Western Real Estate Business

JUN 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

Issue link: https://westernrealestatebusiness.epubxp.com/i/993830

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Page 40 of 50

38 • June 2018 • Western Real Estate Business www.REBusinessOnline.com LENDING A HAND Rising interest rates, creative financing, and alternative solutions — not to mention asset classes — has investors re-evaluating both their long- and short-term strategies as they seek to get the most out of every dollar. Many factors are weighing heavily on the minds of lend- ers and borrowers as we head into the sec- ond half of 2018. The Mortgage Bankers As- sociation (MBA) pro- jected in February that commercial mortgage origination volume will slightly decrease from 2017 numbers by 3 percent this year to $549 billion. This is still a histori- cally strong number, and MBA expects origination volume will remain steady through 2019 as well. The current com- mercial financing market is defined by a mix of influences that are both driving activity forward and potentially holding it back. What this essentially means for bor- rowers is that, throughout the remainder of 2018 and into 2019, the key factor to securing competitive financing is easing the concerns of lenders via strategic, cre- ative planning and presentation. Factors Driving Uncertainty Commercial real estate remains an at- tractive investment. Capital is hungry due to a strong economy, high property values and rising rental rates. That said, concerns over the current point in the market cycle, rising interest rates and the potential impact of stock market volatil- ity has resulted in hesitancy among in- vestors and lenders, which have become more discerning in their underwriting. Recent stock market volatility has some in the commercial real estate indus- try wondering if we may be on the hori- zon of a market correction in the years to come. This volatility is likely a reaction to uncertainty regarding changing poli- cies and rising interest rates, rather than a direct indication of the market's health. Consequently, we do not believe we will see a direct impact of this volatility on the commercial real estate financing market in the foreseeable future. That said, we do consider the psychological impact of this uncertainty on real estate investors and lenders in our approach to securing loans.The Federal Reserve's recent and anticipated interest rate hikes also continue to have a significant impact on commercial financing. Short- term rates are projected to rise 1.5 per- cent to 3 percent by 2020. Though this doubles the current figure, 3 percent re- mains an exceptionally low rate, reflect- ing a continued period of historically low rates. Impact on Lending Trends Increasing interest rates and other fac- tors have caused most lenders to offer lower leverage. For example, while com- mercial loans are still being originated at healthy levels, we are seeing lenders re- duce leverage from the 70 percent range to the 65 percent range. These figures can be even lower for higher-risk loans, such as construction. That said, while some lenders will be- come more conservative in their under- writing as interest rates rise, other factors, such as the recent tax package, will likely have a positive effect on the availability of capital and mortgage flow, which we anticipate will keep cap rates low. We continue to see the rush of refi- nancing transactions as borrowers look for the opportunity to lock in 10-year fixed rates while they are still in the high 4 percent range. While the cost of capital will rise with interest rates, we do not anticipate that this will subvert the positive state of the market in the short-term. Addressing Lender Concerns Head-On This uncertainty and lender hesitancy has resulted in an increased need for cre- ativity. Today's borrowers need capital advisors who are capable of securing competitive loans by addressing lender concerns head-on utilizing comprehen- sive analysis to demonstrate borrower investment strategies. For example, Continental recently ar- ranged competitive financing on behalf of a borrower who was looking to re- place an existing loan on an office and retail property in Orange County, Calif., to secure low interest rates. The asset, which the borrower had repositioned into a modern mixed-use space, was vacant at the time of loan application, causing hesitancy among most lenders. Despite this, we were able to secure a loan sized at 70 percent of cost, which included renovations, ten- ant improvements, leasing commissions and interest reserves. We worked closely with potential lenders to ensure they had a thorough understanding of the asset location's strength and interest from po- tential tenants, as well as the borrower's strong track record and business plan. There is still ample capital available for borrowers with sound and strong investments. Borrowers can secure competitive financing by identifying a finance partner who will address poten- tial lender concerns head on and strate- gically demonstrate strategy and com- prehensive market analysis. TECHNOLOGY INNOVATION IS THE FUTURE OF SMALL-BALANCE COMMERCIAL LENDING By Pat Jackson, CEO, Sabal Capital Partners in Irvine, Calif. There has been significant growth in the small- balance commercial real estate lending sector over the past several years. In fact, by the end of 2017, Freddie Mac had funded a total of $6.9 billion in small-balance loans (SBLs). That, combined with interest in the space by lenders and borrowers alike, suggests the market will continue to grow over the next several years. This trend is evident in the Western U.S., where Sabal's SBL deal pipeline has increased 123 percent from 2016 to 2017. Typically categorized as loans between $1 mil- lion and $7.5 million in size, SBLs often fly under the radar in the commercial real estate industry. Despite their low profile, they fill an essential role in the commercial lending land- scape, particularly in the multifamily arena where a specific need exists for the financing and refinancing of smaller multifamily prop- erties. Many of these properties are designated workforce housing and fall in major U.S. metropolitan areas where unemployment is low, populations are dense, housing costs have become prohibitive and affordable options are sparse. Prolific lenders serving this SBL sector often possess a very differ- ent skillset than their mid and large loan lender counterparts. This is simply because they have to. Where commercial real estate finance overall has proven a slow adopter of change and relied heavily upon tried and true, paper-based practices, the small-balance sector is now driving increased efficiencies and innovations. Small loans, by their sheer size, offer smaller returns. To be profit- able, a small-balance lender must complete a high volume of trans- actions and achieve a certain efficiency ratio. This requires robust infrastructure and a completely seamless transaction process from loan application through processing, funding and servicing. Lend- ers who are able to offer speed to financing attract the most business as competition for deals remains fierce among buyers and investors. Cutting-edge SBL lenders are addressing these issues by lever- aging internet-driven platforms to effectively replace cumbersome paper processes with faster automation. Well-designed platforms provide borrowers with 24/7 access to complete loan applications, along with other key documents and milestones. This allows the loan process to continue after normal business hours as time-con- suming paper processing tasks are avoided. It makes perfect sense that much of the innovation occurring with these high-tech applications is happening in the smaller loan space. When you compare the variables an SBL lender must have in place to succeed in this specialized sector — speed, efficiency, scalability — with the benefits of technology, it all aligns. The greatest value in these automated models ultimately centers around the improved communication between borrower and lend- er, as well as the increased number of touchpoints between parties. By working closer together in a technology-enabled environment, the start-to-finish loan process timeline is dramatically reduced, creating unquestionable value on both ends. For example, through Sabal's proprietary SNAP program, the team has increased its speed to close by 64 percent. In one instance, the SNAP technology's ef- ficiencies enabled Sabal to close a $3.4 million acquisition loan for a 39-unit apartment property in Tucson, Ariz., in just 39 days. While small-balance lending still requires a great deal of human decision- making and expertise, these technology-enabled results showcase the benefit of employing automation in small-balance lending. As the demand for small commercial loans continues to increase, borrowers will seek out lenders who are efficient, as well as those who deliver transaction speed and ease. Expect to see technology continue to reshape this sector, with much additional innovation likely on the horizon. Paskover Jackson FINANCING TRENDS, CREATIVE SOLUTIONS IN 2018 By Mitch Paskover, President, Continental Partners in West Hollywood, Calif.

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