As one of the first COVID-19 epicenters in California, Los Angeles’ economy is going through severe hardships. The metro’s unemployment rate was at 18.1 percent as of June—the largest jobless rate recorded among the country’s 30 largest metros. Despite the grim state of the economy and a slowdown in real estate investment, multifamily players paint an optimistic picture of the future of Los Angeles’ multifamily market.
“Multifamily in Southern California will remain a primary investment option for many real estate investors,” said Hamid Hussain, president of real estate and commercial banking at Banc of California. In the interview below Hussain and President & CEO Jared Wolff talk about why Los Angeles is positioned for a quick rebound and share details about Banc of California’s lending practices.
How would you characterize Los Angeles’ multifamily market before the coronavirus outbreak?
Wolff: The multifamily market in LA was fairly vibrant with stable-to-rising rents and a good amount of new construction activity downtown and in West LA. There was a significant amount of transaction volume and financing rates were among the lowest in years. Our view at Banc of California was that the lending market was very stretched with unusually low risk-adjusted returns that were not surprising, given the long-growth cycle after the previous economic downturn. We were active in the market but very selective on structure and pricing.
What can you tell us about the current dynamics of LA’s multifamily market?
Hussain: The pace of transactions has definitely slowed, largely caused by a gap in seller and buyer expectations. That will of course, in time, self-correct as sellers lower their price expectations somewhat and buyers recognize that the world is not ending. There will continue to be strong housing demand in Southern California and LA, in particular, driven by a healthy economy and rising job market. Given the low-rate environment, multifamily should remain one of the best asset classes for real estate investment, even with the regulatory and political noise for price controls.
How has the demand for multifamily financing changed during the COVID-19 crisis in LA?
Hussain: Investors are certainly spending more time on analysis and underwriting to much tighter parameters as rents and demand have softened during the pandemic. That is actually a positive for lenders as the owner forecasts seem more realistic and easier to understand. The number of financing transactions is slower than before the pandemic, but the more liquid borrowers are seeing a good amount of opportunities.
How has the pandemic affected Banc of California’s lending practices?
Wolff: Banc of California is in a very favorable position with its balance sheet and theoverall strength of our loan portfolio. We are reaching out proactively to our clients to see where we may be able to assist with their banking needs and help them capitalize on opportunities that inevitably always emerge during downturns. We aim to provide consistent, reliable capital, but during times of market upheaval, the certainty of execution is a critical advantage for our clients.
What types of deals and opportunities are you focusing on during these challenging times?
Wolff: We remain focused on long-term relationships with liquid borrowers who have significant experience and have lived through prior cycles. As the downturn abates, there will be opportunities for investors with liquidity and a willingness to step back in earlier than some others. Acquisition and bridge-to-perm financing are two specific areas where we are helping our clients.
Multifamily has long been at the top of investors’ list. How do you expect this trend to be shaped by current events?
Hussain: Multifamily in Southern California will remain a primary investment option for many real estate investors. Housing demand, given the size of Southern California’s economy, will remain very strong, and, aside from anecdotal evidence of migration from urban cores, people will still want to live in large cities where there are ample amenities and employment opportunities.
The work-from-home change for many companies will be another option for employees but it will not be a paradigm shift, as we are already seeing that people enjoy collaborating in groups, leading to greater productivity than eight hours of daily videoconferences. Interest rates, according to the Federal Reserve, are to remain at historic lows for some time, ensuring healthy demand for multifamily, which is considered a stable return vehicle with an underlying real asset that is a natural inflation hedge.