It’s hard to believe, but we are about to head into 2023.
Although not much has changed since our last update, there are still some points that must be considered as the year ends.
So, in this month’s economic update, we’ll talk about some big moves coming from some of the nation’s largest corporations as well as the U.S. treasury.
To begin, let’s talk about everyone’s favorite topic, the U.S. Treasury.
A Leap In Treasury Yields
Treasuries sold off on Monday as stronger-than-expected US economic data added fuel to traders' bets on how high Federal Reserve interest rates might ultimately go. The pullback in US debt markets drove yields in the belly of the curve up by around 10 basis points, with the 10-year rate jumping to 3.58%.
Swaps showed a similar increase in expectations for where the Fed terminal rate will be, with the market indicating a peak of close to 5% in the middle of 2023. The dollar also strengthened, while US stocks lost ground.
Monday's moves were also influenced by the Institute for Supply Management's services gauge, which unexpectedly rose to 56.5 in November from 54.4 the month before. This increase in the business activity measure was the biggest since March 2021, suggesting that the largest part of the US economy remains resilient.
Investors are likely to closely watch data releases, including next week's consumer-price inflation report. Additionally, liquidity may be strained heading into the holiday period, potentially leading to larger market movements from smaller transactions.
Blackstone Property Bets Getting Rockier
Sky-high rents for non-mainstream real estate may be a pandemic trend that is about to reverse, with Blackstone's $70bn property fund potentially having performed too well for its own good.
Clients were told last week that they will have to wait to get their money out of the private equity firm's semiliquid, nontraded real-estate investment trust, known as BREIT. More than most REITs, Blackstone's portfolio is stuffed with the kind of property that has been in high demand: 55% is rented residential, 23% is logistics buildings, such as e-commerce warehouses, and the rest is data centers, student housing, offices and retail.
Starwood Limited Investor Redemptions
Starwood Real Estate Income Trust (SREIT), a $14.6 billion real estate investment trust (REIT) managed by Starwood Capital, is limiting investor redemptions after receiving requests that exceeded its monthly limit in November.
SREIT is the second-largest nontraded REIT behind Blackstone Real Estate Income Trust (BREIT), which also placed limits on redemptions in November. Both SREIT and BREIT allow for 2% monthly redemptions of net asset value (NAV) and 5% of NAV quarterly.
The elevated redemption requests show that many retail investors are moving away from non-traded REITs after their performance vastly exceeded that of publicly traded peers this year.
NYC's Silverstein Raises $1.5 Billion For Office Conversions
New York developer Silverstein Properties is seeking to raise $1.5bn for converting older offices to residential buildings.
The effort could potentially expand to other areas of the US, such as Washington, D.C., Boston and the West Coast. CEO Marty Burger said in an interview, "It's a huge market. Our acquisition group is solely focused on this right now."
Silverstein Properties agreed to buy a Financial District office building with partner Metro Loft Management earlier this year and plans to start transforming the property into residential units in 2023.
December: Moving Forward
In the real estate market, cap rates may need to widen, or increase, in order to attract investors and lenders. This may be particularly true in weaker markets, where there is less demand for commercial real estate and therefore a higher risk of investment.
For borrowers who need to refinance their commercial real estate properties in the near term, there may be a "funding gap" if the lender-required coverage ratios, such as the debt service coverage ratio (DSCR) and debt yield, are not met. These ratios are used by lenders to assess the borrower's ability to repay the loan and to ensure that the property generates sufficient income to cover the loan payments. If the coverage ratios are not met, the borrower may not be able to refinance their loan or may only be able to do so at a lower loan amount, resulting in a funding gap.
To bridge this funding gap, borrowers may need to execute a cash-in refinance, in which they contribute additional cash to the property in order to meet the lender's requirements. Alternatively, they may be able to refinance with subordinate debt, in which a secondary lender provides additional financing to fill the gap. In some cases, borrowers may need to sell their properties in order to bridge the funding gap.