Why Kennedy Wilson CEO Bill McMorrow likes construction lending now

Commercial real estate isn’t a bank’s favorite asset class right now. Many financial institutions are pulling away from lending on real estate projects, as distress has risen and values have dropped. 

For Kennedy Wilson CEO Bill McMorrow, that only serves as an opportunity. 

“If everybody thinks this is a bad time to be doing construction lending, but we can find the best projects and the best borrowers with big track records, my attitude is, it’s the best time, right?” he said. 

McMorrow’s publicly traded investment firm, based in Beverly Hills, has emerged as one of the only active lenders on multifamily across the U.S. over the last year, as others have retreated. The firm had $27 billion in assets under management as of the end of June, according to financial filings, and about $2.6 billion in outstanding loans. 

A boost came after the company acquired a construction lending team and portfolio from Pacific Western Bancorp, a regional bank that was struggling with an efflux of deposits last year and was working to offload some of its commercial real estate exposure. Kennedy Wilson was one real estate firm eager to pick up the pieces. 

TRD sat down with McMorrow to chat about 2023’s regional banking crisis, how he started the firm and how every deal comes down to a handshake. 

You grew up in L.A. Tell me about your family. 

So I’m one of nine kids. Every one was successful in their own way. My older sister became a very accomplished medical doctor. If you didn’t get good grades, it was bad. We had to have a job from the time we were 8 years old. Mine was a paper route when I was 8 — six miles along the old road in Malibu.

Was there a moment that got you interested in real estate? 

That was just a lucky thing that happened. I was raised by parents who instilled a great work ethic. In those days, there was no resume building. You were trying to find the best job that paid the most money. I worked on fishing boats growing up when I was 14. I got a summer job at Farmer John hot dogs in Vernon. 

Then I went to the University of Southern California. When I graduated, it was a very bad time in the economy. I had 50 interviews and got one job offer, for a job I didn’t really want. That was working for a bank, Crocker Bank, now part of Wells Fargo. 

In those days, people in the bank didn’t call on companies. They thought a company should call you up if you’re lucky enough. But I started calling on companies myself. We started having some real success. 

Somehow, we started sharing business with Fidelity Bank in Philadelphia. They asked me to move to Philadelphia. I got to travel all over the United States at 25, and we were lending money to Fortune 500 companies and coal mining companies, and just big consumers of capital.

How did you end up coming home to Southern California? 

When I was 30, Imperial Bank in Southern California got into a lot of trouble in 1980 with real estate. Two families controlled it. [Founder] George Graziadio Jr. was in his 60s and he kind of became my father. He put me in charge of the bank. 

It was a small bank that was heavily focused on real estate construction lending. But George always wanted us to get interest rates that may mean that you got the worst customers. It’s not like our business now, where we get the best customers. He got the worst ones. 

It’s worked for some. But the bank was really, really in tough shape. After the bank got turned around, I went to George, and said “I’d really like to try to do something on my own.” He said, “I want to be your partner.”  In 1988, I founded Kennedy Wilson. 

And it was an auction house? 

When I was at Imperial Bank and we were taking back all this real estate, we were auctioning off a bunch of it. 

The auction business back in those days was basically selling. Say you had a whole condominium complex with 50 units. You would hire Kennedy Wilson, and we would sell each unit one by one at an oral auction, but there was a marketing plan around it. 

And back then, banks used to keep everything top secret about their problems. Not like today, where everything is transparent. If you wanted to buy something from them, they basically wouldn’t see you. They would act like there was no problem. 

But Kennedy Wilson had such a good reputation with banks that if I called up any bank in the country and said I wanted to come to talk about marketing — not buying, but marketing — real estate, they would say, “When do you want to come down?”

What was your first move? 

We only had 11 employees. Four of them were marketing people. Three of them were really not very good. There was a guy in the back office, and I said, “If you ever find any condominium projects that the bank wants to sell in total without doing an auction, I’d be interested in buying those.” 

Why did you want them? 

