by Daria Walker, Walker Realty Capital
Last week, I hosted a luncheon for the Los Angeles Mortgage Association featuring regional banks and credit unions. Our panelists included Melissa Yi from First Tech Federal Credit Union, Kerry Canto from Provident Bank, John McCurdy from Farmers Insurance Group Federal Credit Union, and Morgan Ferris from Genesis Bank.
Over the past six months, we’ve witnessed several bank closures, dramatic increases in interest rates, and corporate investors ‘handing in the keys.’ Although this isn’t an apocalypse, we are in for a massive slowdown that some of the panelists projected will last up to two years. The panel was very lively, and the room was often filled with laughter, however, the overall outlook was pretty grim.
Underwriting has become more conservative across the board and those still lending are being extremely selective. Unequivocally, office was out amongst the panelists with very few exceptions. Multifamily is still highly favored; however, rents are projected to stagnate, and the term ‘value-add’ has become a four-letter word as sales prices are heading downwards.
Current interest rates have also been slowing much of the transaction volume. While the featured credit unions are pricing over the FHLB, which results in more stable interest rates, they have also widened their spreads and that makes them more expensive relative to other balance sheet lenders. On the other hand, the banks featured on this panel admitted to a more arbitrary pricing model that simply puts them in line with average market rates, which have increased to around 250 basis points over the corresponding Treasury. When asked who is the greatest competitor on the capital markets, they all agreed that life insurance companies are holding court on pricing.
While the credit unions expressed no concerns around liquidity, the emphasis on deposits was split between the two banks. One preferring to nurture their existing relationships, and the other being open to new relationships under the condition of receiving substantial deposits upfront. All lenders are seeing an uptick in ‘cash-in’ refinances for maturing loans on their balance sheets.
Increased interest rates, stagnant rents, and picky lenders have all impacted commercial real estate sales, which many brokers are already reporting. Investors who fled California in search of higher cap rates may find their way back as prices adjust, and previously high-growth areas like Texas and Florida are becoming less attractive to lenders as they experience defaults.
To conclude, I asked the panel what it would take to get things going again. The answer was ‘nothing short of a catastrophe.’ While the 2024 election will likely liven things up in the capital markets, everyone should be preparing for the long winter ahead.
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