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ECONOMIC TURMOIL IN THE
COMMERCIAL REAL ESTATE INDUSTRY
How are financial institutions responding?
The sudden upheaval in the U.S. economy has presented a formidable challenge for the commercial real estate industry, thanks primarily to spiking interest rates. How are financial institutions handling the sudden change in the landscape?
Connect Media posed several questions on the topic to Banc of California’s Managing Director Real Estate Banking, Michael Nguyen, and the insightful analysis from Nguyen and “California’s Business Banc” paints a cautious yet optimistic picture.
Q: How are you adapting to the turbulent market conditions?
It’s challenging because it happened so quickly. With rising interest rates, we’re trying to maintain good quality deals, but at the same time we’re not locking into long-term interest rate deals right now for two reasons: 1) We don’t want to take on the risk right now, and 2) We don’t know what’s to come in five years. Many of our clients have chosen to take the shorter five-year fixed-rate option, and then revisit it. There’s a lot of uncertainty right now. New investors have been playing in the low interest-rate marketplace for the past 10 years, so with rates now creeping into the low 5s, they’re being very cautious. Banks are also less willing to go outside of the box right now on deals than say six to nine months ago.
Q: Do you think the market is causing a halt…or it is more just a cautious approach?
I think it’s more caution. There hasn’t been a level-set yet between buyers and sellers. Interest rates have gone up, but cap rates are still low, although in certain asset classes, some slight deterioration is starting to show. Sellers are being very bullish about what they think their property is worth, so they’re holding firm. Our experienced investors are building cash and creating reserves to take advantage of opportunities that may materialize as we head into the latter half of this year and early next.
Q: We just had a major rate hike in June and we’re looking at another 2–3 in the next six to nine months. Do you think the market fundamentals are strong enough that we will still see a thriving commercial market then?
I believe the uncertainty will end and people will adjust, especially for folks that have pressing matters like maturities or interest rate resets, as they will be forced into making decisions. They likely won’t be getting as much cash out on a refinance, but it remains a good investment. The demand is there, and barring any major implosion, we’re looking at a new reality that may last two to three years, given the new rate environment. Leverage on assets will come in from what we have become accustomed to, but overall that is healthy for the market.
Q: Are you finding that California-based clients are looking at markets in other states? What are the property types that you’re seeing the most?
They have been for a while trying to arbitrage the low cap rates in California. Many are going into secondary and tertiary markets to find better returns, but it really depends on the client. Some are more into single-tenant, triple net-lease low-maintenance-–type investments, while others are more into value-add opportunities and higher cap rates than are available in California. Banc of California generally sticks to the Western U.S., and we typically stay in California for first-time clients. Sixty-five percent of our portfolio remains multifamily. I’ve been seeing more bridge transactions recently with clients looking for opportunities to upgrade a Class B/C property into a high-Class B/low-Class A property.
This interview was originally published on ConnectCRE on August 12, 2022. Opinions expressed do not necessarily represent Banc of California Opinions do not constitute investment advice or a guarantee of future outcomes.
Michael Nguyen
SVP Managing Director
Real Estate Banking
Phone: 949-751-4147
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