But California also has a number of challenges, and housing is arguably the most pressing. About 1.3 million renter households in the state, or 22%, are classified as extremely low income, according to the National Low Income Housing Coalition. And the state has a shortage of nearly 1 million homes that are affordable and available for these people, defined as those who earn less than 50% of the area median income.

A report this past December in The Wall Street Journal delved into the regulatory maze that has stalled many affordable housing projects in California and made them more expensive to complete. In San Jose, the cost to build a single unit of low-income housing in 2022 was $983,700, up 24% from the previous year.

San Francisco granted less than half as many housing permits last year as New Braunfels, Texas, which has one-eighth the population of the City by the Bay. And in one extreme example of a project that has been delayed by political battles and financing hurdles, a 49-unit apartment building in Los Angeles is reportedly set to open later this year after the nonprofit developer acquired the land in 2007.

Gov. Gavin Newsom recently signed several pieces of legislation that are expected to benefit developers of mixed-income multifamily projects. One of these bills is designed to streamline the approval process for qualified housing developments in jurisdictions that don’t create enough new supply by removing the need for an environmental study.

California has an estimated $68 billion budget shortfall across its current three-year fiscal forecast that’s tied in part to weaker-than-expected personal income tax revenues. The 25% decline in tax collections during the 2022-2023 fiscal year was “similar to those seen during the Great Recession and dot-com bust,” state legislative analysts wrote.

Still, California’s gross domestic product grew at an annualized rate of 2.9% in third-quarter 2023, close to the U.S. average of 3.5%. As of this past August, California’s nonfarm payroll employment exceeded its pre-pandemic level by 447,600 jobs. Employment gains in sectors like logistics, technology, construction and health care have surpassed job losses in other industries.

Silicon Valley is a hotspot for data center investments. CBRE reported that all of the new data center supply delivered in Silicon Valley during the first six months of last year was preleased. With an inventory of 410.7 megawatts at midyear 2023, Silicon Valley was the nation’s third-largest market for data centers, trailing only Northern Virginia and Dallas-Fort Worth.

The Golden State’s largest office markets continue to struggle. Newmark reported that San Francisco had a vacancy rate of 27.3% and asking rents reached a six-year low point in third-quarter 2023. In Los Angeles, office-using employment dropped by 3% during the first eight months of last year and 44% of all office buildings had vacancy rates of more than 20%. ●

Nowhere has the cooldown in U.S. industrial real estate been more apparent than in California’s Inland Empire, centered around the cities of Riverside and San Bernardino. A midyear 2023 report from Colliers showed that the metro area, which is the country’s largest industrial market, posted negative quarterly net absorption for the first time in more than 13 years.

Third-quarter 2023 data from Cushman & Wakefield showed a negative absorption figure of 1.8 million square feet (msf) from July through September. But absorption during the first nine months of the year remained positive at 1.2 msf. Asking rents in the Inland Empire at the end of Q3 2023 stood at $17.96 per square foot, down from a peak of $18.85 in Q4 2022 but still well above the national average of $9.73 for industrial space.

Cushman & Wakefield also reported five industrial sales valued at more than $25 million in the area during the third quarter. The priciest deal during that time was BentallGreenOak’s $144 million purchase of nine buildings totaling 458,000 square feet in the Chino submarket.

What the Locals Say

The resort markets along the coast — including the Coachella Valley, Palm Springs and Palm Desert — have done phenomenally well. They’ve far surpassed what they were doing in 2019 and have enjoyed record top-line revenues and record net profits. We’re now seeing those markets start to taper off.

On the other end of the spectrum are the downtown hotel markets that are heavily reliant on commercial business, and that’s gone in the opposite direction as people have continued to work from home. You have fewer employees in the downtown market, so that’s definitely impacted guest stays, as well as food and beverage, at those hotels.

We publish a biannual survey, and through the first six months of 2023, individual hotel sales transactions in California were down 53% from where they were in 2022. That is a record decline. We’ve been tracking sales for over 20 years and it’s even surpassed what we saw in the first six months of 2009. And that’s just tied to a huge disconnect between the buyer and seller expectations.

