‘The Sky is Falling’ Mentality Spurs Borrowers

IRVINE, CA—Since no one really knows when  interest rates  are going to rise, borrowers are looking to lock in low long-term fixed-rates before they go up, rather than looking for short term lending products,  ReadyCap Commercial ’s CEO  Jim Going  tells GlobeSt.com. We spoke with Going exclusively about trends in various aspects of the  lending environment, including asset classes, geography, the looming prospect of rising interest rates and new lending products. GlobeSt.com: What trends are you noticing in lending among the various asset classes?
Going:  I look at it from the standpoint of distinguishing between our core business and our  Freddie Mac  agency business. In our core business which covers  office ,  industrial ,  retail  and  multifamily , as well as  self-storage.  commercial banks continue to offer extraordinarily low rates and are aggressive when it comes to leverage. We’ve seen loan to values go from 65 percent 12 to 18 months ago to approaching 80 percent in some markets. These banks are our biggest competitors. On the Freddie Mac side, we continue to offer a multifamily product that competes with  commercial banks. The Freddie Mac SBL product is a nice complement to our CORE program and allows us to serve the needs of clients by having a diversified product offering.
GlobeSt.com: What about geographical market trends—what are you seeing in specific regions?
Going:  Cap rates in California continue to fall. This cap rate compression is creating opportunities for borrowers to refinance their properties and receive cash at closing. The California market is very hot and aggressive, and currently Texas continues to be an attractive market. The economy of Texas continues to improve and grow in light of the oil-related headlines. The Southeast and Southwest are higher-cap-rate markets in contrast to California which is a low-cap-rate market. In both the Southeast and the Southwest, cap rates are generally higher than other geographical parts of the country. We are seeing investors moving their capital out of low-cap-rate markets and investing it in those higher-cap-rate markets. 
GlobeSt.com: How are rising interest rates and expectations thereof affecting the lending environment?
Going:   The impact on lending when interest rates rise is very interesting. No one really knows when the Fed will act, but it looks like they are poised to do something by the end of the year, and this causes urgency among borrowers to lock in long-term fixed rates before they go up. The mindset of the borrower is, “The sky is falling, so I’d better lock in now because I’m never going to get fixed rates as low as they are now.” The sense of urgency to lock in low rates in anticipation of the Fed making a move in the short term is what we’re seeing in the marketplace. Borrowers are anxious to get deals locked up.
GlobeSt.com: Can you talk about some of the product trends you’re noticing?
Going:  Currently, I’m not seeing a material amount of systemic changes in the small balance commercial real estate space. We do see on occasion, other lenders becoming aggressive on underwriting, leverage or property condition. Aggressive in the sense that you have to wonder if those lenders understand the amount of risk they are assuming. ReadyCap has a fiduciary responsibility to our investors and our employees. Within all of our ReadyCap lending platforms, the intent is to always apply Real Estate 101 principles. In other words, we appropriately align our capital with the risk profile of the transaction expecting the return of that invested capital to the satisfaction of our investors.
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