Saturday, February 25, 2023

Market Monitor: Feb. 25, 2023 - Origin Investments

Market Monitor: Feb. 25, 2023 - Origin Investments

Market Monitor: Feb. 25, 2023

Topic:  • By Origin Investments • February 24, 2023  Views


The Great Special Transfer

Tom Briney, National Head of Debt Investments

One of the more interesting pieces of news in the past couple of weeks is a move by Blackstone Inc. to transfer a loan, collateralized by one of its New York City portfolios, into special servicing. The $270.3 million loan is structured as a commercial mortgage-backed securities pool and collateralized by 11 properties throughout Manhattan. The underlying collateral appears to be performing well, with net operating income (NOI) increasing roughly 25% over the past two years, a healthy performance by any standard. So, what does it mean to transfer to special servicing, and why is such a large portfolio, of seemingly healthy assets, in that space? 

When a loan is performing as designed, the borrower pays monthly principal and interest payments, the lender receives those payments, and a master servicer handles the monthly transactions. Other than accounting for these payments and monitoring the health of the loan, the master servicer’s role is quite limited. If a loan is not performing as expected or there is an expectation that the loan will not continue to perform as expected, it is transferred to special servicing—a sort of loan purgatory. The special servicer has more latitude to work with the borrower and the lender to either get the loan to perform as planned or be foreclosed upon.   

The real estate in the Blackstone loan pool had been financed with a floating rate structure, with SOFR as the index benchmark. The interest rate on the loan has risen so rapidly that the 25% increase in NOI since 2020 can’t keep up with the increasing loan payments. Blackstone is not alone in its exposure to rising interest rates. In 2009, the absolute peak of stress during the Great Recession, 207 multifamily loans were transferred to special servicing; the all-time low of 35 occurred in 2018. Since then, the number of loans moving to loan purgatory—a leading indicator of distress—has been climbing steadily. Last year, 134 multifamily loans moved to special servicing, only 35% below the peak in 2009.   

Hundreds of billions of dollars in new floating rate multifamily loan originations are completed annually in the United States, slightly less than half of which are structured with floating interest rates. It’s nearly impossible to know how many aren’t hedged against rapid interest rate increases. But it’s safe to say there will be many more instances of interest rates outpacing NOI, and borrowers being forced to transfer their loans into special servicing. If interest rates remain high, the problem will accelerate due not only to rising interest rates but also slowing NOI growth. This is the beginning of the “Great Special Transfer,” and I won’t be surprised if we see the number of assets transferred into special servicing exceeding the 2009 peak, though I hope I am wrong!  

CMBS Multifamily Loans Transferred to Special Servicing

CMBS MF Loans Transferred

Source: Bloomberg

Note: This chart represents loans that were previously part of a publicly traded commercial mortgage-backed security (CMBS) pool. Substantially more loans were held by private institutions, such as banks and life insurance companies; they are not included in the chart.  


A Deep Dive into Material Prices

Kevin Miller, Vice President of Development

As Market Monitor observed in November, construction prices declined in Q4 2022. So far this year, pricing has remained relatively flat, and we have wondered: Is this just a lag in the market as construction starts have slowed, or will construction pricing remain at this more elevated level?  

Three components factor into subcontractor pricing: labor, materials and equipment. Each makes up from 20% to 45% of the total direct construction budget. This week, we’re zeroing in on construction material prices. According to the Federal Reserve Economic Data (FRED) Construction Materials Producer Price Index, the highest percentage year-over-year increase in construction materials in the index’s 75-year history was in 2021—a 27% increase over 2020. And 2022 was third highest, increasing 12.5% over 2021.   

While the aggregate impact of those two years is staggering to contemplate, one can simply recall the headlines to remember why. High demand and low labor availability due to COVID-related restrictions, along with the war in Ukraine and an aging blue-collar workforce, drove historically high commodity and transportation prices.  

Starting in mid-2022, residential homebuilder demand began to fall, China reversed its zero-COVID policy, and backlogs at ports cleared up, among other factors. We saw the impact quickly in several leading indicators: Lumber futures plummeted from near-historic highs of $1,250 per thousand board feet to their current $400 to $500. Global shipping rates, as measured by the Freightos Baltic Index (FBX), fell to $2,000 per 40-foot containers from $8,500. And the S&P Global Commodities Index (SPGSCI) fell from a five-year high of $853 to around $575 to $600. Starting in June 2022, month-over-month material pricing turned negative and stayed that way into January. 

These factors helped blunt the impact of rising interest rates on new developments. What can we expect for the rest of 2023?  

