SAN DIEGO—Traditional lenders used to make up the bulk of CRE lending, but now alternative lenders are viewed as a viable lending source, often backed by institutions, Money360's president Gary Bechtel told attendees at RealShare San Diego's capital-markets session Wednesday. The panel explored the most current and challenging issues in San Diego's financing realm.

Moderator Olga Alworth, SVP with George Smith Partners, asked the panelists why are there so many debt funds in the market, which has seen quite a few alternative lenders enter the space. Chad O'Connor, senior managing director of capital markets for Marcus & Millichap Capital Corp., said the influx of debt funds started before the recession, but many were too attracted to risk and didn't survive. Now, debt funds are much more cautious in their underwriting and are more focused in their approach. Traditional lenders are seeing the need to create more traditional banking products and fewer CRE loans doing less lending since “the handcuffs are getting tighter and they're not coming off.” He added that there's much more room for alternative lenders in the market, and he sees this as a segment that will continue to grow.

Bechtel said the lending environment has changed “dramatically” since the recession. With all the regulations that were put in place during that time period, traditional lenders now need to pick and choose which borrower to service, especially with bridge and construction loans, creating opportunities for alternative lenders to come in and fill that void. “Lenders are viewed as just another lending source,” he said.

Alworth asked O'Connor what percentage of debt he places in alternative lending, and O'Connor said he places more debt with traditional lenders because the cost of capital with alternative lenders is hard to determine. “Pricing matrixes change overnight. Debt funds are great for deals with some air, but there's not so much certainty of execution in some cases.” Bechtel said the funds that survive must do their homework, and borrowers must align with the right alternative lenders; most now are backed by institutions.

Charles Salas, senior underwriter with Seattle Funding Group, said certainty of execution often hinges on speed and the ability to close a loan quickly, which gives alternative lenders an advantage of traditional lenders. A two-week closing with an alternative lender could take three or four months to complete with a traditional lender.

Alworth asked why a borrower would turn down a deal with an alternative lender, and Salas said if conventional capital can provide the loan at a lower rate, then a borrower might choose to go with them. When it comes to the choice among alternative lenders, much depends on leverage levels, loan structure and the nature of the guarantees required. He said his firm is structured to withstand downturns, and “we look at the sponsor” and won't step into some tertiary markets where the risk is too high.

Alworth asked where O'Connor sees most of the business going: to alternative or cash? O'Connor said locally, business is going to commercial banks, while nationwide business is going to Fannie Mae and Freddie Mac. “There's a huge push for global cash-flow underwriting. More than anything, that can kill a deal in this market.”

Regarding the different property types or food groups, O'Connor said in Southern California, the market didn't overbuild retail and that service-based retail will be fine—the panic over this sector is largely overblown. “Our retail fundamentals here are in really good shape.”

Bechtel concurred, saying that 94% of retail purchases are done in a brick-and-mortar store, “but the retail experience has changed.” Big box is morphing into experience-based centers where customers look at products in the store before buying them online; as a result, even alternative lenders “are getting more conservative with retail lending.”

Salas said his firm is always looking at it from a location standpoint and the fact that “we can do it faster,” and Bechtel added, “You can move quickly, but you still have to do proper diligence.”

On the subject of construction lending, Bechtel said the more-traditional sources are beginning to back off with construction lending because it's late in the cycle, but some markets are “still going crazy” with development. Salas said the low-hanging fruit for alternative lenders is the bridge loans; construction financing is much more complicated.

With regard to multifamily, Alworth asked, “What's disrupting the way traditional lenders are looking at a deal?” O'Connor said, aside from Airbnb, capital for this property type is pouring in from other major metros like L.A. and San Francisco, so multifamily is the best product type for lenders in terms of stability.

Bechtel said in core markets, his firm is seeing very little multifamily business; there's more activity in secondary and tertiary markets. Salas said his firm's primary requests in this sector are repositioning loans; since alternative lenders can deliver on speed, these transactions don't lend themselves to institutional loans. “Also, we're seeing a lot more construction requests from multifamily builders in primary and secondary markets.”

When asked what keeps them up at night, Bechtel replied, “Competition for what we do,” although it's great to see so much money coming into the market. “There's capital out there for every deal.”

All of the panelists expected to see a few more bumps in interest rates, but no more than a 30- to 40-bps increase overall.

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