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Capital Markets Update Week of 12/17

December 17, 2024

Private-Label CMBS and CRE CLOs

One transaction priced last week:

• ORL 2024-GLKS, an $800 million SASB backed by a floating-rate, five-year loan (at full extension) to a joint venture between Elliott Management and Trinity Investments to refinance the 1,592-room Grande Lakes Orlando Resort.

By the numbers: According to Commercial Mortgage Alert, two transactions totaling $1.4 billion are currently in various stages of marketing. Year-to-date private-label CMBS and CRE CLO issuance totaled $111.1 billion, 142% ahead of the $46 billion for the same period last year.

Spreads Narrow

• Conduit AAA spreads were tighter by 2 bps to +75, and A-S spreads were tighter by 5 bps to +105. YTD, AAA and A-S spreads are tighter by 41 bps and 60 bps, respectively.
• Conduit AA and A spreads were unchanged at +145 and +175, respectively. YTD, AA and A spreads are tighter by 80 bps and 200 bps, respectively.
• Conduit BBB- spreads were unchanged at +450. YTD, BBB- spreads have tightened by 450 bps.
• SASB AAA spreads were tighter by 4 – 7 bps to a range of +95 to +115, depending on property type. YTD, they have narrowed from a range of +143 to +212.
• CRE CLO AAA spreads were tighter by 10 bps to +135 / +140 (Static / Managed), and BBB- spreads were tighter by 25 bps to +375 / +400 (Static / Managed). YTD, they have narrowed from +200 (Static / Managed) and +600 (Static / Managed), respectively.

Agency CMBS

• Agency issuance totaled $4.7 billion last week, consisting of $2.9 billion in Fannie DUS, $1.2 billion in Freddie K, ML, and Multi-PC transactions, and $629.6 million in Ginnie transactions.
• Agency issuance for the year totaled $116.9 billion, 1% higher than the $116.1 billion for the same period last year.

The Economy, the Fed, and Rates…

Economic Data

• Inflation: The inflation rate ticked up to 2.7% in November from 2.6% in October, consistent with economists’ expectations but still indicative of persistent price pressures. Core CPI inflation rose by 0.3% in November, marking the fourth consecutive month at this pace, keeping the 12-month rate at 3.3%. While shelter inflation slowed, core goods prices rose, reflecting persistent inflationary pressures.
• Producer Price Index (PPI): Producer prices showed an unexpected acceleration in November, rising 0.4% (the highest since June), though components feeding into core PCE, the Fed’s preferred inflation measure, were relatively soft. A significant surge in food prices, particularly eggs (up 55%) and fresh vegetables (up 33%) drove the increase.
• Labor Market: Jobless claims rose to 242,000 in the week ending December 7, up from 225,000. While some increase may be due to seasonal adjustment challenges around holidays, the trend suggests cooling labor market conditions. The median duration of unemployment reached 10.5 weeks in November, up from 9.0 weeks a year earlier.

Federal Reserve Policy

• Expected Rate Cut: The Fed is expected to announce a 25-basis-point rate cut at its December 17–18 meeting, lowering the federal funds rate to a target range of 4.25%-4.5%. This would mark the third consecutive rate reduction despite inflation persisting above the 2% target. Market pricing shows a near-100% probability for this move.
• Neutral Rate Uncertainty: Ongoing discussions about the neutral rate (r*) - the rate at which monetary policy neither stimulates nor restricts growth - are influencing Fed decisions. Estimates for r* have edged higher to 2.875% in recent months, reflecting shifts in long-term economic fundamentals. As Fed Chair Jay Powell noted: "We're pretty sure it's below where we are now," though the exact level remains uncertain.
• Long-term Strategy: Beyond December, the Fed will likely pause or slow its rate-cutting trajectory to balance the risks of entrenched inflation and labor market destabilization. Powell explained that the Fed faces a delicate balance: "We're mindful of the risk that we go too far, too fast, but also of the risk that we don't go far enough."
• Implications of Trump Policies: President-elect Trump’s proposed tariffs and tax cuts could introduce upward inflationary pressures, complicating the Fed’s efforts to stabilize prices. Economists warn of potential policy confrontations between the administration and the central bank in 2025.
• Federal Deficit Concerns: The federal budget deficit hit $1.83 trillion in fiscal year 2024, the highest since the pandemic years, driven by increased debt interest costs and higher Social Security and defense spending. These fiscal imbalances could limit the flexibility of both monetary and fiscal policymakers.

