The Southern California Development Forum (SCDF) is an organization that brings together a community of leaders to discuss the latest trends, strategies and projects in the real estate industry. The organization hosted a discussion on Jan. 26, 2023, to analyze the economy of California and provide an outlook on the current climate of development and construction opportunities across the U.S.
The two presenters were Nathan Adkins, senior economist of CBRE, and Brad Ross, managing director and head of originations of Parkview Financial.
Commercial Real Estate Market Forecast
Key findings from Adkins’ presentation included:
- Industrial: The industrial market within fast-growing cities is predicted to remain strong. E-commerce bolsters the industrial market demand as well, through an increase in online purchases by consumers.
- Office: Class A office spaces are popular in the U.S. as people begin returning to the office following the COVID-19 pandemic.
- Retail: Retail centers’ performances are expected to accelerate beyond pre-pandemic levels. Also, well-located retail centers are expected to benefit from steady disposable income growth. Consumers will likely continue to buy more food, which benefits leisure-oriented retail centers.
- Multifamily: There is a persistent shortage of multifamily housing across Southern California and those renting will likely live in cities longer.
- Labor market: The labor market is experiencing increased costs as wages go up, forcing companies to raise prices on goods and services that consumers purchase. To afford the cost of living, employees request even higher wages from their employers. For the construction industry in particular, while labor costs do remain high, costs may go down as higher interest rates will impact employment.
- Inflation: Major contributors to overall inflation, such as gasoline and used car prices, have slowed considerably in recent months, helping to decrease year-over-year consumer price index (CPI) growth. While inflation is high, it is predicted to come down to about 3% by the end of the year.
Inflation Impact on Borrowers and Lenders
Brad Ross of Parkview Financial analyzed the current inflation effect on commercial real estate.
Ross explained that stagnation of interest rates has occurred. On the borrower's end, the ratio between the cost of a property is a higher yield than the overall value expectancy within a quarterly-annual yield rate. This brings a huge gap in loan cost expectancy that national banks can no longer adhere to. On the buyer's side, private equity companies have been able to compensate for loan equity costs that central banks are financially unequipped to supply. Additionally, the private funds increase the cap yield on interest rates but package each loan within a securitized CMBS bond.
Additionally, the offset of loan-to-cost (LTC) to loan-to-value (LTV) has created a forbearance, meaning that the agreement between the lender and the borrower will delay a foreclosure. Often a fourth-party joint venture equity partner has to step in and provide funding for the early stages of construction. This partnership is a result of rising interest rates and has had a direct result in driving up capital markets.
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