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Monday, Dec 5, 2022

Lending Through Interest Rates, Inflation

Banc of California's Real Estate Focus is Multifamily

The last time the Business Journal caught up with Hamid Hussain, president of Banc of California Inc.’s real estate and commercial banking entities, Orange County was still in the early months of the pandemic, and the region’s banks were trying to make sense of the ongoing market uncertainty.

Today, that uncertainty remains, albeit for different reasons.

For one, interest rates are much higher than they were two years ago—more than 200 basis points higher—slowing transaction volume and softening the lending market.

Another component that’s kept the economy largely in a wait-and-see mode: inflation.

“The past two years have really been a roller-coaster ride,” Hussain told the Business Journal. “During the pandemic, the pace of activity increased with people wanting to lock in low rates. Today, transactions are down dramatically, and it’s unclear how far these interest rate increases will go.”

Multifamily Top of Mind

Santa Ana-based Banc of California (NYSE: BANC) is the second-largest commercial bank based in Orange County with $9.5 billion in assets as of June.

Nearly two-thirds of the bank’s business is real estate, which has been specifically impacted by interest rates, with a slowdown in construction that started occurring over the past few months.

“A lot of projects just aren’t penciling in today’s economy,” Hussain said.

Most of Banc of California’s real estate business is multifamily, followed by industrial, the two hottest sectors during the pandemic as shelter-in-place and remote work trends bolstered demand for both residential real estate and online shopping.

Demand for multifamily has only increased in the wake of the pandemic as housing affordability continues to be an issue in California, where the bank handles all of its business. Mortgage rates are climbing along with interest rates, which has pushed, or kept, individuals in the rental market.

During the first quarter of the year, Orange County rents were up nearly 18% year-over-year, the second-largest increase within the Pacific region.

No Hedge to Inflation

That breakneck pace appears to be slowing.

National rents declined during the third quarter by 0.4%, according to a report by Apartments.com, an affiliate of CoStar Group.

“As a whole, the multifamily sector witnessed a disappointing peak leasing season and with an estimated 110,000 new units set to deliver in Q4, all signs point to rent growth slowing even faster than initially projected by the end of the year,” Jay Lybik, national director of multifamily analytics for CoStar, said in the report.

Hussain expects to see some concessions return to the multifamily sector as pricing plateaus.

“I think we will see that in the next six months or so,” Hussain said.

Though real estate has historically been considered by investors to serve as a hedge against inflation, that has yet to play out in full in California, as rents are not keeping pace with inflation.

Cap rates, in turn, are on the rise, though they will compress quickly once “the market gets a sense of when the Fed will start reducing rates,” Hussain said.

Attractive Markets

Banc of California typically funds apartment projects priced under $35 million, through permanent financing deals as well as bridge lending.

“Lately, we have been handling shorter terms as borrowers don’t want to be locked in at higher rates,” Hussain said. “Five-year terms are very attractive to us right now.”

Another attractive segment for Banc of California?

“Orange County is always attractive to us,” Hussain said. “There’s so many unique factors that draw builders in, and there’s plenty of employment opportunities as well as more available land.”

Product Line Expansion

Banc of California aims to stay in growth mode in part through its recent entrance into the payment space.

The firm in September acquired the payments platform and technology of Global Payroll Gateway Inc. and its wholly-owned subsidiary, Deepstack Technologies LLC, for $24 million in cash and stock.

Deepstack, which is headquartered in Jupiter, Fla., with a team located in Southern California, is an e-commerce payments platform that provides clients with services like merchant processing, tokenization, and fraud protection tools.

The acquisition diversifies the bank’s revenue mix while increasing non-interest income as a percentage of revenue, the company said.

“We are always looking at opportunities that helps us differentiate from our peers and grow our business,” Hussain said, adding that the firm is hiring employees to support this new business line. All of Deepstack’s employees have joined the bank as well, with its three executives entering into three-year employment agreements with the bank.

The company counts 420 employees in Orange County.

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