Equity, Debt & Structured Finance Capital Markets Update

Market Commentary

Treasury yields and major US equity indices moved higher for a second straight week as US and China officials announced plans to hold face-to-face meetings in Washington in “early October.” The optimism of a trade war is outweighing concerns of a slowing global economy temporarily. The increase in rates has meant slightly higher borrowing costs for deals rate locking or closing in the past few days, but sticker prices on borrowing costs remain shockingly low.

 

Headlines are losing luster or shock value on the topic as new records are set weekly, but there is now more than $17 trillion of negative yielding bonds globally. Negative yielding debt is creating a feeding frenzy for US debt as investors worldwide are seeking any positive return on fixed income. This is positive for real estate borrowing, corporate debt, as well as US government debt as each debt offering is oversubscribed and bid to lower yields.

 

Counter to headlines of slowdown, US Labor Department announced the 107th consecutive month of job growth in August. In the sectors that are most important to CRE, job growth was solid. Office-using employment rose by 52,000 jobs, and employment in industrial-related sectors rose by 5,200 jobs. Consumers continue to spend with a strong 4% annual rate increase during the past six months. One area of job growth which stands out as interesting is the decline in truck drivers as the amount of goods shipped grows. This could be a limiting factor for the growth of companies dependent on deliveries.

 

RCA released a story last week on the impact of rent controls on cap rates, housing availability, and loan defaults and impact to stock prices of banks with exposure to multifamily loans. New York and Oregon have passed measures placing caps on rent increases; California is approving a similar measure. The percentage of markets that have experienced cap rates increases is nearly double in markets that have introduced some form of rent control. Local and state governments are sending shock waves through the investment markets. Time will tell if this is an overreaction and those still buying will make money in the long run, or if the groups sidelined with regulation fears were right.

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