Bridge Lenders - Current pricing & loan sizing (survey results)
Bridge lenders are a collection of commercial real estate lenders chasing transitional, value-add, or construction deals on a non-recourse basis and typically calculate pricing based on a spread over Term SOFR. The universe of bridge lenders consists of over 100 groups including debt funds, mortgage REITs, pension funds (domestic & foreign), investment banks, specialty finance companies, select insurance companies, etc.
Most of the bridge lenders (but not all) will provide borrowers a loan with a 3.50% - 4.50% spread and then lever 70-80% of the amount with their bank (e.g. warehouse line, A-note, etc.) at a 2.25% - 2.75% spread to generate higher returns for themselves. Note that this pricing is for existing assets and construction financing typically prices 50-100 bps higher to account for taking construction risk and the slower funding schedule.
Last week I surveyed a representative sample of this market and asked four questions regarding multifamily financing. I focused on multifamily because it’s the most common product type with the most data points, but bridge lenders will look at nearly all asset types.
Question 1: How are you currently sizing and pricing existing multifamily deals?
The majority of lenders are sizing their loan based on a minimum stabilized debt yield (stabilized NOI / loan commitment). In the data below, you’ll see that 62% of the market is using a stabilized debt yield between 7.0% and 8.0%. Prior to the run up in interest rates, most of the market was using a 6.5% to 7.0% minimum stabilized debt yield.
?Here’s the breakdown of responses:
Several lenders said they’re targeting debt yields that are 200 to 250 bps higher than the as-stabilized cap rate. For example, if they think cap rates still stabilize at 6.0%, then they’re looking for an 8-8.5% stabilized debt yield.
With respect to minimum pricing over 1-month Term SOFR, here are the results:
Pricing can vary widely based on the level of in-place cash flow and other factors. For context, a year ago most lenders were targeting 3.00 – 3.25% spread with a group of lenders as low as 2.50% - 3.00%. It’s also worth noting that there are other bridge lenders targeting even higher yields that likely won’t compete on existing multifamily because their all-in interest rates are above 10%.
Question 2: How are you currently sizing and pricing multifamily construction?
There was a wide variety of responses to this question, but these are the four main take-aways:
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Note that I excluded groups that responded saying they’re targeting 55% LTC and sub-4.0% spread because they’re primarily competing with banks and are not targeting higher leverage like most bridge lenders.?
Question 3: What advance rates and pricing are you currently seeing from your warehouse lender(s)?
Understanding the cost of capital for bridge lenders is essential to understanding the pricing they’re charging borrowers. The interest rate that bridge lenders can offer their borrowers is directly impacted by the financing available to them via the bank market or through a securitized CLO execution. Throughout 2022, the pricing for this capital increased and the leverage decreased.
Let me illustrate the importance of this with an example. If a bridge lender provides a whole loan quote at SOFR + 3.75% because they think they’ll be able to put this on their warehouse line at a 75% advance rate and SOFR + 2.25%, then they’re targeting a 12.75% return on the portion they’ll retain (excluding fees).
However, if their warehouse lender decreases the advance rate from 75% to 70% and increases pricing 25 bps, then the bridge lender would need to increase their original spread nearly 50 basis points from 3.75% to 4.22% to maintain the same yield target.
Nearly everyone responded to the survey question saying warehouse lines were offering advance rates between 70-80% with pricing in the 200’s. The most common response was 70-75% advance rate with spreads between 2.25% and 2.75% depending on deal profile.
There are a handful of bridge lenders that are unlevered and less exposed to capital markets risk. They’re competing more on certainty of execution and are unlikely to be the lowest priced option.
Question 4: Are you currently requiring an interest rate cap?
Most floating rate lenders are requiring interest rate caps. Out of those surveyed, 87% are requiring a cap vs 13% not requiring it. There’s a focus on bringing down the cost of the cap by reducing the term to only 1 or 2 years and requiring the borrower to repurchase a new cap when the old one expires.?The strike rates required mostly ranged from 4.5% to 5.0%.
For reference, a new $40M cap at a 4.5% strike for 2 years would cost $312K, which is 0.78% of the loan amount. However, if you previously had a 2.50% cap that's expiring and your lender is requiring you to replace it at the same strike rate, then that would cost $1.4M, which is 3.5% of the loan amount. There will be many properties that sell or refinance this year because of the cost of renewing the cap.
There are billions of dollars of bridge capital waiting to be deployed this year. The cost of capital is higher than the bank or insurance company market, but they'll provide much more leverage and could be a good option if you need 2-3 years of short-term financing to execute your business plan.
Good luck!
Launching new brands and websites.
1 年This is a great breakdown of the variables at play for lending and the current landscape. Lots of different levers to pull. Super insightful.
Investor
1 年Great article. I learned a lot regarding Bridge lenders just now. ???? Brandon Roth.
Director, Commercial Real Estate, BMO - Industry Expertise, Market Insight
1 年Great info and explanation of how debt fund lending works. Thanks.
Asset Manager at CONAM
1 年Great overview. Looks like we are one of the few bridge lenders offering fixed rate loans.