Loans via interest rates, inflation

The last time the Business Journal caught up Hamid Husseinpresident of Bank of California Inc.Orange real estate and commercial banking entities, Orange County was still in the early months of the pandemic, and banks in the region were trying to make sense of the lingering market uncertainty.

Today, this uncertainty remains, albeit for different reasons.

On the one hand, interest rates are much higher than they were two years ago – more than 200 basis points higher – which is slowing transaction volume and loosening the loan market.

Another element that keeps the economy largely in a wait-and-see mode: inflation.

“The last two years have really been a roller coaster,” Hussain told the Business Journal. “During the pandemic, the pace of activity has increased as people want to lock in low rates. Today, transactions have dropped dramatically, and it’s unclear how far these interest rate hikes will go.

Multifamily Top of Mind

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

Almost two-thirds of the bank’s business is real estate, which has been hit particularly hard by interest rates, with a slowdown in construction beginning to play out in recent months.

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

Most real estate activity on the Banc of California is multi-family, followed by industrial, the two hottest sectors during the pandemic, as shelter-in-place and remote work trends have supported real estate demand residential and online shopping.

Demand for multi-family housing has only increased in the wake of the pandemic as housing affordability continues to be an issue in California, where the bank runs all of its operations. Mortgage rates are rising along with interest rates, which has pushed or kept individuals in the rental market.

During the first quarter of the year, rents in Orange County rose nearly 18% year over year, the second highest increase in the Pacific region.

No inflation hedge

This frenetic pace seems to be slowing down.

National rents fell 0.4% in the third quarter, according to a report by Apartments.comaffiliate CoStar Group.

“Overall, the multi-family sector has had a disappointing rental season and with approximately 110,000 new units expected to be delivered in the fourth quarter, all signs indicate that rental growth will slow even faster than initially expected by the end of the year”, Jay Lybiknational director of multifamily analysis for CoStar, said in the report.

Hussain expects to see some concessions return to the multifamily sector as prices plateau.

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

Although real estate has always been viewed by investors as a hedge against inflation, this has yet to fully materialize in California as rents do not keep 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 cutting rates,” Hussain said.

Attractive markets

Banc of California typically finances apartment projects priced below $35 million, through standing financing agreements as well as bridge loans.

“Lately we’ve been running shorter terms because borrowers don’t want to be locked into 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 are so many unique factors that attract builders, and there are plenty of job opportunities as well as more land available.”

Extension of the product range

Banc of California aims to stay in growth mode in part thanks to its recent entry into the payments space.

The company in September acquired the payment platform and technology of Global Payroll Gateway Inc. and its wholly owned subsidiary, Deepstack Technologies LLCfor $24 million in cash and stock.

Deepstack, headquartered in Jupiter, Florida, with a team located in Southern California, is an e-commerce payment platform that provides customers with services such as 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 for opportunities that help us differentiate ourselves from our peers and grow our business,” Hussain said, adding that the company is hiring employees to support this new line of business. All Deepstack employees also joined the bank, with its three executives entering into three-year employment contracts with the bank.

The company has 420 employees in Orange County.