CMBS Takes a Tumble Amid Fed Rate Hikes

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DEEP FREEZE

Bond Volume Plummets as the Commercial Property Market Hits a Wall

The sales of commercial mortgage bonds have taken a drastic dip, dropping by approximately 85% year-over-year. The increase in interest rates has resulted in a reduction in lending volume, and investors have been alarmed by the spike in defaults.

Applying pressure: A rising interest rate environment, lack of transaction volume, and large-scale defaults in office & retail sectors have investors shaking in their boots. Earlier this week, Brookfield (BN) defaulted on loans associated with two offices, rather than refinancing the debt—a sign of things to come as office demand continues to fall.

Don’t just stand there, do something!: The Fed’s rate hikes have also increased cap rates, bringing commercial property prices down and transaction volumes to a screeching halt. As the Mortgage Bankers Association expects CRE loans to fall another 15% this year, expect financing to chase “trophy assets” with excellent sponsors and collateral.

➥ THE TAKEAWAY

More of the same: Barclays (BCS) expects CMBS issuance to stay low through the remainder of the year, forecasting $45B of securities backed by mortgages on single properties. Market participants (aka, you and I) are still adjusting their pricing expectations to the new rate environment. The sooner we can arrive at some kind of consensus, the better.

TAX REBATE

Detroit Hopes for Revitalization with a Property Tax Overhaul

Detroit is considering a radical change to its property tax system in a push to revitalize the city and shrink racial wealth disparity. If successful, it could become a replicable model for other Rust Belt cities.

Understand the incentives: Most cities in the U.S. calculate property taxes by estimating the value of a property’s land and buildings, and charging a fixed percentage on that amount. The proposed tax change would calculate taxes based on the value of the land only, rather than the value of the land and buildings. The idea is that homeowners and commercial-property owners would see their tax bills fall, encouraging new property development.

A long way to go: The proposed legislation has several legislative hurdles to clear, including state approval and a majority vote from Detroit voters. However, Joe Tate, the speaker of Michigan's House of Representatives, supports the new policy. Other mayors and housing advocates have their eyes on Detroit as a guinea pig for this tax policy.

Vicious cycle: Out-of-state investors bought up land in Detroit, speculating on eventual appreciation. A continued decline in population brought down home values and property taxes, pushing city lawmakers to raise taxes and inadvertently drive more people away. Proponents of the tax change believe (hope?) that the law will be a boon for property values and new development.

➥ THE TAKEAWAY

Bring out the skeptics: Others, like developer Roderick Hardamon, aren’t so hopeful. Hardamon argues that unfair property tax assessments happen under both types of systems, so there won’t be a material difference from the tax change. Another risk is that businesses that use a lot of land will suffer more than property owners will benefit.

• More roadblocks: Lenders are pushing developers for conservative income assumptions in their proformas, reflecting slowing demand for apartments.

• Lowball offer: Life Storage Inc. (LSI), rejected an $11B bid from Public Storage (PSA), claiming that the offer price “significantly” undervalues their assets.

• Slow your roll, landlords: Boston Mayor Michelle Wu proposed a rent-control measure that caps rent increases at between 6% and 10%, depending on CPI.

• Still in pain: Despite solid jobs numbers in January, the Producer Price Index shows that prices were up 6.0% over the last 12 months.

• The people's champ: Blackrock's (BLK) fixed-income ETFs have attracted more investor cash since US interest rates started rising than all their competitors combined.

• A whole lotta bucks: Apollo Global Management Inc. (APO) and Newbond Holdings are considering selling the Westin Tampa Waterside for over $150M.

• Retail resurgence: Retail REITs are crushing their pre-pandemic performance as foot traffic and leasing activity have returned to healthy levels.

• Scrambling to the finish line: The stalled NYC high-rise project at 125 Greenwich has been resurrected—the partners scored $313M from Northwind Group to complete construction.

• The American Nightmare: Along with urban offices, U.S. malls are in trouble yet again, with New Jersey’s American Dream mall leading the way.

• Long live the 'burbs: Coworking spaces outside major cities are growing, as workers who moved to the suburbs during COVID need office spaces closer to their homes.

• Deep value: Despite soaring inflation and economic uncertainty, most 401(k) plan participants in the US increased their contributions and rode out the COVID market downturn.

• Crypto is back?: Soros Fund Management bought $39.6M of convertible debt in crypto miner Marathon Digital Holdings (MARA), according to a 13F filing with the SEC.

• The bigger they are, the harder they fall: A new report from CoreLogic shows that declines in housing prices in high-priced areas are causing U.S. price levels to converge at lower levels.

• Bulk distribution: Terreno Realty Corp. (TRNO) is buying a 121-acre site in Hialeah, FL for $173.6M, with plans to develop 2.2 MSF of industrial assets.

• Get back to work: Amazon (AMZN) is requiring employees to return to offices at least 3 days per week starting on May 1.

• What's your hourly rate?: Beyonce earned $24M for a one-hour concert in the grand opening of Dubai’s Atlantis The Royal.

ICYMI

⏪ Last Week's Highlights

📈 Chart of the Day

This upcoming week will be filled with significant data, including the US PCE inflation, revised Eurozone CPI, and US personal income. In addition to that, we can expect the release of the Fed minutes, more statements from Fed officials, as well as comments from BoE officials. Notably, we will hear from the newly nominated BoJ governor for the first time. The G20 meeting on debt in India is also worth keeping an eye on.

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