Real Estate Review and Commercial Lending Trends in California of 2015

Business Loans

We’re looping towards the end of 2015. The year has been an eventful one for California’s real estate industry.

These are the highlights as reported by the National Association of Realtors in the beginning of last month (November 2015):

  • Commercial vacancy rates declined for office, industrial and retail properties. Same trend is predicted to continue in 2016.
  • Demand for and supply of apartments have been constant. They are expected to rise in the coming year.
  • Commercial and residential rents rose across the board from 2.5 percent to 3.7 percent. Rents are going to rise still further particularly with the recent hike in interest rate.
  • Alternative lenders gained more profit as banks became more choosy. Government and consumer regulations are tightening their control over this industry, but technology and economic conditions are helping the industry thrive.


2015 may have been the beginning to the end of the recession. Economic activity had advanced 2.4 percent by the end of 2014 inflating some air into the real estate market. Construction – largely commercial and higher-priced – was constantly in motion. Housing inventory was largely small. People sought housing. But unless you could afford it or grab a loan that you could repay, you were reluctant to move homes or invest.

Work prospects had picked up in 2014. By the beginning of 2015, business investment and spending rose 1.6 percent. The rest of the year saw the familiar bust and boom of spending that increased to an excess of 8.0 percent before it deflated and rose again. The last quarter of this year was the softest at 2.6 percent. Commercial investors were largely small business owners and wealthy expatriates. Residential investors were mostly from middle to upper-middle class families – largely baby boomers – who tended to look towards renting. Wealthy foreigners acquired homes in certain areas of California, too. For a time, the Chinese seemed to be most interested in property especially in Los Angeles and surrounding suburbs. Wealthy businessmen from New York plunked their spots.

Blips included rising property tax revenues, rocketing property prices (that are in the triple and 4 digit numbers in areas such as San Francisco, Los Angeles and suburbs), falling inventory that fails to meet demand, and, more recently, a 0.25% hike in interest rates.

Some experts speak of a ‘housing bubble’ crisis where space and housing prices become so rarefied that only the very rich would be able to buy homes. These experts call for government intervention and predict a housing scarcity that would supercede that of 2006. Statistics show that some are unable to pay rent. The Joint Center for Housing Studies (JCHS) of Harvard University stated that in prime areas such as San Francisco and Los Angeles almost 60 percent of renters consumed too much of their income for a roof over their heads. About 58.5 percent of the renters from Los Angeles/Orange County (LA/OC) metro areas are “burdened” which means that they are using more than 30 percent of their income for rent and losing out on other necessities such as food and healthcare. As much as 32.8 percent of renters are said to be “severely burdened” consuming over 50 percent of their income for rent’s payment. Los Angeles, they reported, had become the 22nd least affordable metro in the country and too many renters have been evicted due to their failing to pay their rent.

On the flip side, inflation in California reached 0.5% through the 12 months up-to-date as published by the US government on December 15, 2015. Critics of the ‘housing bubble’ scenario brush concerns aside and point to California’s fluctuations as representing the economic law of supply and demand. Prices are high because supply fails to meet demand. Expanded housing market, they argue, would lower price.

Commercial vacancy rates declined for office, industrial and retail properties

During the past year, commercial vacancy rates in California contracted for office, industrial and retail properties. Demand for commercial space rose in 2015 and is expected to continue to advance in the coming year. More offices were being built and snapped up by business professionals and expatriates or by foreigners who had the money. Commercial rents rose across the board from 2.5 percent in 2014 to 3.7 percent this past year. Prices are still rising albeit at a slightly slower rate.

In contrast to the large commercial transactions reported by Real Capital Analytics (RCA) that were mostly processed through local banks, it seems as though alternative lenders found more success with small business and entrepreneurs. Most banks in California tend to be reluctant to lend to such individuals even when credit history and trustworthiness justify loan application. Banks verify according to performance and experience. Most are reluctant to lend to newcomers in the business field and prefer dealing with corporate executives. Fifty eight percent of entrepreneurs and small business owners still approach local and regional banks as their first source of entry. Most are rejected. Alternative lenders – one of which is commercial hard money lenders – remains their followup choice.

Demand for and supply of apartments have been constant. They are expected to rise in the coming year.

In 2015, the apartment sector in California remained the best performer, with national vacancies hovering around 4.0 percent. However, a significant new supply of apartment units entered the market during the year, leading to concerns about oversupply in some areas. At the same time, supply outpaced demand with working class families and lower middle class unable to meet prices. California’s average monthly rent is about $1,240, 50 percent higher than the rest of the country ($840 per month). New apartment completions added 230,000 units on the market this year. The volume of new space in apartment vacancies increased from 4.1 percent in the first quarter to 4.3 percent by the fourth quarter 2015. Rent increased too.

Alternative lending in California of 2015:

Alternative lenders gained more profit as banks became more choosy. Government and consumer regulations are tightening their control over this industry, but technology and economic conditions are helping the industry thrive

The incidence of default reached a new low in 2015. This has largely been due to spiking property houses that made it increasingly more difficult for borrowers to repay their loans.

Redfin, a residential real estate company that provides web-based real estate database and brokerage services predicts that recent spike in interest rate will cause defaults to grow in the coming year. Some hard money lenders have become stricter about who they lend to. More tend to scrutinize credit history as well as value of collateral, but since many (particularly newer agents) focus on collateral, lenders may let a few penurious borrowers slide past and experience bad loans.

Also in this last year, federal government and local consumer protection agencies introduced new regulations, such as TRID that curbed the industry, controlled the process, monitored transactions, and slowed the alternative commercial lending system. REALTORS cite this as the most relevant cause of bank capital shortage for brokers and real estate advisors since it has been more difficult for inexperienced or emerging private lenders to find partners who are willing to help them fund investors.

On the other hand, loan-to-value (LTV) ratio has declined across the board which makes commercial hard money lending more attractive than ever. The growing market has caused private lenders to become more aggressive and competitive in their service. Some lower payment rates, many fiddle around with terms and schedules to make them more convenient and faster, others offer a variety of loans, and increasingly more lender are adjusting LTV rates to hugely attractive heights.

The field has also grown to meet the Californian investor’s increasing demand for funds and to service those who are rejected by the banks. For those who are resilient, technologically-minded, and savvy, Tom SEO of sees a promising future.