I just returned from the Crittenden Real Estate Finance Conference where approximately 250 attendees gathered in Miami to discuss all forms of commercial real estate finance. There was a significant focus on bridge loans and other forms of high-yield finance with some great insights into the South Florida real estate market.
A Highly Efficient Capital Market
Despite being at least six years into the commercial real estate recovery, no one was ready to say we are in the late innings of this game. The diverse ecosystem of lenders that has emerged from the credit crisis is providing a reliable and versatile flow of debt and equity capital for all types of CRE projects. When one capital source is disrupted (as was the case with CMBS lenders earlier this year) others are there to fill the void. This vibrant network of capital providers should prevent concentration issues from any one market segment (e.g. banks) so the industry can collectively avoid the errors of the past. Many property investors are looking to private lenders where traditional financing does not work, such as for bridge loans for repositioning, pending lease maturities and re-tenanting.
While increased competition among lenders has resulted in some underwriting easing and thin loan spreads, even the most aggressive non-bank lenders are not willing to compete on advance rates (loan amount). This is a good sign.
CMBS Getting Out Flanked
As CMBS lenders struggle with new “risk retention” regulations, alternative lenders are stepping into the market with bridge, hard-money and structured products to help address the “wall of maturities” – those 10 year balloon loans that were underwritten in 2006 and are now coming due. Specialized lenders are able to offer refinancing solutions to maturing, retail and office properties at spreads of 550 – 750 over LIBOR. These loans are typically 12-36 month, interest-only and non-recourse, with advance rates up to 75% to 80%. Some entrepreneurial private lenders are able to work with banks to create structured solutions that offer compelling all-in financing cost to borrowers while creating risk tranches appropriate for all participants in the capital stack.
Condo Construction Lending
Banks are pulling back from high-end housing construction lending in markets like South Florida, New York City and San Francisco where inventory and future supply is starting to raise concerns. As banks retreat, alternative lenders including REITS and credit funds are stepping in, albeit at higher pricing.
An unintended consequence of the surge in high-end condo and rental housing construction and low levels of single-family housing starts is some tightening in vacancy rates and cap rate compression in older, class B and C properties. The agencies (Fannie and Freddie) and their small balance lending seller/servicers are capturing a big portion of this financing opportunity.
The Final Word For Modern Funding Clients
The market for CRE finance is highly fragmented with numerous types of lenders. Borrowers need to keep their options open, as the best lender for their acquisition or refinance loan may not be the local bank. Modern Funding has relationships with many types of lenders with a variety of loan products across the credit spectrum. We have lenders who are actively seeking good projects to finance, and now is a great time to secure financing for your small balance commercial real estate project.