Connect Orange County Panelists See Improved Financing Outlook Heading into 2025

From the standpoint of lending volume, 2023 represented a pair of bookends: a strong first and fourth quarter with a pair of “really choppy” quarters in between. That’s how Gary Bechtel, CEO of Red Oak Capital Holdings, described the prior year at the in-person Connect Orange County 2024 conference earlier this month.

By comparison, he said 2024 has been “a little bit more even, in that we’ve been dealing with a more even rate environment, especially in the short-term rates, which is what we base our loan off.” 

Bechtel joined panelists James Ruiz, Eddie Prosser, Bali Kumar and Cory Jubran in the “Getting Deals Done: Financing in Today’s Market & Beyond” panel that concluded the well-attended Sept. 10 event. Allen Matkins partner William Ahern moderated the discussion. 

Head of credit and COO at Thorofare Capital, Prosser also described the contrast between last year and this one. “Going into the first part of this year, the majority of the activity was largely refinance activity and these were assets that were over-levered; they had a story to them,” he said. That meant a lot of investors sitting on the sidelines when it came to new acquisitions.  

Looking ahead, Prosser continued, “With the potential for some rate softening and the buildup and supply of sideline capital over the last six quarters, I think we’re going to see more equity capital entering the system and entering the real estate market, maybe taking some chips off the table from an overheated stock market and redeploying into real estate.” 

One financing vehicle that has shone in 2024 is PACE (Property Assessed Clean Energy). Introduced in California in 2017, PACE this year has been “coming in as rescue capital for some banks in deals where they’re struggling to find a participant,” said Kumar, COO at PACE Loan Group.

Partly as a result, PACE financing continues to “hockey-stick its growth every year… It’s just something that’s gaining more and more acceptance and understanding in the market as people are forced to learn how to accept and understand how to use it in a capital stack.”  

Where there hasn’t been as much volume yet as some would expect to see is distressed debt, and properties, hitting the sales market. Senior director with Gantry, Ruiz observed, “I’m actually surprised I haven’t seen more problems come across my desk. I’m seeing deals that don’t work, but I’m not necessarily seeing deals that are maturing that need to be refinanced.

“My sense is that they’re kind of pretending and extending, quietly helping these borrowers, hoping that when interest rates come down far enough, they can then get them refinanced.” 

Looking ahead, “I think that there’s going to be a lot of people who made those 75% LTV loans in the last five to six years who are going to be owning” the properties, said Jubran, senior director, originations with Nuveen Green Capital. “You’re already seeing Oak Tree taking properties back downtown. You’re seeing Blackstone give away keys in New York. You’re seeing Seattle going through a lot of issues.”  

“Extend and pretend” was standard operating procedure across the lending spectrum for a time. “The banks, I think, will continue to be able to do that because most of the banks have counterparties that are strong enough, at least for now, and the banks are okay with pretending a bit longer,” continued Jubran. “But I think some of the funds who made some of those loans on warehouse lines or repo lines are going to be owning a lot of those properties.” 

The distressed property market is just beginning to unfold, with significant challenges still ahead. On October 22, hear experts from Trimont, Greystone, Transwestern and more discuss the rising tide of distressed assets, upcoming CMBS maturities, and stricter underwriting practices. Gain insights into what lies ahead as we transition into 2025 at Connect Distressed Investment & Finance at the Luxe on Sunset in LA.