Before the pandemic, lumber futures traded at a five-year average of about $350; global shipping rates were about $1,400; and the SPGSCI traded between $290 and $485 for the five years leading up to 2020. The pre-pandemic five-, 10- and 20-year average annual growth rates for the FRED Construction Materials PPI were 2.32%, 2.11% and 2.53%, respectively. Today’s construction material prices are about 25% higher than pre-pandemic pricing trends would suggest. However, looking back over the history of the FRED Construction Materials PPI, we rarely—apart from the Great Recession—see steep decreases in pricing after sharp increases. More typically, we see a new benchmark, followed by prolonged periods of flat to slightly negative price changes, before the next run-up in demand.    

It’s fair to expect construction material pricing to face downward pressure through 2023, but it also seems that it would take a dramatic demand shock to bring construction material prices back in line with pre-pandemic pricing norms. While pricing stability creates more predictability, it is only part of a development environment that includes falling rents and elevated interest rates. Even a decline in construction prices probably will not be enough to keep the pace of construction starts in line with the past two years.  

Producer Price Index by Commodity: Construction Materials

Producer Price Index

Source: U.S. Bureau of Labor Statistics via St. Louis Federal Reserve

In Pictures: See Every Single Artwork in the Rijksmuseum’s Vermeer Show, a Once-in-a-Lifetime Exhibition That Is Already Sold Out

In Pictures: See Every Single Artwork in the Rijksmuseum’s Vermeer Show, a Once-in-a-Lifetime Exhibition That Is Already Sold Out

Friday, February 24, 2023

Watch out, Xi and Putin — the world is a ‘hostile environment for autocrats’ - btbirkett@gmail.com - Gmail

Watch out, Xi and Putin — the world is a ‘hostile environment for autocrats’ - btbirkett@gmail.com - Gmail

THE CONVERSATION

Ken Roth poses for a photo.

Ken Roth, then-executive director of Human Rights Watch, poses for a photo on Jan. 16, 2019. | Markus Schreiber/AP Photo

Ken Roth retired in August after almost 30 years as the executive director of Human Rights Watch. In those three decades, Roth turned HRW from a 20-person group called Helsinki Watch focused on freeing dissidents in the former Soviet Union to a global organization with more than 500 staff working on some 100 countries.

Roth helped develop and refine HRW’s methodology of legal-standard human rights research backed by a global network of advocates that name, shame and demand change from government’s implicated in human rights abuses. In the process Roth became an inexhaustible marketer of the HRW brand who would rub elbows with world leaders at Davos on one day and get sanctioned by the Chinese government on the next.

But Roth’s tenure at HRW wasn’t without controversy. The organization admitted in 2020 that under Roth’s watch it had accepted a donation on the explicit condition that the funds not be used to support HRW’s work on LGBT rights in North Africa and the Middle East. HRW later returned that donation and implemented a policy that explicitly forbids such conditions on donor contributions, but the credibility damage was done. Roth also made headlines in January when the Harvard Kennedy School withdrew a fellowship it had offered him at the Carr Center for Human Rights. While Harvard gave no reason for that move, Roth suspected it was a reprisal for HRW’s outspoken criticism of Israel’s human rights record. Roth launched a high profile media campaign decrying Harvard’s decision, prompting the school to reverse course later that month.

I spoke with Roth about his role in the rise of the global human rights movement. In that conversation Roth shared how his own family’s narrow escape from authoritarian terror steered him into a career defined by facing down dictators and fighting to bring them to account.

The following interview has been condensed and edited for clarity.

Who’s winning in this battle of autocracies like China and Russia against democracies and what the Biden administration calls the “rules-based international order”?

The common wisdom is that autocracy is in the ascendancy and democracy is in decline. And that is just not where we are right now. So many autocrats are illustrating the danger of being surrounded by sycophants, stifling debate and insisting on making all decisions yourself. That's how you get [Russian President] Vladimir Putin's invasion of Ukraine, [Chinese paramount leader] Xi Jinping’s zero-Covid policy, followed by zero preparation for post-Covid or [Turkish President Recep Tayyip] Erdogan’s amnesties for construction-code violators even in earthquake zones.

So people are seeing through the supposed benefits of autocracy. The old view that our democracy is too slow and divisive and messy ignores the fact that democracies allow public debate and are able to correct policy errors more effectively than autocracy. Which is why we've seen this outpouring of popular support for democracy in so many countries around the world. If you put yourself in the shoes of an autocratic, it's a hostile environment.

You’ve met a lot of abusive authoritarians over the decades. Any stand- out encounters?

