The Chase for Capital

COSTA MESA, CA-Several weeks ago Urban Land Institute's Orange County/Inland Empire chapter hosted their fourth annual “The Money Chase” capital markets program.  It's remarkable how much the tone of the conference has changed since its inception in 2010. Back in those 'old days,' panelists talked about what they would like to do simply because they just couldn't describe anything that they actually closed—nothing was getting done. Fast-forward to 2013 and we are hip deep in capital, but we're still shin deep in deals. 

Highlights from the program included the following:

• The industry “operates in 10-year cycles, but with a seven-year memory” joked Davis Nass of UBS. While it's still early for the emergence of a systemic lack of discipline in the lending world, the panelists commented on a concern that competition could lead to bad risk decisions. Maybe they're just disappointed that increased competition among lenders is swinging pricing power in favor of the borrower…
• CMBS lending is back and functioning well. Investor demand for the bonds is just one reason that the AAA rated tranche is pricing at swaps + 80 basis points (a basis point is equal to 0.01%). Last year that pricing was swaps + 190 basis points. Greater bond buyer interest means more liquidity in the debt market, so watch what the bond buyers say and do. 
• Past borrower blemishes such as foreclosures and bankruptcy can be a deal breaker in establishing a new capital relationship. One conference attendee was quick to wonder why focus solely on the borrowers? What about the capital providers who misbehaved?”
• Debt yields are dropping and loan to value ratios are increasing, but risk-based pricing is alive and well. As long as that stays true, and cash flow underwriting looks backwards, discipline in the lending market will be alive and well too!
• According to the equity investors, secondary markets are more appealing opportunities because core assets in 'A' markets seem very frothy.
• There is the beginning of a gravitational flow from apartments to other property types because multi-family returns are at such compressed levels. No one would talk about the strength of that pull though, and I really wonder about that. Lemmings inexplicably are always walking off cliffs, can investors really flow away from apartments…
• CRE firms with local and regional operating expertise are invaluable to equity investment firms.  The entire panel agreed that their internal growth requires new operating partner relationships, not just more deals with existing partners.
• In the same vein, one equity investor boldly advised the investors, developers, and operators in the audience to “use professionals and tap into their expertise”. He believes brokers can cover the financing market better than most sponsors and are an invaluable resource.

The Money Chase proved that capital is really back in the market, and more importantly, that it's getting deployed. Chasing Capital is part of our industry and it's fun when the game is on…and it is! 

Tom Shelock is the co-founding principal of Talonvest Capital Inc. in the Orange County, CA office. He can be reached at tsherlock@talonvest.com. The views expressed in this column are the author's own.

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