Hotels have not yet seen value declines of 70% to 80% like those seen in office space. But a classic example would be two of the largest hotels in downtown San Francisco. They’re both Hilton products, and in 2016, those hotels appraised for $1.6 billion. The publicly traded REIT that owns them has given the keys back to the lender. The debt is $725 million.

3 Cities to Watch

Irvine

This Orange County city has added a whopping 100,000 residents since 2010 to reach a current population of 314,000. Irvine serves as the home base for fintech firms like Acorns and Cloudvirga, as well as a number of startups in the software, digital media and real estate sectors. Three Nobel Prize-winning researchers hail from the University of California at Irvine, which has a highly diverse group of students and faculty.

Oakland

After losing its pro football and basketball teams in recent years, Oakland received another economic blow this past November when the Athletics baseball team announced its pending relocation to Las Vegas. Affordable housing is a key issue in the East Bay hub. Brooklyn Basin, a major redevelopment project that would build 3,700 new homes on the site of a former shipping dock, is still many years away from completion.

Sacramento

From agriculture and health care to education and clean energy, the California state capital has a diverse economy that produces more than $160 billion per year in goods and services. Colliers reported that the $773 million in commercial real estate sales across the metro area in first-half 2023 was down 63% year over year. Industrial and multifamily deals accounted for a respective 39% and 24% of this six-month sales volume.

Sources: Allen Matkins, Built in LA, CalMatters, CBRE, Colliers, Cushman & Wakefield, Executech, Forbes Advisor, KQED, National Low Income Housing Coalition, Newmark, SFist, The New York Times, The Wall Street Journal, UCLA Anderson School of Management, University of California at Irvine, Visit California, Wisevoter

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State and local HFAs support the purchase, development and rehabilitation of affordable homes and rental apartments for low- and moderate-income families. These agencies play a crucial role in providing affordable housing across the country. (And yes, HFA is not to be confused with FHA or Federal Housing Administration loans.)

“You or your company may have had a prior unsatisfactory experience in the HFA space. The good news is that time and technology have facilitated important progress.”

Not all housing finance agencies are alike. How they operate and function can vary widely. Typically, HFAs act as independent organizations overseen by a board of directors that’s appointed by an elected official. For state-level HFAs, the governor is usually the appointing authority.

You or your company may have had a prior unsatisfactory experience in the HFA space. The good news is that time and technology have facilitated important progress.

Shapes and sizes

Let’s begin by distinguishing HFA models. Some of these agencies operate as full-scale mortgage banking institutions with in-house loan origination, secondary marketing, servicing and other centralized business units required to conduct mortgage lending. A small number of HFAs are approved seller-servicers through Freddie Mac, Fannie Mae and Ginnie Mae. They do not rely on a lender as the master servicer.

Some HFAs are more focused on multifamily finance or niche products to serve their specific market. Some have a contractual partnership with a mortgage lender or another HFA to conduct some or all the activities required to manage a first-mortgage product offering and downpayment assistance. This partnership creates a master servicer that is the conduit to buy all of the loans originated through the HFA’s program by partner lenders.

You may know or already work with some of these institutions. For instance, U.S. Bank is a master servicer that works with more than 40 state and local HFAs across the country. HFAs with servicing capabilities include the Idaho Housing and Finance Association, as well as ServiSolutions, which is a division of the Alabama Housing Finance Authority. Lakeview Loan Servicing, one of the nation’s largest servicers, also works with multiple state HFAs.

To work with an HFA or its master servicer, an originating lender will need the systems and process support to sell whole loans and comply with the agency’s policies and procedures. Lenders will need to complete an application obtained from the HFA or its master servicer, in addition to paying an application review fee. In most cases, it is similar to being approved to deliver loans to a correspondent.