Because that’s what we took back at Imperial Bank. That got me interested in the real estate business, taking these projects back at Imperial Bank. I was turning around and selling them to somebody else, and I was watching them make all this money. We could get the fees from the auction business and then make money buying things from the banks. 

Did he find any?

One in Palm Springs and one up in Northern California. I brought them to George. He goes out [to the one in Palm Springs] and says it was the stupidest deal he’s ever seen. He didn’t think that was a good location. But he said he would loan me the money, but was not going to be my partner. 

What did you like about the deal? 

It was 60 houses, each with their own swimming pool, inside a gated community. When the bank had taken it back, they ran it as a hotel, and it had very, very high occupancy rates. And so during the due diligence, I got a list of guests that had stayed there. I thought, all these people want to stay there. Why wouldn’t they want to buy one? 

Normally in the auctions, you try to get four bidders to every unit you’re offering. That would mean about 240 bidders. The interest was so huge we had to rent the Palm Springs Convention Center. We had 800 registered bidders for the 60 units. Our pro forma was for all these units to sell for $135,000. The first one sold for $275,000. That was really the beginning of Kennedy Wilson. 

What drove Kennedy Wilson to branch out into Japan [in 1994]?

We got a call from a Japanese developer to auction something that they had built down in Orange County, a single-family housing project. I had to go to Japan to get it approved. I flew to Japan and had never been to Japan in my life. When I was there, I visited a bunch of banks. I felt like the loans that they were making to their customers — they were using their money to buy stuff in California, New York and Texas. So we opened an office there. 

What are your tips for closing a deal?

You have to be a handshake person. 

I really learned that in Japan, where they don’t have the same kind of legal system that we have. There are fewer lawyers, the documents are really, really simple, one page. You’ve got to be able to create trust with people. 

They have to know that if I shake your hand — no matter what the circumstances are, because there can be things that come up along the way — you’re going to just figure it out. 

Last year, we saw regional banks start to wobble — Silicon Valley Bank collapsed, JPMorgan Chase took over First Republic Bank. How did Kennedy Wilson play a role in picking up some of those pieces — acquiring loans from PacWest, for example?

It was something like I’d never seen before. The depositors freaked out. There was nothing wrong with the assets of those banks, but they lost their deposits. You lose your deposits, you don’t have any way to fund your loans. I said to somebody, “If Janet Yellen and [Jerome] Powell don’t come out quickly and make a statement, this whole thing could collapse.” They made a statement that every depositor would get their money back, tantamount to a guarantee.

But then, regulators started just combing through all of these other regional banks. Once the regulators start turning up the pressure on you, you’ve got to start selling assets. 

So that was how the banking transaction that we did was really based on the relationship that goes back 20 years. We got it done in 30 days. 

Do you see more bank collapses on the horizon? 

It’s hard to say. These interest rates have stayed elevated for a long time. People have to be hurting. It’s weird. It’s masked by all the growth in these tech companies. I don’t know what’s going to happen with banks. 

You said earlier that Kennedy Wilson has relationships with the best borrowers. How important is reputation when it comes to a borrower? 

It’s everything. The average-size loan we’re doing is almost $85 million. If you’re lending at 50 percent, that counterparty has to come up with $85 million of equity. There aren’t very many people that can do that today, and so that starts to weed out the number of people that can actually get a loan. 

Then you’ve got the banking system that has basically walked away from real estate lending. You’ve got two of us now that are the only ones you can go to. We’ve always tried not to run with the herd. 

If everybody thinks this is a bad time to be doing construction lending, but we can find the best projects and the best borrowers with big track records, my attitude is, it’s the best time, right? 

With the banks pulling back, there’s this opportunity for private credit to swoop in and not only make senior construction loans, but also provide mezzanine financing and preferred equity. 

We’re gonna gravitate into both of those products. Our focus is all on the housing market. Every loan we’re doing is either student housing or multifamily housing. But there’s going to be a need to recapitalize some of these other deals with preferred equity or mezzanine debt of some kind.