I met with Joseph Kabila, who was President of the Democratic Republic of Congo, three different times. But in the last meeting I had with him he was refusing to step down even though he was term limited. And he was super corrupt and increasingly repressive: There were protests against his staying in power and his police forces were shooting the protesters. So I said, “Mr. President, I see two paths before you. You can accept a transition, allow an election to take place and be the first Congolese leader to oversee a democratic transition. You will be a respected figure, you'll be sent on African Union missions, you will retire as one of the founders of Congolese democracy. Or you can continue sliding into a forever presidency. And there'll be protests and you'll keep shooting the protesters, and things will get more and more ugly. You're probably going to be forced from power. And at that point, you're going to face the real likelihood of prosecution.”

I remember him saying “Don't assume anything.” By which he meant, don't assume that I'm going to hang on forever. He ended the meeting by saying, “Pray for me.” And he ultimately did agree to step down. I can't take credit for this; I was one of many people pushing, but he stepped down.

It was an example that somebody who was very corrupt, quite repressive — it was possible to push them in a positive direction.

You started your career as a lawyer and a federal prosecutor — what were you thinking?

I thought of law as a route to political activism. It didn't start off very auspiciously, because I signed up for the one human rights course offered by Yale every year and each year, they canceled it. So, to this day, I've never taken a human rights course.

But what I did for Human Rights Watch has many parallels to what I did when I was a courtroom lawyer. You have to investigate and present the facts in the most compelling way you can, applying the law to those facts and persuading somebody to judge them. In the case of domestic litigation, it's all within the confines of the courtroom. And for human rights, it's within the global public domain — public opinion and government officials.

What does the controversy over your Harvard fellowship say about the career risks of challenging Israel's human rights record?

I'm actually quite worried about it. I had the visibility to make a stink in the media. And so the Kennedy School team reversed itself. But most scholars and most students don't have comparable visibility and there is broad fear that if you criticize Israel, you put your career in jeopardy. And that needs to be addressed.

How did Human Rights Watch change in your 30-odd years there?

It was much smaller than when I started – I think there were 20 staff. It was tiny.

The other huge change has been the change in communications technology. When I started, international phone calls were expensive. International travel was expensive and done rarely. And you literally wrote letters to people. Even investigations involved letter writing to government officials. When the fax machine emerged it was this major technological revolution because it enabled you to send an entire piece of paper worth of information for the cost of a quick international phone call. And that was huge. We would smuggle fax machines behind the Iron Curtain.

And when email emerged, that just changed everything because it enabled, for example, the global NGO campaign to ban landmines to communicate with colleagues around the world. But it also changed the metabolism of human rights efforts because until email, human rights reports were pretty much retrospective. And email enabled real-time reporting for the first time so that we could record a serious abuse today and try to stop it from occurring tomorrow. And that really changed the enterprise.

Speaking of technology, you’re a prolific Twitter user with a huge following. What do you think of Elon Musk and how he's running Twitter?

 It's an odd convention – why should this platform with 280 characters per tweet turn into a dominant form of political discourse? For whatever reason Twitter is where every journalist, every politician, every official has a presence and there's no substitute. So when people say, ‘Well, I'm going to delete my Twitter account and join Mastodon,’ they're out of their minds. Mastadon isn’t where it's happening. It's happening on Twitter.

You may not like the direction Elon Musk is taking it, but there's just no substitute for it. I find Twitter very useful for getting the word out to the people who matter for policy conversations. And also for shaping an informed public opinion. People who care about these issues tend to look to Twitter, for both knowledge and the latest developments, but also guidance about what they should do about it.

Your father escaped to America from Nazi Germany. How has that shaped who you are and what you do?

I grew up with Hitler stories. My father used to cut the hair of me and my brothers and to keep us quiet while he was cutting our hair, he would tell us stories about Germany. When we were little, he would tell us funny stories about the horse who would deliver meat from my grandfather's butcher shop. But then as we got slightly older, he would tell stories about what it was like being a young Jewish boy being moved into a Jewish school —being fearful of being arrested for some violation or having his father arrested.You’ve met a lot of abusive authoritarians over the decades. Any stand- out encounters?

I met with Joseph Kabila, who was President of the Democratic Republic of Congo, three different times. But in the last meeting I had with him he was refusing to step down even though he was term limited. And he was super corrupt and increasingly repressive: There were protests against his staying in power and his police forces were shooting the protesters. So I said, “Mr. President, I see two paths before you. You can accept a transition, allow an election to take place and be the first Congolese leader to oversee a democratic transition. You will be a respected figure, you'll be sent on African Union missions, you will retire as one of the founders of Congolese democracy. Or you can continue sliding into a forever presidency. And there'll be protests and you'll keep shooting the protesters, and things will get more and more ugly. You're probably going to be forced from power. And at that point, you're going to face the real likelihood of prosecution.”

