June 30, 2017
By Dennis Kaiser
Capital availability, specifically, an abundance of it, combined with market uncertainty, is making for some interesting conversations between borrowers and lenders today. The relevant and meaty discussion among finance players participating in Connect Los Angeles’ panel entitled, Financing Los Angeles’ Deals, revealed how funding is getting done at some of the city’s timeliest projects.
They discussed money sources and intended deals, both large and small. Here are the key takeaways from the money experts:
Hunt Mortgage Group’s Vic Clark says in the last six months, the lending environment has compelled him to provide maximum leverage or he felt they wouldn’t have any chance at winning the deal. He hasn’t seen that level of competition in the 25 to 30 years he’s been in the business.
Walker & Dunlop’s Mark Grace agreed that lenders have had to become “more aggressive to get into deals.” But he notes, after a slow start to the the year, the past few months, the deal flow has kicked into high gear “trying to make up for lost time.” Spreads are stabilizing and the Treasury has come back, he says.
Thorofare Capital’s Brendan Miller pointed out that the slowdown in investment activity reflects the bid-ask spread, though deals are “getting done.” Miller says, they are working considerably harder to close deals these days, now that the cycle has shifted towards value-add transactions rather than “pure appreciation and rent growth” deals.
RealtyShares’ Bill Lanting notes that owners are looking for more leverage now. And they are seeing some interesting deals from CMBS exits, as borrowers try to time when to sell.
Grace shared that relationships are important to getting deals done now, and will become even more critical should the market transition into “difficult times.” That’s because those connections foster a “trust element” that becomes a “foundation to solve problems.”
Relationships matter to Hunt Mortgage’s Clark too, who says the lender backs trusted clients on deals that may not be in their sweet spot because it is the “right thing” to do. That was the case on an aggressive bridge loan it made to help stabilize a property and get the sponsor through two years to a permanent loan.
Clark says, the type of asset classes lenders now favor is multifamily, because it is “pretty stable compared to retail and office.” A shift has occurred in retail away from big chains to boutique brands, or experiences ranging from non-chain health clubs to trampoline gyms.
RealtyShares’ Lanting says he finds hotel deals interesting since hotel financing sources have dried up, similar to what occurred in retail.
Thorofare Capital’s Miller cautioned against too much exuberance about a market like DTLA, given the “number of cranes” and development activity currently under way. He’s not certain that the aggressively underwritten deals at those pro forma’s ultimately will prove out successful. “Be careful,” was his advice. With so much supply coming online, he wonders if there’s sufficient Class A renters as expected to fill all the units.
Clark indicated that the market could “potentially be reaching the peak,” though it could also be that “we’re just catching a breather and the current cycle will continue on for another “three or four years.”
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