Interviews November 5, 2015

Commercial Debt - National and Southern California Perspectives

Gregg Loubier, Partner in Alston & Bird’s Finance Group, highlights issues impacting the real estate finance market, examining national and Southern California specific perspectives on commercial debt.

Given you’ve been practicing real estate finance law in California for almost 30 years, what is happening now that interests you? Do you see any new trends? 

The California real estate market is as diverse and vibrant as any in the country. It’s interesting to participate in the evolution of our real estate finance markets since the end of the recession. Conduit lending and commercial mortgage loan securitization has grown considerably, although not to pre-recession levels. Some life company lending is down because of low yields in this interest rate environment. Non-bank sources of real estate capital are growing to fill a void left by more highly regulated financial institutions. EB-5 sources of debt financing have revolutionized the way certain projects are funded using foreign investment capital, including some very significant real estate development projects. Inbound foreign investment is again driving certain markets. It’s fascinating to observe how businesses created in the recession to acquire single-family residential properties for rent have matured and accessed capital markets financing and investment to sustain that business model. 

You were recently quoted in an article regarding real estate crowdfunding for Law360 — why do you think non-bank lenders are finding their sweet spot in risky areas that banks have been hesitant to venture into? 

Non-bank sources of real estate debt are filling voids in various product lines left by highly regulated financial institutions that have migrated toward lower-risk lending. Non-bank lending sources are capturing market share and a growing portion of financial industry profits that would otherwise have gone to banks and other more highly regulated institutions. Real estate finance is one of the last areas to experience a technological revolution. Financial technology companies in commercial real estate lending have grown and innovated considerably in their few years of operation and, in my opinion, inevitably will scale up and take market share from established sources. 

As you have noted, confidence is rising in the real estate sector, but there are still challenges to financing real estate assets. What are you seeing your clients battle with the most? 

Whatever the environment, our lender and borrower clients and mortgage bankers are constantly challenged to match the right lender and loan product with the real estate assets to be financed. Lenders are challenged to tailor their loan programs to help meet customer objectives and right-size loan documentation to avoid unnecessary burdens on the loan closing process. Going back to the example of financial technology companies, the use of technology and information to simplify and accelerate the loan closing process will increasingly create competitive challenges for other lending sources. 

Where do you think the current state of play in the real estate finance market is? What are your projections for 2016?

The information we have suggests strength in the commercial real estate market through 2016. Some interest rate indexes are already volatile and it’s anyone’s guess now when the Fed will raise rates and how that will impact real estate values and access to financing. We are now refinancing a wave of loans made between 2005 and 2008, which will partly drive real estate finance for a few years and then decline in 2018.

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