Connect Orange County was everything it promised to be, gathering commercial real estate leaders and professionals to share expertise and dig into the trends currently shaping our industry. While the conference was held in Orange County, the discussion really focused on major trends impacting the broader Southern California region. From the current state of the capital markets to challenges facing the region’s industrial asset class, a realistic assessment of current conditions highlighted the work yet ahead in an improving climate.
I enjoyed the opportunity to join with a roster of lenders for the “Getting Deals Done: Financing in Today's Market & Beyond” panel, a lively discussion on debt in today’s market climate. Here’s a few key takeaways from the day, both our panel and the day in general.
Capital Markets Panelists agreed that financing conditions are improving for most borrowers, and more deals are getting done, albeit in a higher for longer market cycle.
Current five-year and 10-year treasury rates are at 52-week lows, but volatility remains as they most likely will hover and fluctuate from current levels in a 15 to 25 basis point range. Initially, cuts to the Fed rate will improve short term and SOFR rates.
Banks, long a traditional debt partner for many in the industry, remain sidelined or expensive in the current market cycle. That will not change in 2025. Where they are competitive right now is in the bridge and construction lending space, primarily reserved for existing bank relationships with large accounts.
Life companies remain as the most reliable and consistent source for permanent debt and continue to grow their allocations to commercial real estate loans. A big shift for the life companies is their move into the shorter term three- to five-year perm and bridge debt market to pursue yield, and willingness to offer prepayment flexibility at higher spreads.
CMBS continues to be an attractive option for those looking to maximize proceeds or seeking up to full term interest-only. Interest only terms and rate buydowns are enticing to borrowers. Continued rate volatility and not setting a final rate until loan closing have kept some borrowers away.
Dormant equity that has built up on the sidelines will most likely begin to deploy into new acquisitions, new developments, and preferred equity positions as maturities reset values and controlling lenders take back assets and mark to market.
PACE Loans can be an opportunistic play and are becoming increasingly compelling alternative to preferred equity or mezzanine capital placements. These loans are best suited to new construction or projects in transition and may be in conflict with first position lender priorities. Agencies are PACE adverse, as are many others.
Bridge lenders are still a vital source for pre-stabilization debt and projects in transition. Many are shifting to variable rate loans as rate climate improves.
The Southern California industrial market is in a correction mode, with a current glut of space from overbuilding and sublease options from indulgent post COVID leasing programs, cooling rents as landlords compete for credit tenants, and changing end user logistics patterns, that include competition from Las Vegas and Phoenix, put pressure on the sector. However, the asset class is still outperforming 2019 levels, and fundamentals point to the glut of space being absorbed into the year ahead.
Office is seeing renewed leasing momentum and may have found a bottom for space demands, although a bottom on asset values has still yet to be reached. Office remains the most challenged asset class to refinance. Build to suit office is getting built with credit and/or government tenant leasing in place. Flight to quality is real.
AI in CRE currently functions as a customer-relationship optimizer, facilitating tenant/client inquiries via phone and chat features. Expect the next wave of AI innovations for CRE to focus on due diligence and investment strategy functions.