I remember him saying “Don't assume anything.” By which he meant, don't assume that I'm going to hang on forever. He ended the meeting by saying, “Pray for me.” And he ultimately did agree to step down. I can't take credit for this; I was one of many people pushing, but he stepped down.

It was an example that somebody who was very corrupt, quite repressive — it was possible to push them in a positive direction.

You started your career as a lawyer and a federal prosecutor — what were you thinking?

I thought of law as a route to political activism. It didn't start off very auspiciously, because I signed up for the one human rights course offered by Yale every year and each year, they canceled it. So, to this day, I've never taken a human rights course.

But what I did for Human Rights Watch has many parallels to what I did when I was a courtroom lawyer. You have to investigate and present the facts in the most compelling way you can, applying the law to those facts and persuading somebody to judge them. In the case of domestic litigation, it's all within the confines of the courtroom. And for human rights, it's within the global public domain — public opinion and government officials.

What does the controversy over your Harvard fellowship say about the career risks of challenging Israel's human rights record?

I'm actually quite worried about it. I had the visibility to make a stink in the media. And so the Kennedy School team reversed itself. But most scholars and most students don't have comparable visibility and there is broad fear that if you criticize Israel, you put your career in jeopardy. And that needs to be addressed.

How did Human Rights Watch change in your 30-odd years there?

It was much smaller than when I started – I think there were 20 staff. It was tiny.

The other huge change has been the change in communications technology. When I started, international phone calls were expensive. International travel was expensive and done rarely. And you literally wrote letters to people. Even investigations involved letter writing to government officials. When the fax machine emerged it was this major technological revolution because it enabled you to send an entire piece of paper worth of information for the cost of a quick international phone call. And that was huge. We would smuggle fax machines behind the Iron Curtain.

And when email emerged, that just changed everything because it enabled, for example, the global NGO campaign to ban landmines to communicate with colleagues around the world. But it also changed the metabolism of human rights efforts because until email, human rights reports were pretty much retrospective. And email enabled real-time reporting for the first time so that we could record a serious abuse today and try to stop it from occurring tomorrow. And that really changed the enterprise.

Speaking of technology, you’re a prolific Twitter user with a huge following. What do you think of Elon Musk and how he's running Twitter?

 It's an odd convention – why should this platform with 280 characters per tweet turn into a dominant form of political discourse? For whatever reason Twitter is where every journalist, every politician, every official has a presence and there's no substitute. So when people say, ‘Well, I'm going to delete my Twitter account and join Mastodon,’ they're out of their minds. Mastadon isn’t where it's happening. It's happening on Twitter.

You may not like the direction Elon Musk is taking it, but there's just no substitute for it. I find Twitter very useful for getting the word out to the people who matter for policy conversations. And also for shaping an informed public opinion. People who care about these issues tend to look to Twitter, for both knowledge and the latest developments, but also guidance about what they should do about it.

Your father escaped to America from Nazi Germany. How has that shaped who you are and what you do?

I grew up with Hitler stories. My father used to cut the hair of me and my brothers and to keep us quiet while he was cutting our hair, he would tell us stories about Germany. When we were little, he would tell us funny stories about the horse who would deliver meat from my grandfather's butcher shop. But then as we got slightly older, he would tell stories about what it was like being a young Jewish boy being moved into a Jewish school —being fearful of being arrested for some violation or having his father arrested.

So I grew up very aware of the evil that governments can do. And I think that's a big part of what pushed me in the rights direction and toward international work.

How did your parents feel about your career choice?

At first, they thought I was crazy not to go to some big law firm. When I instead went to this obscure little human rights organization that no one had ever heard of, they thought I was out of my mind. And it took a few years until they began to see how respectfully Human Rights Watch was treated in the media and how I was treated and then they actually got into it.

My father died just two years ago, and I was able to spend his last two weeks with him. And one of the very sweet things he did was he had this group of friends we called the Romeos. Romeo stands for “retired old men eating out.” And he wanted me to meet with his Romeo group, to talk about my work and Human Rights Watch. And this was in the last week of his life and so he was very proud of it in the end, which was nice.

Thanks to editor Heidi Vogt and producer Andrew Howard.

Thursday, February 23, 2023

Bargain battery material - btbirkett@gmail.com - Gmail

Bargain battery material - btbirkett@gmail.com - Gmail

Bloomberg

Welcome to the Hyperdrive daily briefing on what’s reshaping the auto world. Read the story featured in today’s newsletter on the web here, and sign up if you’re not already subscribed.

