Hot Inflation Keeps Fed Rate Hike in Play

Good morning,

Hot inflation keeps Fed rate hike in play, “Almost all loans are bad” - banks cautious on lending despite deposit pressure, multifamily remains preferred asset class for investors, and American Eagle sues landlord over safety issues at San Francisco Centre. Let’s delve into today’s topics.

📈 Market Update

📈 Hot Inflation Keeps Fed Rate Hike in Play

August's higher-than-expected core CPI inflation reading of 0.6% likely ensures the Federal Reserve keeps interest rate hikes on the table for November or December. Despite a projected pause this month, the accelerating core inflation remains well above the Fed's 2% target. Markets see less than even odds of a November hike, but further tightening can't be ruled out. Services inflation jumped in August, reflecting still-tight labor markets. While energy drove overall inflation, the core uptick suggests entrenched pressures. With inflation expectations a key concern, the Fed will remain data-dependent but another rate hike this year seems probable.

🏦 “Almost All Loans Are Bad” - Banks Cautious on Lending Despite Deposit Pressure

Although increasing lending could help offset rising deposit costs, banks are extremely selective about expanding their loan books. Despite cheap valuations, banks worry about deposit stability and higher capital requirements from the Federal Reserve. Major banks say they will focus lending on core customers rather than indirect channels, and may pull back on certain types of loans. While prudent lending standards are positive, the lack of credit expansion presents headwinds for banks aiming to grow revenues.

Startup Aims to Revive Mortgage Loan Assumptions:
RE startup Roam is trying to revive "assumable loans," where home sellers transfer their existing low mortgage rate to buyers. Demand for mortgages has essentially stalled as rates exceed 7%. Loan assumptions are more prominent in commercial transactions, and could help residential buyers avoid today's interest rates. But loan assumptions have gained little traction so far, as most lenders don't want to process them. Roam aims to streamline the process and make assumptions more appealing. But the concept faces hurdles, as investors could demand higher rates on new loans if more borrowers assume older ones.

🔝 Multifamily Remains Preferred Asset Class

Multifamily has become the top sector for CRE investment, attracting nearly $500B over the past two years. Strong fundamentals during the pandemic contrasted with struggling CRE segments. Persistent housing scarcity and demographic shifts supporting renting have boosted demand. Although valuations have moderated from 2021/2022 peaks, multifamily cap rates remain well below offices. Investors are attracted to luxury rental units supported by high-income households. With rents forecast to recover by 2024, investor interest should sustain multifamily as the leading CRE sector.

🏬 American Eagle Sues Landlord Over Safety Issues at San Francisco Centre

American Eagle has filed a lawsuit against Unibail-Rodamco-Westfield, owner of the struggling Westfield San Francisco Centre mall, alleging the landlord has failed to address mounting safety and security issues. The retailer claims there have been over 100 security incidents at its downtown store since May 2022, and accuses the landlord of letting the mall "deteriorate into disarray" as foot traffic declines and crime increases. American Eagle argues Unibail has invested in its other malls but neglected its obligations at San Francisco Centre. The lawsuit lands as Nordstrom and other anchors exit the mall.

✍️ Further Reading

• Offices Need $200 PSF Rent to Pencil Out: Boston Properties Prez (RD)

• How Concessions are Eroding Multifamily Rents (GS)

• New York Developer Gambles on Las Vegas Shift Toward Strip-Facing Stores (CS)

• Amazon Plans $11B Data Center Push in Rural Virginia (GS)

• Why Co-Working Firms Won’t Save WeWork’s Landlords (RD)

• Person of the Week: Henry McVey, Chief Investment Officer, KKR Balance Sheet (CS)

• Blackstone Taps New Credit Boss in Bid for $1 Trillion Goal (BBG)

• Once Beset by Violence, This City in Colombia Now Struggles With Too Many Tourists (BBG)

• Starwood JV Pays $146M for NYC Industrial Portfolio (CPE)

• Goodbye, California. Driverless Trucks Are Headed to Texas (BBG)

📊 Chart of The Day