Questions will be asked about your company’s financial condition, production levels, quality control and appraisal process. Be prepared to provide information on any active legal actions, audit reports, resumes of key personnel, proof of insurance and other details. In addition, there may be less common requirements, such as actual office presence in a specific state.

Pots of money

Congress established the tax-exempt bond program in 1968 to fund affordable housing, allowing for the creation of many of the state housing finance agencies. This provided state HFAs with a vital funding source. Tax-exempt bond financing can produce below-market interest rates on 30-year fixed-rate mortgages for first-time homebuyers. This is especially important in a rising-rate environment like today’s.

In 2019, state HFAs financed more than 64,200 mortgages in the U.S. with these bond programs. These agencies also built or rehabilitated more than 46,200 affordable rental units through multifamily bonds. When Congress created the bond program, each state could issue these low-interest bonds up to a cap of $50 per state resident. Due to program effectiveness along with strong lobbying efforts, this limit has grown over the years to $120 per capita in 2023.

Some HFAs also rely on the to-be-announced (TBA) secondary market. The TBA market is a mechanism to obtain pricing for the future sale of securities and is a common form of mortgage-backed securities trading. HFAs can supplement their tax-exempt bond programs by leveraging this standard taxable source of funding.

In addition, many state and local agencies benefit from other federally funded programs. The Community Development Block Grant program received $3 billion in funding in 2023, while the Home Investment Partnerships Program was funded at $1.5 billion. These programs can pay for specific housing needs, such as downpayment assistance and home improvements.

Tax-exempt bond programs generally require additional documentation. Beyond credit qualification, the lender will need to provide documented proof of the borrower’s maximum household income and first-time homebuyer status. Therefore, if a lender is participating in a program that is funded by the sale of tax-exempt bonds, expect to see a loan delivery checklist that contains more documentation for each file.

One example is the need to ensure that a borrower signs the recapture notice. Borrowers may be subject to recapture — a tax to the federal government for the benefit of a lower-interest mortgage. Recapture tax is rarely sought but is required to be paid if all three of the following conditions occur: the home is sold within nine years of being purchased; the borrower’s income exceeds allowable limits at the time of sale; and the borrower profits from the sale.

Rolled-up sleeves

Downpayment assistance programs are an important tool to support first-time homebuyers and purchase-market production. More than ever, originators need to offer these programs. Even if a borrower is ultimately able to qualify without downpayment assistance, the originator has demonstrated their value and is likely to earn future referrals by having more ways to help the client qualify.

Many large banks have stopped participating in some or all state HFA programs. This is due to slim profit margins that don’t support the additional resources needed to ensure the quality of loans. Even the more nimble independent mortgage banks have been vocal in recent years about the lack of consistency in program guidelines, processing, required technology support or manual workarounds.

Anyone interested in expanding homeownership opportunities in underserved communities should applaud the government-sponsored enterprises (GSEs) and advocacy groups for their efforts to bring more consistency to downpayment assistance programs. In the past few years, there has been silent but impactful work to develop standard subordinate legal documents for these programs.

This will reduce the time and expertise needed by a lender to review documents and comply with GSE requirements for downpayment assistance. Docutech and DocMagic were part of the legal team that created these documents, which are now available for the 16 states that are currently using them as pilot participants.

Another advancement is the HFA1 tool that’s now available through the National Council of State Housing Agencies. This tool indicates the alignments and differences for programs offered by 23 state HFAs. Lenders will find details on mortgage and downpayment assistance qualification, closing, delivery and other instructions.

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Despite the complexity of participating in dozens or hundreds of programs, it can be beneficial and lucrative for lenders and originators who can patiently put the required support in place and build a name for themselves as experts in the field. HFA websites will often post lists of their best lenders to refer potential homebuyers.

Real estate professionals who work in the first-time homebuyer market will look for an originator with the widest product menu and the ability to make deals work by explaining to the borrower how they might benefit from a subsidy for the downpayment or closing costs. These subsidies could feature deferred payments, payments forgiven over time or grants that will never need to be repaid. ●

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