Kennedy received varying levels of support in swing states. In the crucial states of Michigan, Arizona, and Nevada, he received 12%, 13%, and 15% of the vote, respectively.

Later in the poll, voters were asked to choose from a list of candidates that did not include Kennedy and then to choose again from a list to which Kennedy had been added. For the full poll, please click here.

• Trump lost a higher percentage of voters to Kennedy than did Biden in five of the seven swing states polled. But in most cases, that difference was around 1%, within margins of error.
• Historically, third-party candidates tend to do worse than their polling suggests. As voters consider the likely outcome of the election, the allure of an outsider candidacy tends to wane.

Other data points demonstrate that RFK’s campaign draws from Biden voters.

• In the polling average maintained by The Hill and Decision Desk HQ, Trump leads Biden in a one-on-one match-up by a negligible margin: roughly half a percentage point. But the former president has a 2-point advantage over Biden when Kennedy is listed as an option.

Where Is RFK Jr. on the ballot? RFK Jr. claims he is on the ballot in all of the states noted below. Yet, not all of those states have confirmed.

Ballot eligibility varies from state-to-state:

• RFK Jr’s campaign claims that he is on the ballot in Utah, Hawaii, Nevada, New Hampshire, North Carolina, Iowa, Nebraska, Michigan, and Idaho.
• Only Michigan and Utah state officials have publicly confirmed he is on their ballots.
• The 2020 winning margins in Nevada, North Carolina, and Michigan were under 3% in 2020.

What’s next: Both campaigns have taken note of Kennedy’s candidacy, with the Biden campaign recently holding an event in which other members of the Kennedy family endorsed Biden instead of their relative.

• However, third-party candidates’ influence tends to peak before the party nominating conventions in the summer and then wanes as election day grows closer.
• These next few months could very well be Kennedy’s high-water mark. Click here for a deeper dive on the history of third-party voting.

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

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