Market Reaction

• Treasury Yields: Treasury yields surged, with the 10-year yield climbing 25 bps over the week to 4.40% and the 30-year yield up 26 bps to 4.60%. The yield curve steepened, signaling market recalibration as investors priced in fewer rate cuts in 2025. Breakeven TIPS rates increased, driven by elevated food prices and resilient economic activity.
• Equities: Equity markets, particularly tech-heavy indices, have rallied on expectations of continued monetary easing. The Nasdaq Composite surpassed 20,000 for the first time on Wednesday. However, the rally contrasts with concerns over longer-term inflation risks and fiscal constraints.

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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CREFC Highlights Threats to Debt Liquidity 

September 25, 2023

This week, CREFC continued its ongoing efforts to highlight government policies that could negatively impact CRE and multifamily debt liquidity. The key concerns include:

• Basel Endgame Proposal that would raise capital requirements on banks with >$100 billion in assets. Some estimate overall capital charges could increase 20%, which means less credit available for borrowers.
• The SEC’s overly broad Conflicts of Interest in Securitization proposal could levy additional compliance burdens and limitations on CMBS participants and possibly chill participation in the market.
• The looming threat to the 144A market in 2025 when the SEC’s interpretation of 15c2-11 will require broker-dealers to verify information is publicly available on 144A bonds to freely quote them.

Any of these proposals in isolation could prove challenging for CRE finance in normal times. But during this difficult market, government policy could exacerbate the cost and availability of CRE and multifamily credit. The above will only exacerbate the market challenges to CRE debt liquidity given today’s sharply higher benchmark and mortgage rates.

Last week, CREFC met with key policymakers including:

• SEC Commissioner Hester Peirce;
• Rep. Andy Barr (R-KY), Chairman of the Financial Institutions and Monetary Policy Subcommittee of the House Financial Services Committee; and
• Key Democratic and Republican members and staff of the House Financial Services Committee.

Policymakers are interested in developments in the CRE markets, and there is bipartisan concern that regulation, including capital rules, may overburden access to credit for CRE during one of the more challenging market environments since the GFC.

Contact Sairah Burki (sburki@crefc.org) with questions on regulatory advocacy and David McCarthy (dmccarthy@crefc.org) with questions about legislative advocacy. 

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Key Committees See Influx of Freshman Lawmakers

December 17, 2024

The makeup of key committees in Congress is starting to take shape and there have been a few surprises. Notably, a record number of freshman lawmakers will join the so-called “A Committees.”

As reported in the story above, Rep. French Hill (R-AK) beat out Rep. Andy Barr (R-KY) for the coveted top spot on the Financial Services Committee. He will replace retiring chair Rep. Patrick McHenry (R-NC).

The leadership of key “A Committees” is listed below.

Committee on Appropriations

• Chairman: Tom Cole (R-OK)
• Ranking Member: Rosa DeLauro (D-CT)

Committee on Energy and Commerce

• Chairman: Brett Guthrie (R-KY) (New chair)
• Ranking Member: Frank Pallone (D-NJ)

Committee on Financial Services

• Chairman: French Hill (R-AR) (New chair)
• Ranking Member: Maxine Waters (D-CA)

Committee on Ways and Means

• Chairman: Jason Smith (R-MO)
• Ranking Member: Richard Neal (D-MA)

Why it matters: The GOP appointed a record number of eight freshman members to the “A Committees.” No newly elected lawmakers made it to the Ways And Means Committee, for which freshman members are rarely selected.

However, there were some new additions to the Ways and Means Committee on the GOP side. They are:

• Rep. Aaron Bean (R-FL)
• Rep. Max Miller (R-OH)
• Rep. Nathaniel Moran (R-TX)
• Rep. Rudy Yakym (R-IN)

The eight freshman members who made it on to the other three “A Committees” are:

• Appropriations Committee: Rep-elect Riley Moore (R-WV)
• Energy and Commerce Committee: Reps-elect Gabe Evans (R-CO), Julie Fedorchak (R-ND) and Craig Goldman (R-TX)
• Financial Services Committee: Reps-elect Mike Haridopolos (R-FL), Marlin Stutzman (R-IN), Tim Moore (R-NC) and Troy Downing (R-MT)

The bottom line: These freshman members have the rare privilege of sitting on highly sought-after committees and likely will have an impact on policies relating to financial markets, energy, and government spending.

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

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