In the wake of the great recession, traditional commercial real estate lenders have taken a more conservative approach to their lending standards. In the past commercial real estate lending was dominated by the “big three”; banks, life insurance companies and CMBS lenders. Although these three are still the lead players, the world of alternative lenders is gaining momentum. Alternative lenders are categorized as lenders outside the big three, mainly consisting of bridge, hard money, mezzanine, and private lenders, as well as crowdfunding.
The consensus for this financing shift is that it stems from both a change in the risk appetite of the big three and increased regulations from the government. Having been burned in the great recession, large financial institutions and the government alike have undertaken to avoid a reoccurrence, by limiting their exposure to a particular asset class, geography, or client. Banks, who prior to the recession were primarily underwriting the real estate collateral are now more concerned about “relationship lending” to create new banking clientele. The biggest lending pullback has come from the CMBS market who in 2007 just before the great recession, issued over $220 billion in CRE. In 2016, almost 10 years later, they issued a mere $75 billion in CRE loans. With maturities coming due every day, alternative lenders have come in to fill the financing void.
Last year alone, the five largest players in the sector – Blackstone Group, Mesa West Capital, Starwood Capital Group, TPG Capital and Mack Real Estate Credit Strategies – collectively funded some $20 billion of interim loans. These alternative lenders generally have initial terms of two to three years to allow sponsors to complete upgrades or stabilization efforts to reduce risk and qualify for a permanent loan from one of the big three.
“It’s not that banks aren’t lending,” as quoted in Trepp Advisors, July 05, 2017. “They’re effectively rationing their credit by not providing too much financing to any one developer, sector or geographic area. That’s prompted some developers to line up new financing and quickly pay off their construction loans well before their projects reach stabilization. As a result, developers will often turn to alternative lenders for interim loans that would take a project from certificate of occupancy to stabilization.”
Others believe that the increase in alternative lenders has not only come about because of a pullback in lending but rather because the equity partners believe that CRE is over heated and that they can make better risk adjusted returns by investing in debt rather than ownership. Whatever the reason, alternative lending is expanding.
Whatever the reason, alternative lending is expanding and MCA can provide valuable assistance. Having closed over $3 billion in transactions, your team at MCA is in constant contact with both the traditional lenders as well as the rapidly expanding alternative lenders. We specialize in commercial real estate lending…THAT IS ALL WE DO! With our extensive database of commercial real estate lending sources, MCA will be happy to guide you through the process.