LOS ANGELES—On the debt side, a number of Asian banks have increased their lending activity throughout Southern California. Banks, such as Royal Business Bank and Evertrust, have been making a large push to expand their presence and attract business from the Chinese American communities. That is according to Daniel Mense, the director of Ness Holdings Inc., a locally based diversified development company. We exclusively chatted with Mense on how the landscape of buyers have evolved, on consolidation of mid-sized banks, the international investment community and how small investment shops have diversified their portfolio in order to stay competitive.
GlobeSt.com: How has the landscape of buyers evolved over the last several years, since the recovery, and what impact has it had on smaller firms?
Daniel Mense: We are seeing greater demand for smaller deals, particularly in the commercial sector in secondary and tertiary markets, which the larger investment firms have been targeting. Over the last year (ending March 31, 2014), smaller deals have experienced the most significant year-over-year price gain of 17.2%–the strongest since the recovery began, according to CoStar. This data strongly supports an increased appetite among larger investment firms for smaller deals in non-core markets. To further highlight this point, in the last year, we have transacted several deals in Southern California with major investment firms, ranging from $5 to $15 million in deal size. This is the first time that we’ve seen such interest for non-core assets by more institutional-oriented investors.
We are also seeing an influx of private equity firms entering this market that traditionally were not focused on real estate. Many private equity firms expressed some hesitancy in the equity markets and a belief that the stock market is due for a correction. They view real estate as a strategic hedge to their existing portfolio, as well as an opportunity to generate stable cash flow streams with strong upside in value appreciation.
While increased demand from the investment community has helped drive strong gains in the marketplace, this has been forcing small investment shops and “mom-n-pop” investors to become more creative in the types of deals they pursue and how they source them. Competing against large institutions is a daunting task and smaller firms need to constantly figure out how to access deals before the larger players see them. One way is searching for off-market deals. More than 90% of the deals we acquired last year were off-market and this continues to be the primary way in which we, along with many other small investment shops, will be pursuing deals.
GlobeSt.com: What is driving the consolidation of mid-sized banks and how has this affected the lending industry?
Mense: On the debt side, a number of Asian banks have increased their lending activity throughout Southern California. Banks, such as Royal Business Bank and Evertrust, have been making a large push to expand their presence and attract business from the Chinese American communities.
Another interesting development is the consolidation amongst smaller banks, particularly in Southern California. Some notable acquisitions include: Banc of California acquiring Beach Business Bank and The Private Bank of California; Grandpoint Bank acquiring Gilmore Bank; and Royal Business Bank acquiring Los Angeles National Bank. While there are a number of reasons for consolidation, ranging from branch expansion, improved balance sheets to expanded product offerings, we are seeing improved service and greater product availability on the lending side. Traditionally, we found banks tend to stick to one asset class and/or product type, but as banks consolidate, they are willing to lend on a variety of deal types. For example, prior to the Grandpoint acquisition, Gilmore primarily focused on single family residence, however under the Grandpoint umbrella, they have expanded their product offering to include multifamily development. This type of expanded product offering has been quite common amongst these smaller banks.
GlobeSt.com: How have small investment shops diversified their portfolios to stay competitive?
Mense: Traditionally, “mom-n-pop” investors have sought simple deals that do not require an incredible amount of management to stabilize, but as inventory wanes, they have been more willing to pursue projects that have complex elements involved. We recently sold an industrial building to a small family office, whose intentions are to reposition the building into a multitenant retail site. In other instances, there are a number of “mom-n-pop” investors acquiring office buildings and converting them into apartments. These types of projects are management and capital intensive, which make them better suited for companies with the infrastructure and capital to execute. However, as the market becomes saturated with more investors, “mom-n-pop” investors will need to be willing to take on more complex deals.
What impact has the international investment community had on the Southern California real estate market?
Mense: There is noticeably increased interest from the Asian investment market on both the equity and debt side. In particular, Chinese investors have been focusing on gateway and port cities, like Los Angeles and San Francisco. Recently, two different sites were acquired by Chinese developers to construct some of the biggest projects in downtown Los Angeles. Shanghai Greenland Group purchased an entire city block with plans to develop 1.65 million square feet of residential and commercial space. Additionally, Oceanwide Real Estate Group purchased 4.6 acres and plans to develop a 1.5-million-square-foot mixed-use development. On the debt side, a number of Asian banks have increased their lending activity throughout Southern California.