No Asset Class Is Off-Limits For LA Lenders

After a skeptical buying season last year caused by the coronavirus pandemic, lenders are now saying no asset class is off-limits. 

Lenders speaking at a Bisnow event in Downtown LA said while they are often paying closer attention to hospitality and office deals, there is no property type they are entirely shying away from.

Not surprisingly, multifamily and industrial, the latter of which has soared in popularity with investors thanks largely to the pandemic-prompted surge in e-commerce, are areas where some of the lenders said they were the busiest. But at least in the near term, panelists said, they are seeing a strong interest in taking risks that might come with a big payoff. 

“We have a lot of investors in our debt, and the trend over the last month or two has been [them] asking for us to find more yield,” PGIM Real Estate Executive Director Trent Brown said, speaking at Bisnow’s Capital Markets, Finance and Deal Flow event at the J.W. Marriott at L.A. Live on Nov. 9. 

That suggests there is an appetite for risk, Brown said, with investors "willing to take on additional risk if they're able to get paid for it." It also suggests investors are "using the last couple months of the year to try to take advantage of finding yield on deals."

Even though the pandemic created a renewed interest in some asset classes and new investment locations — especially more affordable markets outside of Southern California — lenders say they are still looking for experience when deciding what projects to get involved with. 

“We do see a lot of deals where Southern California investors are investing in markets like Boise and Phoenix and Vegas … [we are] definitely cautious about lending to groups that don't have any experience in those markets,” Brown said. 

“Obviously borrower experience is huge,” Nuveen Real Estate Managing Director and Head of Western Region Debt David Kadin said. Both Kadin and Brown said this is a continuation of what they looked for in a borrower pre-pandemic, although many of the asset classes and projects they are looking at now are a more diverse group. 

Lenders speaking on the panel said they were looking at more alternative sector projects — such as medical office and niche industrial properties. Overall, traditional office projects are being approached with the most caution.

Value-add office projects are still a source of optimism. Money360 West Coast Managing Director Cade Vander Broek said his firm is bullish on Class-B offices as a source for new creative office space.  

“We've seen and done quite a few of those deals, in locations that we feel really good about — infill, long-term-growth market locations,” he said. “We believe in the creative office story, especially when it's coming out of less functional B buildings. We think there's opportunities there.”

All panelists expressed confidence in multifamily, though deals are getting extra scrutiny regarding post-renovation rent estimates, Vander Broek said.

“If they're forecasting a 50%, 60%, 70% increase over current rents, is that achievable in the market? Are the demographics of the area willing to support those kinds of rents?” Vander Broek said. He sees many instances where a Class-B or C property would be upgraded and rents raised. “You’ve got to be really careful about who's going to rent it at the end of the day.”

Brown, Kadin and Vander Broek were joined by moderator Nikole Zoumberakis, senior counsel at Buchalter.