Made-in-USA Battery Breakthroughs

As many of the largest US technology companies shed employees, the government is embracing clean technology as a huge employment opportunity, pumping massive sums into electric vehicles and batteries with the hopes of breaking China’s dominance of the sector.

The $370 billion of clean energy investment included in the Inflation Reduction Act and billions more set aside in the Infrastructure Investment and Jobs Act will benefit companies making the lithium-ion batteries that dominate the landscape today, and potentially support the next-generation chemistries that could usurp what’s commonplace in the market.

One such company is Lyten, an eight-year-old Silicon Valley startup that racked up several government contracts before coming out of stealth mode in 2021. Its key innovation is a graphene material designed to enable lithium-sulfur batteries, which the company says would offer high energy density and be lighter and safer than current chemistries. Sulfur is also widely available and inexpensive.

“It is quite literally cheaper than dirt,” George Liddle, Lyten’s director of government programs, said during a tour of the company’s 55,000-square-foot facility in San Jose, California. Incorporating sulfur could help to reduce dependence on metals including cobalt, nickel and manganese.

Yayoi Sekine, BloombergNEF’s head of energy storage, holds up a jar of graphene at Lyten’s facility in San Jose, California. Source: Bloomberg

Lyten has raised more than $200 million and employs around 230 people, making it the best-funded and best-staffed lithium-sulfur effort, according to Dan Cook, Lyten’s co-founder and chief executive officer. Success is not assured, however, as lithium-sulfur batteries have yet to hit commercial scale.

The chemistry suffers from issues with battery degradation causing cells to fail too quickly. Lyten believes incorporating graphene will overcome the pitfalls other lithium-sulfur batteries have had, and the company has patents on the processing, design and manufacturing of 3D graphene material.

Lyten’s sulfur batteries are competing with a range of other next-generation battery technologies, some of which make similar claims and are better-funded.

Solid-state batteries, for example, are being scaled by the likes of Quantumscape and Solid Power, who have raised $1.2 billion and $382 million, respectively. Vehicle manufacturers including Nissan, BMW and Volkswagen have said they will have solid-state batteries in cars before the end of the decade.

Sodium-ion batteries also are garnering interest at two of the world’s biggest battery manufacturers. CATL has announced it will mass produce them this year, and BYD is also reportedly incorporating the batteries into its vehicles.

The evolution of current lithium-ion batteries is perhaps the biggest threat to next-gen battery technologies, as they’re effectively a moving target to compete with. Lyten, for one, is clear-eyed about how much of a challenge it will be to not only develop a breakthrough technology, but scale it to the point of producing hundreds of thousands of cells a day.

“Battery manufacturing has the complexity of semiconductors, the margins of automotive and the throughput of paper,” Jeffrey Bell, Lyten’s head of cell design, said during a tour of the company’s labyrinth of microscopes and lineup of machines for mixing chemicals.

In addition to solving battery chemistry challenges, startup companies like Lyten must find locations with huge grid connections for gigawatt-scale production, purchase manufacturing equipment and raw materials, and recruit employees to run new operations.

The US is providing billions of dollars in support to help overcome these hurdles. The US approved $2.8 billion of grants in October linked to the bipartisan infrastructure law, with more to come. One of the IRA’s most consequential provisions is production tax credits worth up to $45 per kilowatt hour of cell and pack production, which some analysts have said has the potential to turn the US into the most profitable place in the world to manufacture batteries.

Ford’s deal reached earlier this month to license battery tech from China’s CATL was a letdown for some politicians who want to see US companies curb their reliance on the country.

If the government’s strategy goes to plan, companies like Lyten could be the ones producing and licensing out the next generation of battery tech in the decade ahead, positioning the US as a much more competitive force within this crucial sector.

Passport Renewal by mail - U.S. Embassy & Consulate in Portugal

Passport Renewal by mail - U.S. Embassy & Consulate in Portugal

Vast acquires Launcher in quest to build artificial gravity space stations | TechCrunch

Vast acquires Launcher in quest to build artificial gravity space stations | TechCrunch

Vast acquires Launcher in quest to build artificial gravity space stations

Sala René Lalique - Museu Calouste Gulbenkian

Sala René Lalique - Museu Calouste Gulbenkian

René Lalique Room

After a period of renovation, the Calouste Gulbenkian Museum room exclusively dedicated to René Lalique's jewelery and glass production has reopened to the public. Get to know the new gallery through a selection of texts and images that allow you to highlight some of the works on display and discover the sections specially designed to highlight the artist's major themes.