The Commercial Lending Market Environment in 2015: California and Comparison to Key Cities

In March 2015, the National Association of Realtors (NAR) randomly surveyed 49,485 realtors asking them about the housing market conditions in their particular state during that past year. 791 individuals – 1.61 percent – responded. As realtor who works in California, I found it informative to work through the different reports, categorize them according to challenging and easy conditions, and wrap up by comparison to real estate conditions in California during 2015.

Commercial lenders, investors, or anyone interested in buying or selling property may find this analysis informative and interesting. Here it is.

Some states found the market environment to be feasible.

Some states such as Illinois found 2015 to be a booming time for real estate. Agents in Chicago revelled in opportunities.

This broker had this to say:

[… ] Best market in my 40 year history. These are the “good ole days”! – Tennessee The property taxes are out of control, especially for commercial properties.

But another added

The property taxes are out of control, especially for commercial properties.

Other states suffered from their market environment

There were the common gripes: Recession, economic uncertainty, spiking prices, topping default, languishing homes because of unaffordable prices or distressed or unstable markets.

Said this agent in New York:

Economic uncertainty is a close third choice to item 3 above. The ‘local’ commercial investor remains hard-hit by the recent recession. Significant vacancy still exists for many ‘neighborhood’ centers.

And another:

We live in a distressed area it makes it very hard to start or maintain a business in small town America.

Montana in 2015 was another pricey area. Real estate agents there noted:

Declining rates of return. 7% today is reduced by low annual increases to the point of leases being a detriment the longer they are in place and that affects a bank and buyer being attracted to them. Net present value of future dollar return: 10% every 5 years ends up being a loser in the long run not being able to stay even with historic 3% or 4% inflation.

Fussy lenders

Other states, this last year, saw fussy lenders who were more reluctant to lend. A great deal of this was due to tightened government regulations and heightened consumer protection that was especially taut for residential property.

In Missouri, for instance, real estate agents mentioned that:

Reduced net operating income of the Subject Property and the Borrower, values and equity positions (larger equity contribution to the transaction and lower loan-to-value) have a HUGE impact on the decisions lenders are considering and making. Money does NOT seem to be the problem.

Government regulations had tossed in their part and although they are definitely helpful to the borrower proved provoking to private lenders. In North Carolina, this is what representatives in the real estate industry had to say about their situation:

Dodd-Frank has done missives to the sale of Farms, home must be valued at 35% of sales price.

And said another in Indiana:

Government over-regulation stifles growth.

The private lending sector has grown by leaps and bounds this past year, but apparently, the larger the private lending market, the deeper the toe-hold of the federal government. Florida witnessed the worst of it in 2015. (These coming months predict no better). Said a broker working in Miami:

Future Flood Insurance rates are a big issue in Florida Commercial Real Estate

The market environment in California in 2015

California housing prices topped all charts breaking way out of bounds. On the one hand, the ground was bursting with architectural designs and attractive buildings some of which were erected by the most famous names in the architectural field. Wealthy expatriates and foreigners flocked to the land plunking cash straight out of pocket to purchase buildings. Buildings included homes and commercial properties. Prices across the board rose to new heights.

In most cities in California supply increased apace. Apartments were the stock in demand, likely because they were the most affordable. But even here, one had to be relatively wealthy to afford them.

Housing in California has long been more expensive than most of the rest of the country, but between 1970 and 1980, California home prices went from 30 percent above U.S. levels to more than 80 percent higher. Today, an average California home costs $440,000, about two-and-a-half times the average national home price ($180,000). Also, California’s average monthly rent is about $1,240, 50 percent higher than the rest of the country ($840 per month). And prices are predicted to rise (albeit slightly) the coming year.

Also, not enough housing exists in the state’s major coastal communities to accommodate all of the households that want to live there. This competition bids up home prices and rents. Some people who find California’s coast unaffordable turn instead to California’s inland communities, causing prices there to rise as well. In short, California became notorious for pricey homes leading experts to predict a housing bubble that would supercede that of 2006 in scope and intensity. (But whether this is so remains arguable).

High home prices here also push homeownership out of reach for many. Faced with expensive housing options, workers in California’s coastal communities commute 10 percent further each day than commuters elsewhere, largely because limited housing options exist near major job centers. Californians are also four times more likely to live in crowded housing leading at least one private commercial lender who works in California to observe that:

Vacant Land is Always a Problem.