Last week, market activity was slow due to the Thanksgiving holiday. Two- and 10-year Treasury yields came up 10 and 7 BPS, respectively. Uncertainty about the cumulative impact of monetary tightening remains, which continues to influence the Federal Open Market Committee’s (FOMC) “wait and see” approach. Since their last meeting, the 10-year yield has fallen 50 BPS, the labor market has tightened, and inflation has seen its downside. Due to these signals, it looks like we’ve seen the end of the FOMC’s rate hikes. However, based on the Fed’s meeting minutes that were released last week, there appears to be a dichotomy between market expectations and the Fed’s promises. It remains unclear when they’ll begin cutting the rates – this depends almost entirely on inflation. The question everyone is asking: Will the Fed’s cut rates when they near their inflation target or hold steady?

This week we have Gross Domestic Product (GDP) to watch on Wednesday, Personal Consumption Expenditures Price Index (PCE) on Thursday, and Institute for Supply Management Price Index (ISM) on Friday. Core PCE is the inflationary measure that the Fed watches most closely. There are also several TSY auctions (about $150B) early this week between the 2- and 7-year sectors and a speech from Powell on Friday that will be worth watching.

It was also a quiet week on the macro level. There are a lot of hawkish members of Congress looking for dramatic cuts to spending. It’s tough to imagine them coming to an agreement. We may be in for a brutal fight with no middle ground.

The average commercial mortgage-backed securities (CMBS) coupon through Q3 has been about 7%, with term averaging between 85-90 months, loan-to-value (LTVs) below 55% and debt-service coverage ratios (DSCR) between 1.90 and 2.0. 

We will provide insights on how Q4 is performing as we learn more.

About Thirty Capital Financial:

Thirty Capital Financial is a leading service provider to the commercial real estate industry. Our team of advisors have spent decades providing solutions for defeasance, interest rate hedging, and debt management. With our personalized approach, we provide you with the tools, solutions, and strategies to confidently manage debt while supporting the growth of your company. Contact us today to speak with an expert defeasance consultant!

Last week was a light one for economic data. Two- and ten-year Treasury yields increased about 22 BPS and 8 BPS, respectively. The Treasury auctioned $24B in 30-year bonds, which went poorly.

There weren’t enough bids to clear the market – primary dealers had to step in and buy 25% of the auction (10-11% is normal), which increased 10-year yield by about 13 BPS.

Moody’s put US Treasuries on a negative outlook from a credit perspective. Moody’s is the last AAA rating on our government debt, which seems to be in peril at the moment.

Powell notably came out and said, “The inflation battle has a long way to go.”  

This week, there will be much more interesting economic data to watch.

Tuesday, we have Consumer Price Index (CPI) data coming out, followed by Retail Sales and Producer Price Index (PPI) on Wednesday. The Philadelphia Fed outlook and Housing Starts numbers are also worth watching later in the week

The debt ceiling is Friday, November 17 at midnight. There’s a real possibility of a government shutdown on Friday. It will be a challenge for anything to pass in the House that would prevent this from happening.

It’s also important to note that a couple weeks of movement doesn’t necessarily make a trend. We should still generally be looking at a higher rate environment moving forward.

Projected rate cuts are now pushed out to next summer (June/July). There’s still a significant inversion for forward starting hedges over the next 18 months.

The Chinese government is requiring their banks to buy Chinese currency. They’ve been selling off US debt to free up capital to be able to do so. This is a trend we expect to continue.

 Commercial mortgage-backed security (CMBS) issuance is still limited. A couple more securitizations should go through by the end of the year, with coupons averaging around 7.5-8% and the large majority being 5-year deals. 

About Thirty Capital Financial:

Thirty Capital Financial is a leading service provider to the commercial real estate industry. Our team of advisors have spent decades providing solutions for defeasance, interest rate hedging, and debt management. With our personalized approach, we provide you with the tools, solutions, and strategies to confidently manage debt while supporting the growth of your company. Contact us today to speak with an expert defeasance consultant!

