Southern California debt and equity market


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In the last three years, commercial property lending has continued to gain momentum and it is fundamentally strong, while still maintaining disciplined underwriting standards. The fundamentals of the real estate markets also are improving via the growth in the housing markets, construction, industrial production, and the further strengthening of the consumer psyche. The convergence of these factors leads us to an optimistic 2014 forecast for the real estate lending markets. Banks now trust the improved value of real estate again, which results in increased lending competition that should keep spreads tight and fuel strong performance up the risk curve to broader geographies and asset types this year.

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Southern California debt and equity market

  1. 1. Southern California debt and equity market
  2. 2. Southern California debt and equity market In 2013, the economic recovery solidified in Southern California. Transaction volumes increased, investors became more aggressive and lenders more interested in our markets. Life Company lenders had good volume but the bigger news was that banks are aggressively back in the market and CMBS lenders more than doubled their volume. Over the year, the increase in the 10-year treasury yield along with a steep yield curve pushed borrowers to choose floating-rate financing and/or shorter term (5 year) fixed-rate execution. In 2014, we expect continued improvement in the supply/demand leasing fundamentals in the major Southern California markets with increased lender volumes across the board (Life Companies, Banks, CMBS and Debt Funds). Jones Lang LaSalle
  3. 3. Southern California debt and equity market We saw a significant increase in CMBS financings in Southern California in 2013. Overall, CMBS volume nationally totaled approximately $90 billion, which is double 2012 volume. • MBS underwriting standards are much C more stringent than what we saw in 20052007 and lenders seem to be maintaining their discipline. Average leverage is 65-70 percent given our low cap-rate markets that put pressure on in-place debt yields. • nvestors looking for higher leverage and/ I or those buying non-trophy properties are more likely to use CMBS financing. Jones Lang LaSalle
  4. 4. Southern California debt and equity market CMBS loans provide higher loan proceeds and liquidity for non-trophy properties with solid occupancy and operating histories. However, they don’t size well for nonstabilized properties and additional funding is problematic. Non-responsive servicing agents are a concern for many potential CMBS borrowers. There is currently a healthy amount of capital for real estate investment at all levels of the capital stack with, perhaps, more capital than opportunities. As a result, lenders and investors are becoming increasingly competitive thereby putting pressure on spreads and testing underwriting assumptions. As the economic recovery continues in 2014, expect a continued strong market for real estate financing. Jones Lang LaSalle
  5. 5. Southern California debt and equity market 2014 Trends: multi-family development losing some steam, hotels getting closer to equilibrium, new construction of industrial, office beginning to rebound, retail slow to recover but could be the next opportunity. Southern California, particularly Los Angeles, always attracts international investors given the size and diversity of our markets and population. Hotels, apartments and trophy office seem to generate the most interest from the international investment community. Jones Lang LaSalle
  6. 6. Chris Casey Managing Director Jones Lang LaSalle’s Capital Markets +1 213 239 6332 Download the complete report Debt and equity availability update: The guide to financial commercial real estate Jones Lang LaSalle