Western Real Estate Business recently spoke with various lending companies to gauge the economic environment in the West. Lenders have a broad range of answers and outlooks on financing, as would be expected in such a large and diverse area. However, many agree that multifamily is currently the most promising property type and the Southern California market is performing the best overall.

While apartments are doing well in many markets, the multifamily trend seems to be conversions. “The hottest property type is apartments that can be converted into condos because they are stabilized retail assets,” says Tim Hennessey of Mountain Funding. Greg Galusha of Pacific Coast Capital Partners agrees, also listing apartment conversions as the most favorable investment right now. John Davis of Collateral Mortgage Capital believes the trend will continue on account of the falling capitalization rates.

Although many areas of the West are booming, the word ‘growth’ is often equated with Southern California.

“Southern California continues to be a hotbed of activity in most sectors,” says Tim Hawthorne of Buchanan Street Partners. “Population gains have contributed to an imbalance in the multifamily and residential housing markets as demand outstrips supply.” The perpetual influx of people and businesses continues to propel the housing and retail markets forward. Davis of Collateral, also using the ‘hotbed’ buzz word, adds that the area is an attractive market across the board.

Within the Southern California market, there are specific pockets of increased activity. “North San Diego continues to trade assets and produce demand,” says Galusha. “And Santa Clarita is also on fire for commercial and single-family residential.”

While the area continues to attract attention, there are several other markets of interest to investors. “Southern California is hot, but we have seen an increase in activity and closed a significant number of deals in Washington, Arizona, Colorado and Oregon,” says Andrew Fawer of CIBC World Markets. Gregory Kelsey of Imperial Capital adds Phoenix, Las Vegas and Tucson to the list of improving markets.

Davis of Collateral agrees that Las Vegas is the place to watch. “Las Vegas is a city that continues to draw strong attention and activity,” he states. The city is currently experiencing steady growth, particularly in the areas of housing, retail and hospitality.

Many western markets have recovered from the economic downtimes of the past, though a number still haven’t fully healed. “Most markets seem to be stabilizing; however, the ‘tech wreck’ markets of Puget Sound, the San Francisco Bay area (mainly Silicon Valley), Boulder/Denver corridor and the tech-heavy submarkets of west Los Angeles are struggling,” says Hennessey of Mountain Funding.

Thomas McKnew of iCap also sees a slow recovery in San Francisco. He has found that the city’s economy is still depressed, especially the hotel and office markets. Renee Mankoff of Imperial Capital has a similar view. “Office in the Bay area is still facing significant vacancies, which translates to difficulty in obtaining satisfactory debt coverage ratios, though this does represent an opportunity for investors.”

Jeff Eliason at Buchanan Street has a different outlook on the city. “Bay area real estate fundamentals are improving, making this a market to watch as gains in the technology sector and an overall increase in capital expenditures by businesses begin to take effect,” he says.

In regards to the year ahead, many of the lenders remain cautiously optimistic. Davis and Fawer both predict a bull market for the remainder of the year, with market prices increasing across the board. Davis adds, “We anticipate continued low and attractive interest rates and a continued abundance of capital available for real estate. As the economy continues in its early stages of recovery, it will be important to have demonstrated employment growth. We are seeing improved and stronger real estate fundamentals in most marketplaces.”

According to Hawthorne of Buchanan Street, “There is still ample debt and equity capital in the market, and lenders are anxious to fund as much capital as they can while rates remain attractive and investor demand for real estate mortgages is strong.”

McKnew of iCap believes there will be low rates and plenty of money — “No shortage of capital but a shortage of good quality deals,” he says.

Imperial Capital’s Kelsey compares this year to last year in regards to lending. “Assuming interest rates remain near their current levels, the market should remain relatively strong in most areas and improve in some of the softer markets.”

Hennessey of Mountain Funding believes the toughest economic times have passed. “In California, especially Northern California, as far as continued negative absorption, the worst is behind us. As we move into the year, we will see a marked decrease in the rate of negative absorption and in fact, we may see signs of positive absorption before the end of the year,” he says. “However, given the sheer volume of vacant and/or under-utilized space in the market, it may be several years before this market begins to stabilize in a meaningful way.”

Real estate will continue to be a favored investment throughout the year as many soft markets gain strength and interest rates hold steady. “Activity has already stepped up considerably so far this year and should continue to do so,” says Galusha of Pacific Coast Capital Partners.

