LOS ANGELES—Excess and low-cost capital have been the recurring theme of the commercial real estate financing in the Los Angeles market; however, these aren’t the only drivers pushing the availability of financing. To take a closer look at this complex issue, we asked the principals and managing directors at George Smith Partners to weigh in on the drivers in different sectors within the financing space, and asked: What’s the number one factor driving the availability of commercial real estate financing in L.A. today?
Gary E. Mozer, George Smith Partners principal and managing director, on retail:
Los Angeles is a gateway/24 hour City, and institutional capital is flowing into these major metropolitan areas. It is usually not a matter of if a space will rent, but rather just how much a landlord can get in grocery-anchored or power centers. In addition, California as a whole has a large diverse economy with a large population. With the density of the population, retail is successful. These demand drivers help commercial real estate in general, but are especially powerful in retail.
David Rifkind, George Smith Partners principal and managing director, on debt:
The most important drivers from a debt/bank perspective come from two factors – which must be taken together. The first is the historically low cost of capital for banks, which has now resulted in very high profits on new commercial real estate loans. The second is the return of healthy fundamentals in most commercial real estate markets, especially evident in Los Angeles. These two factors have given banks the confidence to lend, driving capital into the Los Angeles market.
Steve Bram, George Smith Partners principal and managing director, on multifamily:
From a multifamily perspective, the Los Angeles Metro is still a large employment center, which requires sufficient housing for workers. The highest demand continues to be near the coastal areas, near the newly forming mass transit metro routes or in downtown LA. In these areas rents are approaching levels unheard of in prior years.
Gary M. Tenzer, George Smith Partners principal and managing director, on CMBS:
Clearly, CMBS likes the Los Angeles/Southern California market. We have found no shortage of CMBS lenders who understand the low cap rates and “full” valuations of Southern California real estate and are able and willing to compete aggressively on proceeds, spreads and other loan terms. The securitized lenders are driven by competition from the commercial banks and life insurance companies who are actively competing to put loans on their books.
Malcolm Davies, George Smith Partners principal, on development:
We are currently at a point of convergence in the market where construction lenders are now just as bullish as developers. This convergence, as well as the market’s positive economic outlook, is driving the availability of capital for developments in Los Angeles and Southern California. As a result, I expect the further loosening of leverage ratios, liquidity and net worth standards, along with the availability of more non- and limited-recourse construction loans.