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A Look at SoCal Lending Over the Next Year

Carrie Rossenfeld Multifamily

Changing demographics and an increased number of deals hitting the market this quarter are defining the apartment-investment sector in Southern California, Shane Shafer, managing director in Berkadia’s Irvine, California, office, tells SoCal Real Estate. Shafer recently helped lead a team on behalf of seller Colony NorthStar in the sale of the Capes at Ventura Apartments, a multifamily property in Ventura, California, for $100 million to Universe Holdings. We spoke with Shafer and David Bleiweiss, also a managing director in Berkadia’s Irvine, California, office, about some of the trends in SoCal real estate and what they expect the lending environment here to look like for the rest of 2018 and into 2019.

Shane Shafer, managing director of Berkadia | Photo courtesy Berkadia

SoCal Real Estate: What are the main trends you’re noticing in SoCal multifamily, student housing, hotels and hospitality, and seniors housing?
Shafer:
We have seen more deals hit the market this quarter than the previous two combined. We are seeing continued interest from buyers looking for opportunities where they can add value by upgrading units to a contemporary standard. Additionally, we are seeing an increase in interest from buyers who are aggressively seeking class-A core deals. The strength, positive demographics, and good future expectations are making SoCal rise to the top on most investors’ lists of where they want to be or grow their current portfolio.

How are changing demographics across key markets impacting investor appetite in SoCal?
Shafer:
The changing demographics are creating very strong fundamentals for apartment investors. This allows the buyers to feel confident about buying as there is a belief that these fundamentals will continue. Owners who own in SoCal have an appetite to buy more here. Those that are not in the market want to be, so they are going after the opportunities aggressively.

What does Berkadia expect the SoCal lending environment to look like for the rest of 2018 and into 2019?
Bleiweiss:
The Southern California lending environment in 2018 and 2019 will be much like 2017. There is no shortage of capital from the agencies, banks, conduits, and other conventional lenders. The biggest challenge will be a rising-rate environment, limiting loan proceeds because of debt-coverage constraints rather than LTV constraints. The request for adjustable-rate mortgage (ARM) loan products has been increasing slightly as the delta between fixed rates and ARM rates begins to widen again, and borrowers continue to search for loan products with interest-only payments to preserve cash-flow and yields.

What else should our readers know about SoCal investment sales?
Shafer:
Investors see the market as strong today and know that it has potential to continue to be strong as Millennials become a larger force in the rental market. The SoCal markets will produce continuous strong market performance and will cause increased interest from buyers.

The Inland Empire will continue to be a market that investors seek. Jobs created in the retail warehouse distribution sector have created a jobs-rich environment that has helped to drive great year-over-year rental growth. This jobs-rich environment gives investors confidence that there could be long-term benefits to owning in these areas as the retail business landscape continues to change.

Orange County, Los Angeles, and San Diego will continue to be sought-after by buyers. Investors are looking at these areas as it is rare to find opportunities that allow for the kinds of great fundamentals that these areas provide. These markets still have room for more rental growth due to steady flow of jobs and desire from tenants to live in these areas.