LEADING LENDERS IN THE WEST Buchanan Street Partners Headquarters: Newport Beach, Calif. Finances: office, retail, industrial, multifamily, mixed-use and self-storage Covers: California, Seattle, Denver, Phoenix, Salt Lake City, Las Vegas and Portland, Ore. Provides: Invests equity and mezzanine debt as principal through its Buchanan Capital Partners group. Also arranges all forms of debt and equity as an advisor through Buchanan Capital Advisors group. Recent Loan Transaction: Last month Buchanan Capital Partners invested $20 million toward the $150 million development of Esprit Marina del Rey in Marina del Rey, Calif. It was a challenge for the project, featuring 437 luxury apartments and a 227-slip marina, to attain maximum construction leverage. The construction lender provided an initial funding of $90 million and agreed to advance subsequent fundings based upon the achievement of particular leasing hurdles. Buchanan Capital Partners funded a $20 million mezzanine tranche to gap the development costs until the leasing performance triggered the additional advances from the construction lender. Pacific Coast Capital Partners Headquarters: El Segundo, Calif. Finances: hospitality, industrial, land, mixed-use, mobile home parks, multifamily, office, retail, storage, studio Covers: California, Nevada, Arizona, Colorado, Hawaii, New Mexico, Utah, Idaho, Washington and Oregon Provides: bridge, acquisition, mezzanine-unsecured short-term floating rate Recent Loan Transaction: Pacific Coast provided a $48 million, 90 percent non-recourse loan on the acquisition and conversion of an apartment complex to for-sale condos. The company provided one-stop financing to the borrower when normally a senior loan and a mezzanine loan or equity partner are required. Pacific Coast also closed the loan within 4 weeks of being engaged. Imperial Capital Bank Headquarters: La Jolla, Calif. Finances: office, retail, multifamily, industrial, mobile home parks, self-storage, single tenant and special purpose Covers: California, Nevada, Arizona, Colorado, New Mexico, Utah, Idaho, Washington and Oregon, on a deal-specific basis Provides: purchase, refinance, bridge, ground up construction Recent Loan Transaction: Imperial Capital Bank handled a $3.2 million land loan for 1,200 single-family lots with entitlements. Imperial Capital does not usually make land loans, however, sponsorship was strong, there was a repeat borrower and loan-to-value was 55 percent. The loan was structured with a short term and periodic required principal reductions. Collateral Mortgage Capital Headquarters: Birmingham, Ala. Finances: multifamily, manufactured home communities, office, retail, industrial, affordable housing, senior housing, self-storage, healthcare, hotels and land Covers: California, Nevada, Arizona, Colorado, Hawaii, New Mexico, Utah, Idaho, Washington and Oregon. Provides: permanent, construction, substantial rehabilitation, forward commitments, credit enhancements, second mortgages, mini-permanents, participating loans, renovation, mezzanine debt and equity financing Recent Loan Transaction: Collateral Mortgage Capital recently funded $65 million in mortgage financing for Aegis Assisted Living, Oakmont Retirement Communities, Oakmont Senior Living and two unrelated ownership groups, via a credit facility. Collateral worked with Fannie Mae’s Multifamily Structured Transaction group and Fannie Mae’s Seniors Housing group to negotiate and fund the facility. The credit facility consists of six cross-collateralized first mortgages with cross-default provisions, secured by six separate senior housing facilities, all in California. CIBC World Markets Corp. Headquarters: New York Finances: office, retail, multifamily, industrial, hospitality Covers: California, Nevada, Arizona, Colorado, Hawaii, New Mexico, Utah, Idaho, Washington and Oregon Provides: construction, bridge, mezzanine and permanent financing Recent Loan Transaction: CIBC faced difficulty in funding a $53 million loan for Santee Trolley Square in Santee, Calif. The company had to understand the Santee submarket and the tenancy at the property. There was also a lack of operating history and several tenants had not taken occupancy at the time of the inspection. However, the client wanted an early rate lock and quick close. CIBC performed its typical due diligence and gained an extensive understanding of the market and the tenancy at the property. Based on strong occupancy levels in the area and the community’s strong acceptance of the property, CIBC realized the property would readily achieve full lease-up. CIBC’s capital markets presence also enabled it to offer the client an early rate lock and eliminate interest rate risk early on. Mountain Funding Headquarters: Charlotte, N.C. Finances: office, retail, multifamily, industrial and hospitality Covers: California, Arizona, Colorado, Hawaii, New Mexico, Utah, Idaho, Washington, Oregon Provides: high leverage mezzanine loans and whole loans, as well as lower-leverage mezzanine loans Recent Loan Transaction: A $25 million high leverage commercial land loan in the Pacific Northwest that had base entitlements in place with the potential to up-zone the property. This was a significant transaction as land loans are complicated, especially in California where there is considerable opposition to development in many communities and a host of environmental challenges. In this loan, the up-zoning required the developer to obtain a new environmental impact report, which can be time-consuming and expensive. The borrower was required to put a significant amount of cash into the deal at close of escrow. Mountain Funding underwrote the transaction to the in-place entitlements and was able to get comfortable with the developer’s ability/track record of working with the local municipality on similar projects. iCap Realty Advisors Headquarters: Chicago Finances: office, retail, multifamily, industrial, hospitality Covers: California, Nevada, Arizona, Colorado, Hawaii, New Mexico, Utah, Idaho, Washington and Oregon Provides: equity, mezzanine, construction, permanent and mini-permanent loans Recent Loan Transaction: The San Francisco office of iCap arranged $20 million in acquisition financing for the 99,000-square-foot Ocean View Village that sold for $28.75 million. (The center includes 370 residential for-sale condos situated above a retail center. The condos were not part of the sale.) The owner of Ocean View Village wanted a long-term fixed-rate loan, which was non-recourse, when they were purchasing the property. The asset was still leasing up and almost 40 percent of the space was still being built without tenants. This, along with the for-sales above the center that were not part of the collateral, provided challenges for iCap in insurance, title, and the fact that the borrower wanted to fix the rate to avoid any future rate risk and obtain maximum dollars up front at closing. To handle the challenge, the company structured reserves for the space that was still being built out and worked with a lender that understood the issues and funded the loan from application to close in 45 days.

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