2019 California Bank Predictions

Lower spreads, longer terms and more flexibility from our banks and we anticipate this to continue into the new year.

As I reflect on our business in 2018, the word that comes to mind is consistent. Almost all lenders have been strong since January, and we didn’t see any major blips slowing down loan production at any time. This is reflected in our firm’s national debt production volume, which is up 8.5 percent year over year through the third quarter of 2018, and is the highest it has been since our inception. 

What is extremely remarkable is the amount of bank business we’ve done in 2018, particularly with California banks. We are on pace to see record production with California banks for several reasons, the most important of which is how aggressively they have been competing for business. We’ve seen lower spreads, longer terms and more flexibility from our banks and we anticipate this to continue into the new year. Barring any large disruptions in the market, below are predictions for 2019 based on observations in the property markets and from the banks.  

Nine Predictions for California Banks in 2019

  1. Apartment Loans are No. 1:  Although many players were on pins and needles waiting for the results from the Costa Hawkins vote on November 6, only a few banks sat on the sidelines. With the NO Vote, banks have jumped right back in to pursue apartment loans. Only a short time ago, there were a few dominant banks for apartments lending, but that the number has increased to double digits. The growth of aggressive banks coupled with outside competition from life companies and the agencies (Freddie SBL) will compel banks to push terms to win as much apartment business as possible. 
  2. Specialized Programs for Industrial Assets:  Lenders love industrial properties due to the ability to secure long-term leases, minimal capital requirements and extremely low vacancy rates. According to CoStar, California vacancy rates are 3.6 percent compared to the national average rate of 4.6 percent. Industrial has become the darling for lenders and some California banks are sizing and pricing industrial loan the same way as apartments.  
  3. Retail is Hard:  It’s an unfortunate truth but it’s just hard to get retail loans finalized unless the retail center is the “best of the best.” California banks are extremely selective with retail and are focused on tenant credit, lease term and tenant sales. Lenders will likely continue to stick to grocery-anchored property, single-tenant credit assets and low-leverage neighborhood centers. Offering recourse may not be enough to do a deal that is out of the bank’s very narrow target for retail. 
  4. Banks up their Construction Lending:  Although many California banks continued to reserve their construction dollars for existing customers in 2018, we saw several take the opportunity to attract new relationships by offering construction loans to first time clients. We expect this to continue as banks fight for clients and as the loosening of the HVCRE rules filter through the system and it becomes easier and more profitable for banks to underwrite construction loans. 
  5. Banks Keep Protecting Their Books:  Banks have gotten increasingly aggressive on maintaining and growing existing relationships. Not only are banks getting aggressive on economic loan terms for client relationships, but they also are getting more creative and flexible on transactions that typically would not be a fit. They do this to further strengthen and protect the relationship and keep as much of their business in-house. This trend will continue as banks focus on continued sustainable growth.
  6. Banks Continue to Offer Longer Duration Loans:  More California banks are regularly offering seven- and ten-year loans for commercial assets. Swapped loans continue be the preference because banks can book the entire swap profit at close, but some banks are just fixing rates internally. Banks have done this before 2018 but more banks are competing for this business at spreads considerably lower than in previous years. 
  7. Floating-Rate Spreads to Stay Low:  As the FED has increased its target rate, LIBOR has increased and banks are making more interest on their loan books. This has enabled spreads to come in and we anticipate this continuing into next year. 
  8. Bigger Push for Deposits:  We’ve seen a notable push from bank originators to bring in deposit relationships. Luckily banks are offering better pricing and proceeds to lure borrowers for their operating and deposit accounts. Being able to pull this lever is a big competitive advantage as it seems banks can transact at pricing levels not achievable by their competition for the right relationship. We don’t see this push for deposits changing going forward.
  9. Underwriting Rates Are Going Up:   As a result of the recent rise in interest rates, notably the 10-year UST rose more than 30 basis points in the past three months, banks have reacted by increasing their stressed underwriting rates to provide more of a cushion between their actual rate and the rate that they are using to size their loans. Unfortunately, this move has reduced the amount of leverage that can be achieved in what has already been a DSCR constrained borrowing market.   

Based on recent discussions, California banks will have larger allocations for 2019 and some new tools to win business. Continued pressure from other lender sources will force our banks to remain competitive on economic terms, so I’m hopeful the market will remain very strong for borrowers.  

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