Loan Trends in Southern California: Questions and Answers
With a strong emphasis on client relationships, Banc of California’s approach to staying active during the pandemic has been to reach out to borrowers to offer them assistance and a reassuring voice, according to Jared Wolff, president and chief executive officer.
As an active lender in the Southern California commercial real estate market, the bank provides acquisition, development and bridging loans. However, recent economic uncertainty has caused changes. The lender has moved away from some transactions and “turned to a greater reliance on overall support from sponsors,” said Hamid Hussain, president of real estate and commercial banking.
CPE spoke to leaders about the direction the region’s financial markets could take this year.
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Describe Banc of California’s overall strategy since the start of the health crisis?
Wolff: Our goal has always been to listen to the needs of our clients and provide them with a consultative approach to help them build on their financial success. Since the start of the pandemic, we have been very proactive in reaching out to our customers to ask how we can help them, if only to offer a reassuring voice and say that we will be successful together. I would say this is the biggest opportunity for us as a community bank during this crisis – to show that we care about our customers and want to help support the communities we serve.
What changes have you noticed in CRE lending activity in Southern California over the past few months?
Hussain: In the banking sector as a whole, the most marked trend has been to reduce risk tolerance and in particular to move away from the hardest hit sectors of hospitality and retail. In more stable sectors, such as industrial and multi-family, we have seen an increased reliance on sponsor strength and liquidity when debt service and tenant quality are closer to the bare minimum. underwriting guidelines. However, the reduction in demand for loans, due to the decrease in the volume of sales transactions as the pandemic persists, is causing some of these stricter lending and pricing standards to return closer to pre-pandemic levels. .
How has the health crisis changed the way you assess potential transactions?
Hussain: Our approach to credit fundamentals – cash flow, guarantees and sponsorships – has not and will not change. Regardless, since the pandemic we have become more dependent on the overall support of sponsors. Sponsors are the key to the success of any real estate investment and it is important for us to know the people with whom we are doing business. Going back to what Jared said earlier, we take a consultative approach to building relationships, so trusting our sponsors and vice versa is paramount to our mutual success.
In light of the current economic climate, how do you feel about adding extra layers of protection to a transaction structure?
Wolff: At the bank level, we are quite happy with our ability to assess risk and, as a result, we did not feel inclined to over-structure transactions, even during the pandemic. We believe consistency and reliability are the key words that build a good reputation. Our customers and prospects must be able to count on the fact that the bank will be responsive and consistent in its execution.
Are you still seeing a demand for construction financing?
Hussain: We haven’t seen significant demand for office construction projects, and we don’t expect to. Office will remain under some pressure as companies allow more flexibility for employees to work remotely. Industrial demand remains strong especially since online shopping transactions have increased. We are seeing more and more of our customers turning to industrial infill projects as “last mile delivery” continues to grow.
From a global perspective, which changes do you think are temporary and which are likely to be permanent in terms of lending in the office and industrial sectors?
Hussain: This is a difficult question to answer because human memories tend to be short, especially those of bankers. Banc of California hasn’t deviated very far from our pre-pandemic lending standards as they have served us well in the home lending arena. Overall, the industry may take a more critical view of tall office buildings, but it’s hard to say if this will be a lasting trend. Industrial became the new multi-family until we hit Oversize status, but that’s probably a bit later.
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How do you see the financial landscape in Southern California evolving in the coming months? What performance do you expect from the different real estate sectors in 2021?
Wolff: Southern California has an incredibly resilient economy due to the diversity of industries based here. Employment will be the key factor, especially in the entertainment industries. But as a lifelong Los Angeles native, I believe in Southern California. As a bank, we are well positioned given the strength of our capital to grow alongside the success of our clients.