Q&A: Inside the Capital Stack with CapitalSource’s Thomas Whitesell

By Dennis Kaiser

Connect Apartments is coming up in Los Angeles later this month. You can find out more information and register for the event on the link below our latest 3 CRE Q&A with CapitalSource’s Thomas Whitesell.

Whitesell, who is responsible for expanding the firm’s work with established CRE developers and investors seeking real estate and construction loans nationwide, will be participating on a panel entitled: Inside the Capital Stack: Financing Today’s Deals. Here’s his insights on the market, getting deals completed and future prospects.

Q: How has 2017 fared financially – what surprises have we seen and what was expected?

A: Very strong year.  We’ve exceeded our goal for commitments this year, and expect to close over $1 billion in commitments by the end of the year.

Increases in Libor was expected in 2017. The increase of approximately 50bps to date this year and further increases are expected to put some pressure on spreads (0.78% in January 2017 to 1.23% in September 2017).

One surprise… severity of increase in costs due to the high demand for both labor and materials. For example, in a recent ground up deal, subcontractor costs shifted upwards significantly between the initial and final round of bids. Due to the economics of the deal, in this case we were able to get comfortable with absorbing some of the increase through an increase in proceeds.

Another surprise would be the phase out of Libor by 2021. It will be interesting to see what index replaces it.

Q: What does it take to get a deal done today? What opportunities and challenges do you see?

A: Our underwriting has always focused on sponsorship experience, sponsorship financial strength, location, and market fundamentals. One underwriting challenge as we move later in the cycle is the risk of new supply, as some markets are expecting several thousands of units to come online over the course of the next few years.

We used to only be able to hold $50MM on our balance sheet, but now we can hold up to $200MM for the right deal.

HVCRE has been around for a few years now so it no longer poses such a challenge as in prior years, because most borrowers and brokers understand it.

Q: Where do you think we are going in 2018?

A: There is a risk that the price of land and labor/materials could lead to a decrease in the volume of construction projects in certain markets. However, we feel that with strong employment numbers, the risk of any significant drop in construction projects is low.

-Libor will most likely continue on its steady pace upward and avoid any large spikes.

-Perhaps in 2018 we may learn more about what will replace Libor.

-Any potential tax reform could potentially have a big impact on CRE.

– Overbuilding is always a challenge as we move later into the cycle.

For comments, questions or concerns, please contact Dennis Kaiser