There has been a significant increase in bank regulations since the last recession and, as a result, the availability of debt is being shifted to non-regulated sources, particularly debt funds, SVP/market manager for PNC Bank’s real estate group Kenya Williams tells GlobeSt.com. Williams, a University of Southern California’s Lusk Center for Real Estatemember, recently served on the event panel at the center’s annual Lusk Executive Forum here. We spoke with her afterward for her observations about the panel.
GlobeSt.com: There is still a strong need for development of housing, especially affordable housing. However, housing development is still sharply below its historical deliveries. Why?
Williams: The Orange County commercial real estate marketplace is doing very well. The pipeline of development in the market is strong, with all product types delivering new product to the market. The market is seeing record-high rental rates on both office and multifamily products. Single-family residential is doing well and is heavily influenced by foreign investment. There has been a significant increase in bank regulations since the last recession and, as a result, the availability of debt seems to be shifting is being shifted from its more traditional bank sources to other non-regulated sources, particularly debt funds.
GlobeSt.com: What particular opportunities and challenges are you seeing facing the OC market?
Williams: While the OC market is doing well, it may be influenced by some of the macro issues going on in the broader economy. There is a feeling among some observers that we are in the late stages of this cycle. There is a growing regulatory pressure that is affecting the availability of debt in the market. And transaction volume is slowing, in part due to valuations being at an all-time high for the cycle.
GlobeSt.com: You mentioned at the forum some concerns from regulators over the amount of construction loans. What are those concerns?
Williams: There is an increasing amount of regulation the that is affecting how banks lend. Banks are being required to reserve higher capital allocations to account for the risk of construction loans. This increased regulatory scrutiny and regulatory capital treatment has impacted the appetite and made it more difficult for banks to provide construction loans. For borrowers, it likely means that they have to rely more heavily on their relationship banks, be prepared to contribute more equity and accept higher pricing on deals.