First off, know that you are not alone. According to the Mortgage Banking Association, an estimated $1.5 trillion in commercial real estate (CRE) loans will mature over the next three years. In the recent past, this wasn’t an issue worth discussing. Low interest rates coupled with high valuations and strong fundamentals led to nearly automatic refinancing opportunities or multiple-offer sales transactions. Owners were afforded several end-of-term alternatives, all positive for their bottom line. But for many property owners, this is now no longer the case.  

Higher interest rates, market volatility, and tightened credit standards have left owners with fewer options to refinance or sell their assets as their existing loans come due. A disconnect in property valuations between sellers and buyers has halted the frenzied pace of acquisitions that occurred in 2021-2022. Some borrowers must now come out of pocket and put in additional equity to make refinance terms work. Additionally, commercial real estate owners are facing a much different landscape than just a few years ago. 

We compiled the following best practice tips to help commercial real estate borrowers navigate how to prepare for a loan that is coming due.    

CRE Loan Maturities Best Practice Tip #1: Prepare for Your Loan’s Maturity in Advance  

First, start preparing early (and there is no such thing as too early). In the years leading up to your loan maturity, work to strengthen property fundamentals to best position your asset for a sale or refinance. Keep a pulse on your local real estate market, and use reporting tools to evaluate the best time to transact.  

Asset management software, like Lobby CRE, can help you track property fundamentals and associated debt across your portfolio. Thirty Capital Financial’s Debt Optimization Model marries proforma assumptions, your current loan terms, and application of forward rate curve projections to stress interest rates, cap rates, and exit costs. The Debt Optimization Model can be used to determine when and if adjustments to your operations and debt strategy should be made. Finally, Lobby CRE provides benchmarking tools that can help ensure your property metrics are in-line with the market for your asset type and location.    

CRE Loan Maturities Best Practice Tip #2: Get Organized 

Second, get all of your ducks in a row. A good place to start is to double check that your financial reports, tax returns, bank statements, loan documents, and other financial property and entity records are complete and organized. EntityKeeper is a cloud-based entity management solution that helps businesses to stay organized and maintain corporate and loan records in a safe and secure location.    

CRE Loan Maturities Best Practice Tip #3: Understand Your Call Protection 

Third, understand your call protection. To do this, you must first determine whether your loan requires defeasance, yield maintenance, or something else. You should obtain yield maintenance or defeasance quotes to ballpark the costs involved.  Defease With Ease (DWE), today Thirty Capital Financial, pioneered the defeasance consulting industry and remains the top choice for commercial real estate owners across the nation.  The team provides free quotes for both defeasance and yield maintenance and will take the time to walk you through the complex process and calculations involved in these transactions.  

CRE Loan Maturities Best Practice Tip #4: Create a Backup Plan 

Next, have your originator or broker contacts on speed dial.  It takes months to negotiate and close a refinance or sale, and market volatility only increases this timespan. Throughout 2023, lending standards have tightened. Originators are looking for just the right balance when underwriting loans, evaluating a multitude of factors like property type, asset class, location, sponsor creditworthiness, desired loan terms, property fundamentals, and economic conditions. In addition, the Federal Reserve’s rapid rate increases over the past year have translated to higher borrowing costs, financial covenant default concerns, and increased hedging expenses. Combine that with a cooling commercial real estate market as buyers become more discerning about where to invest their capital, and you are left with fewer options than just a year ago.  Even if you have a loan commitment or buyer in place, it doesn’t hurt to have a backup plan. 

CRE Loan Maturities Best Practice Tip #5: Communicate with Your Loan Servicer or Lender 

Finally, in the months leading up to your loan’s maturity date, we recommend you reach out to your loan servicer or lender and create an open line of communication.  You should make them aware of your exit plan, including providing the required notices for prepayment or defeasance transactions.  If you are unsure how to proceed and require additional time, you may need to discuss a loan extension, modification, or other workout alternative. 

As we enter Q4 2023, we expect market volatility to persist, fueled by geopolitical concerns, elevated inflation, domestic political turbulence, shifting workplace norms, and steady high interest rates.  At Thirty Capital Financial, we are here to help CRE owners position themselves for the best possible outcome in any market environment.  

You can also reach us at info@thirtycapitalfinancial.com for more information about our products and services offered through LobbyCRE and EntityKeeper.