Financing In A Turbulent Economy: Discussing Lending For CRE Projects At Bisnow’s Jan. 25 Orange County Event
As the commercial real estate industry faces difficult headwinds, some banks have pulled back on CRE financing. With this change in the market, more borrowers have been turning to private lenders to get the capital they need.
California-based borrowers can turn to a private lender like The Nikols Co., manager of Nikols Mortgage Fund, LLC, which issues construction and bridge loans ranging from $5M to $35M. Nikols Co. CEO Carrie Nikols said in times like these, in particular, a private lender can be a more suitable solution than a bank.
“The increase in interest rates has really stressed the whole commercial real estate lending environment, but as a private money lender, we are benefiting from it,” Nikols said. “It has created liquidity issues and a lot of dislocation on the part of banks, which is sidelining them. This is an opportunity for us to pick up market share.”
Nikols will attend Bisnow’s Orange County CRE Market Update & 2024 Forecast event on Jan. 25 and will be on a panel discussing what the future of Orange County CRE could look like heading into the new year.
Bisnow sat down with Nikols to discuss the impact of economic uncertainty for both lenders and borrowers as well as how the company’s “flat structure” helps them achieve success with allocating construction and bridge loans.
Bisnow: What are some of the current trends you’re seeing in CRE lending?
Nikols: The biggest trend began in March 2022 when the Fed started increasing the federal funds rate. The market had anticipated it was going to happen, though market participants concluded that, while interest rates were going to go up, cap rates wouldn't go up the same because of all of the capital in the market for real estate. In fact, that's what happened: Interest rates went up significantly, and cap rates did go up, but not proportionately.
With interest rates going up, one of the issues across the board is that exits are challenged on a refinance basis. So two years ago, somebody at a 3% or 4% long-term, permanent fixed rate is now more in the 6%-7% range. So that obviously affected proceeds on the loan dollars.
The other trend that has been going on since Covid is delays on construction projects. Because of the delays on the part of government entities and utility companies, the timeframes have gotten longer. Construction costs have been going up, and have only just started coming down.
Another notable trend is that many borrowers have had to rebalance loans. We've had to renegotiate existing loans with several of our borrowers. In some cases, we were able to provide the additional dollars needed due to market rate increases, but in other cases, borrowers have had to bring in additional capital.
Bisnow: How does The Nikols Co. help its California clients with construction and bridge lending, especially during this time?
Nikols: In addition to providing bridge loans and construction loans, another unique thing about us is that we have full discretion on our fund, something a lot of lenders don’t have. These lenders can't issue a letter of interest and know for sure that they're going to be able to deliver on it, whereas we have a flat bureaucracy and full discretion. I'm the primary decision-maker, and my partner and husband Don Nikols, who oversees the investment capital side of the business, is the other decision-maker. Underwriting is our core competency. With the help of our Executive Vice President and Chief Underwriter Josh Stude, we are able to vet everything about the opportunity, and then we have the luxury of being able to meet the borrower at the property, tour the property and make a decision. We call that "loan committee."
Since 2007, there have only been a few deals that we haven’t closed on once the borrower executed the letter of interest. We're able to have that great track record because we have a relatively flat structure.
We're doing construction loans as well as acquisition and renovation loans actively, so we’re bringing a lot to the table right now. We’re very interested in reviewing multifamily, industrial and retail loans.
Bisnow: How much of Nikols’ business is with Orange County-based borrowers and Orange County-based properties?
Nikols: Orange County is a great location for us. We’re right between San Diego and Los Angeles and we can get to those markets rather easily. As can our borrowers, since they want to be closer to their properties. There's a lot of savvy real estate participants here in Orange County.
We just closed an $18.3M multitenant project in South Orange County that is being converted to condominiums. There is actually already a condominium map that just needs to be recorded, and the borrower will be able to start immediately selling those individual units. There’s such a strong demand and a lack of supply in that space that we feel very comfortable that we're going to be able to successfully sell these individual units. We're really excited about this opportunity. We've done a lot of loans for condominium conversions, so we have our hands pretty deep in the space.
In Fullerton, there was a property with two or three dilapidated buildings that was a known contaminated site that the state had already spent $8M cleaning up. Our borrower came in and committed to the rest of the cleanup, which will go on for a number of years and will cost $1.6M to $3.3M. It was supposed to be re-tenanted as truck parking. However, once the interest rate environment changed as it did, the truck parking went away. There wasn’t a single meaningful offer to lease space. As a result, the borrower is changing their business plan. We’re looking at doing a construction loan to build a single-tenant industrial building on the property. In addition to the property being in Orange County, the borrower is based in Orange County as well.
We’ve also been working with an Orange County-based borrower group on a former Kmart shopping center on a key thoroughfare on Big Bear Boulevard in Big Bear that has been re-tenanted. They have signed leases to Grocery Outlet, Marshalls and Tractor Supply, and then there will be some additional leasing. We financed approximately 80% of the cost.
One reason that people would want to come to us is that we are what we call “cost-agnostic”. We're looking toward the value that's created at the end of the day, and we don't really care what the loan-to-cost is.
Bisnow: What do you look forward to most about attending Bisnow’s event and speaking on the Orange County 2024 forecast panel?
Nikols: When Bisnow gets all these people together at their events, it becomes a think tank. They bring together everybody in the community who has their hands deep in the industry day in and day out. I love getting all the feedback and hearing what everybody else is thinking. I think that's the best way to make your own decisions on how you're going to be approaching the market on a go-forward basis. I'm really looking forward to that input from all of the experts.
This article was produced in collaboration between The Nikols Co. and Studio B. Bisnow news staff was not involved in the production of this content.
Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.
