Lenders Not Ready For Secondary Markets

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SAN DIEGO—While they may profess optimism about residential-development prospects in non-primary markets, many capital providers aren’t opening their wallets just yet, say Cox Castle & Nicholson partners Matt Wyman and Erica Bose. The two had key roles in two panels here at PCBC recently: the “Executive Roundtable” that Wyman moderated and in which Bose participated and the “Ins and Outs of Funky Financing” panel that Wyman moderated and in which he and several other speakers discussed alternative-financing sources. We spoke exclusively with the two about the key takeaways from both sessions and what to keep in mind about the topics that arose.

GlobeSt.com: What were the key takeaways from the Executive Roundtable?

Bose: I thought it was particularly interesting that everybody is cautiously optimistic, that we’re still on the earlier side of this particular cycle and that there are areas of development in California that are in more of the tertiary markets, but people don’t know if they’re going to come back this cycle or the next. There’s concern over not so much whether pricing will rebound from the downturn, but the pace and whether it makes sense to buy or sell now.

Wyman: There was a big debate as to what the consumer wants and a discussion on Millennials and whether they will be willing to move to markets that would require driving long distances to get to work or whether they will always be destined to live in the urban core. The panelists felt that as Millennials pair up, while it may have seemed cool to live in the city when they were single, now schools and other factors will drive them to other markets.

GlobeSt.com: Won’t Millennials avoid the long drive to work because of environmental concerns?

Wyman: The sentiment was that they will have no choice because it’s the only way they’ll be able to get a house with a backyard in a school district with good schools. Others said it’s not as black and white as that and there are plenty of markets where you’re not either buying a five-bedroom house on a quarter-acre lot or living in a 500-square-foot apartment. There are lots of product types being developed successfully, such as townhomes with patios in the backyard.

There seemed to me a big debate going on about what the Millennials want, and everyone’s nervous about that and when they’ll have the down payment and financing in place to buy a home. On the builders’ side, there seemed to me greater anxiety on the capital-provider side of the discussion. Some wanted to believe in those tertiary markets, but they weren’t up to putting their money up to finance those deals yet.

Bose: Yes, they felt the markets will come back, but they weren’t sure how things will proceed with Millennials, so they’re not actually willing to invest there now.

Wyman: At one point, a participant said he thought the markets would come back in a big way, and one capital provider said he agreed, but he wouldn’t invest. There was this optimism, but a lot of angst over what was pretty much agreed was a need because there’s not much supply elsewhere. There’s an optimism that our industry is doing well, but the next stage could be risky.

GlobeSt.com: What other issues came up?

Bose: One issue was how the drought and the availability of water are impacting transactions now, if at all. It sounded like people are starting to think more about it and it’s more of a consideration of what they need in order to get comfortable during the due-diligence period, but it’s not a determining factor yet. Still, literally within the last few days before PCBC, the water issue came up with a mountain housing development in Northern California. It impacted a lot of people who could be told there literally is no water.

Wyman: The big picture is twofold. We as an industry are not terribly smart about water, so there’s a general agreement that we have to get a lot smarter about water issues. But also, water issues could be used as a proxy for no-growth-ers to come in and prevent development. The industry as a whole has been really poor in terms of dealing with the water issue, and we need to get a stronger lobby together. The amount of water used by these development projects compared to the amount of water used to keep alive an almond tree is nothing. The drought is significantly worsened by the way the agricultural system works in California, and home development is a drop in the bucket—no pun intended—compared to what the agricultural industry is sucking up.

One of our clients is a big Chinese investor, and what I gathered from this and another conference I attended recently with the top people in the industry is that while we’ve always heard about Chinese money coming into our market in dribs and drabs, we are now starting to see the first flow and will continue to see a wall of capital coming in from China. The Chinese government is putting policies in place that encourage Chinese pension funds and companies to get their money out of the country. That market is opening up. A big influx of capital from China has big implications on pricing and land, and will we get into a period of time where we get an oversupply situation—that’s a concern I expressed. When clients get too much capital, it leads to oversupply.

GlobeSt.com: Let’s talk about the alternative-financing panel. What came out of that?

Bose: We were trying to look at different sources of capital. The capital markets farm tends to go to banks and money centers and unregulated lenders These are very important players in this industry, but I wanted to provide a panel of other types of financing the builders might not have thought of. China is one, especially with EB-5 financing. It’s a way for foreign nationals to get a visa here and buy their way into the country by making investments. H. Harry Aharonian with A&J Capital Investment Inc. and Bill Nan Zhou of Elite International Investment Fund were both on the panel to discuss that. Henry Global is one of the largest sources of EB-5 financing in the country, and it’s mostly coming from China.

Technology-based lending platforms for applying for and obtaining loans is another source of alternative financing, as in crowdfunding. We wanted to explore practically how that works with Chase Gilbert of DataFi. Do you put an investment memo on the Internet and ask for people’s money? We wanted to explore the real process and how that works.


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