Publications

- January 1, 2021: Vol. 8, Number 1

5 Questions: Opportunities in real estate lending

by Matthew Koelliker

During the past decade, individual investors, wealth mangers and institutional investors have all sought to participate in private debt because of the attractive risk/return profile, consistent income and short durations. The current commercial real estate environment is considered a tremendous opportunity for lenders and investors alike.

Demand is especially strong for bridge loans that help borrowers manage a property through a transitional phase or other short-term period. The pandemic has forced many borrowers into unforeseen situations, and they now need time and capital to turn things around, says Matthew Koelliker, president and head of client management at M360 Advisors, a firm that manages vertically integrated credit strategies.

What is the current state of commercial real estate lending?

While the pandemic significantly slowed commercial real estate lending activities earlier this year across both traditional and nontraditional markets, capital needs and borrower demand have remained strong. This has created an attractive dynamic for lending programs with capital to deploy, as they can support this pent-up demand and provide customized financing to borrowers at a time when many private lenders and banks have pulled back. Nontraditional lending activity is picking up month-over-month as investors are directing more capital to the space and more lenders are returning to the market. Non-bank lenders with capital to deploy can afford to be more selective on deals today, improving their risk/return profile. We expect this pronounced supply/demand imbalance to persist heading into next year, rewarding capital providers.

Who are banks lending to these days, and who are they ignoring?

Banks continue to be selective in their underwriting and lending activities. Since the financial crisis in 2008, banks have refocused most of their lending activities to stabilized properties seeking permanent financing. While there are some regional banks that will compete on transitional or other bridge/short-term lending opportunities, banks for the most part today are still focused on providing permanent financing on well-capitalized and stabilized commercial properties. This has created opportunities for non-bank lenders to provide more customized solutions for borrowers with properties that have not been served by traditional banks, such as those looking for interim solutions on a path to permanent financing or exit strategies.

Are private lenders filling the gap?

Yes, private lenders have played a key role over the past decade filling the demand gap for borrowers as traditional lenders have pulled back. While COVID-19 has caused a significant number of these private lenders to exit the market or pause/reduce lending activity this year, it has created opportunities for the remaining lenders with ample funding capacity. When supporting borrowers in the current market, private lenders have also become more mindful of the stress and uncertainty in the commercial real estate sector. Given the potential for higher levels of distress as properties and borrowers deal with the effects of COVID, private lenders need to be disciplined and diligent in credit assessment and underwriting, pursuing assets well positioned in their market and structuring adequate reserves to withstand the unknowns. Ideal borrowers will have strong depth and breadth of expertise. It is always prudent to avoid markets or properties where the degree of uncertainty is too extreme to comfortably structure around, and this is even more important now.

What kind of demand is there among borrowers?

Private lenders are needed to help borrowers refinance commercial real estate loans that have matured, or assist owners with renovating and/or repositioning office buildings, multifamily, industrial, retail and other income-producing properties. The demand from borrowers has also created an opportunity for investors. Over the past decade, individual investors, wealth managers and institutional investors have all sought out private debt because of the attractive risk/return profile, consistent income and short durations. The current commercial real estate environment is indeed a tremendous opportunity for lenders and investors alike.

What type of financing is in greatest demand?

We are seeing a tremendous increase in demand for bridge loan financing. Bridge loans are short-term capital solutions (typically one- to three-year terms) that help borrowers manage a property through a transitional phase or other short-term period. The pandemic has forced many borrowers into unforeseen situations, and they now need time and capital to turn things around. Demand for bridge loans has spiked as many business plans have been uprooted and because loan maturities did not stop with the onset of the pandemic. Borrowers are having to turn to new financial partners, as more lenders pull back in order to meet loan maturities or other capital needs.

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