What’s Financial Outlook for 2018?

By Dennis Kaiser

Connect Westside Los Angeles brought together more than 300 real estate professionals at the Luxe Sunset for a full afternoon of CRE conversations and networking. Three deep-dive panel discussions featured some of the region’s top industry leaders who shared insights on trends shaping the market.

Connect Media recapped the Power Players panel and one on office development earlier this week. Today, we’ll share a few key takeaways from the 2018 financial outlook panel.

The general consensus was that the commercial real estate industry is slowly working through the new regulations and figuring out how to navigate the changes involving HVCRE, HVADC or other rules – which were often not applied equally across the board and caused lenders issues, especially pertaining to higher risk construction loans. The regulations have come into greater clarity as a result of legislation, and is resulting in quicker decisions on construction loans.

CapitalSource’s Tom Whitesell says, that’s providing more “certainty when you go to the borrower.” Though Bank of America’s Alan Flatt points out the pricing has moved mostly downward and the “market is better and safer” as a result of the regulations. “The capital markets didn’t work as predicted, they are better,” he said.

The new regs mainly impacted the smaller funds and debt funds, says Flatt, not the broker dealers though, since they had the infrastructure in place to to deal with the requirements. And for an institution the size of BofA, there seems to be an “unlimited appetite” for the risk retention, since it hasn’t proven to be a significant number relative to the size of the bank. He notes, large issuers have figured out a way to manage the risk retention piece by selling it. “It has made the industry more conservative,” Flatt said.

City National Bank’s Paige Serden points out that traditional construction lenders are shifting to other markets outside of California to find opportunities that include infill niches in major MSA’s. Though she also notes, there’s “more money on the sidelines than before.”

George Smith Partners’ Gary M. Tenzer, who moderated the panel, notes many companies recognize now is the time to get money out of investments, and it is a good time to be a borrower if you are able to find product to buy.

Invesco Real Estate’s Charlie Rose says in 2018 he envisions continuing to trade spread for higher barriers to entry, quality assets and markets. He says they are seeing value-add loan submittals where borrowers are looking to max out at a 70 – 75% level. He believes the market is in the late stage cycle of underwriting based on submittals coming in now. Rose says, transaction volume is likely to fall in 2017, since it is difficult to find “anything better to buy,” which is a “huge part” of the investment equation today.

CapitalSource’s Whitesell notes he sees similar levels of investment next year as in 2017, as he doesn’t see any big change in any big way, nor does he see a bubble developing. Though he did express some concern over the number of luxury multifamily projects being delivered, and wonders if that will be sustainable. Landlords may not be able to get the rent they want or not get the equity they want, though they won’t lose equity. He is seeing lenders active in the market in all product types now. Though there is “leverage creep” in all product types, as well as spread compression.

The Westside is an attractive place to live compared to other parts of the county, notes Bank of America’s Flatt. For that reason, “growth is inevitable and expected,” he said. Invesco’s Rose agrees, and says the Westside is a “top investible market for offshore and domestic” players who want to place capital. Since it is later in the recovery cycle, Rose believes the Westside still has a longer run, that’s being fueled by tech and entertainment, which are driving the base of jobs.

City National Bank’s Serden believes the Westside is an “undervalued market” from an international perspective and deal closing perspective. Given the number of companies coming, the flow of people and companies establishing a significant presence, both on the Westside and West Coast in general, she sees growth ahead.

For comments, questions or concerns, please contact Dennis Kaiser