2017 Will Be a Record for Debt Originations

LOS ANGELES—Loan volumes slowed at the beginning of the year, compared with 2016, but capital markets expert Brian Eisendrath, vice chairman at CBRE, says that 2017 will be a record for debt originations. We recently sat down with him to get an overview of the first half of the year and a look ahead. Here, he tells us how L.A. stacks up against the nation, who is borrowing this year and where they are looking, in this exclusive interview.

GlobeSt.com: How does Los Angeles compare with national lending market conditions during the first half of the year?

Brian Eisendrath: The appetite for lending remains strong in Los Angeles, especially for multifamily.  Given the tight cap rates, loan to values are typically lower in comparison to other markets.  Lenders like to see cash equity in deals, which drives strong competition, as do demand for infill locations and strong employment growth in most of LA's submarkets.  At the same time, Los Angeles tends to see more operators that buy and hold long term.  As a result, there is less volume relative to markets such as Phoenix, Las Vegas, Dallas and other more active “trader” markets.

GlobeSt.com: Which borrowers have remained most active in the first half of the year?

Eisendrath: The appetite for value-add properties remains extremely strong with more than half of the activity chasing these opportunities.  In the past year, we have seen a number of private equity firms teaming up with operators to acquire value-add multifamily assets.  In that vein, the workforce-housing sector is particularly perceived to offer attractive upside with good downside protection.  The private syndication market remains strong, but relative volumes in comparison with private equity are much smaller. Lastly, developers with strong track records continue to build new multifamily product.

GlobeSt.com Which lenders have remained most active?

Eisendrath: On the multifamily side, Freddie Mac and Fannie Mae continue to dominate the market.  Both have mandates for affordability as well as green initiatives, which are creating a win/win for borrowers as well as the lenders.  Life insurance companies have sizeable allocations and want to increase exposure to multifamily.  For newer, well-located assets at a moderate leverage level, life insurance companies are pricing aggressively.  Banks and debt funds continue to play in the value-add space and are looking to multifamily, given its resilience relative to other product types.

GlobeSt.com: What are the challenges that you think will have dominated 2017?

Eisendrath: Lender appetite is robust, and we don't anticipate that changing for the remainder of 2017.  The outlier will be interest rates.  The Fed is signaling for additional rate hikes this year, which will put pressure on the cost of borrowing.  Many sponsors have been using floating rate money, in part, to increase distributions through cash flow.  If the longer end of the yield curve remains steady, we will hit an inflection point where fixed rate debt could be less expensive over a five- to seven-year hold period.

GlobeSt.com: What is your forecast for the second half of the year?

Eisendrath: Despite investment sales volume being down in the first quarter, we are seeing robust activity. Part of this is driven through recapitalization opportunities as well as refinances. Given the lack of investment opportunities, combined with continued rent growth for workforce housing, many sponsors are seeing the best opportunity in their existing portfolios.  We think that 2017 will be a record year in terms of debt originations.

LOS ANGELES—Loan volumes slowed at the beginning of the year, compared with 2016, but capital markets expert Brian Eisendrath, vice chairman at CBRE, says that 2017 will be a record for debt originations. We recently sat down with him to get an overview of the first half of the year and a look ahead. Here, he tells us how L.A. stacks up against the nation, who is borrowing this year and where they are looking, in this exclusive interview.

GlobeSt.com: How does Los Angeles compare with national lending market conditions during the first half of the year?

Brian Eisendrath: The appetite for lending remains strong in Los Angeles, especially for multifamily.  Given the tight cap rates, loan to values are typically lower in comparison to other markets.  Lenders like to see cash equity in deals, which drives strong competition, as do demand for infill locations and strong employment growth in most of LA's submarkets.  At the same time, Los Angeles tends to see more operators that buy and hold long term.  As a result, there is less volume relative to markets such as Phoenix, Las Vegas, Dallas and other more active “trader” markets.

GlobeSt.com: Which borrowers have remained most active in the first half of the year?

Eisendrath: The appetite for value-add properties remains extremely strong with more than half of the activity chasing these opportunities.  In the past year, we have seen a number of private equity firms teaming up with operators to acquire value-add multifamily assets.  In that vein, the workforce-housing sector is particularly perceived to offer attractive upside with good downside protection.  The private syndication market remains strong, but relative volumes in comparison with private equity are much smaller. Lastly, developers with strong track records continue to build new multifamily product.

GlobeSt.com Which lenders have remained most active?

Eisendrath: On the multifamily side, Freddie Mac and Fannie Mae continue to dominate the market.  Both have mandates for affordability as well as green initiatives, which are creating a win/win for borrowers as well as the lenders.  Life insurance companies have sizeable allocations and want to increase exposure to multifamily.  For newer, well-located assets at a moderate leverage level, life insurance companies are pricing aggressively.  Banks and debt funds continue to play in the value-add space and are looking to multifamily, given its resilience relative to other product types.

GlobeSt.com: What are the challenges that you think will have dominated 2017?

Eisendrath: Lender appetite is robust, and we don't anticipate that changing for the remainder of 2017.  The outlier will be interest rates.  The Fed is signaling for additional rate hikes this year, which will put pressure on the cost of borrowing.  Many sponsors have been using floating rate money, in part, to increase distributions through cash flow.  If the longer end of the yield curve remains steady, we will hit an inflection point where fixed rate debt could be less expensive over a five- to seven-year hold period.

GlobeSt.com: What is your forecast for the second half of the year?

Eisendrath: Despite investment sales volume being down in the first quarter, we are seeing robust activity. Part of this is driven through recapitalization opportunities as well as refinances. Given the lack of investment opportunities, combined with continued rent growth for workforce housing, many sponsors are seeing the best opportunity in their existing portfolios.  We think that 2017 will be a record year in terms of debt originations.