Competing in Today’s Financing Market Goes Beyond Size, Speed and Certainty

We’ve all tried to compete on those three things... the mantra typically deployed by commercial real estate financiers to try to set themselves apart from their competitors.

In this elongated business cycle, those characteristics have taken on new life as more and more debt shops have emerged, taking advantage of fresh or hot product (such as the CLO or other transitional lending or construction opportunities) and innovative real estate (i.e. co-living and working and industrial and manufacturing assets) as they look for value.

I think what we’re starting to see is the private lenders and debt funds with cheaper capital, starting to compete with banks. The thing that scares me the most—and it’s not the over-leveraging of loans—is the return that’s available in the market for what’s now more riskier loans than what we’re doing two or three years ago is evaporating.

In December, there was a short blip in the market that served as a reminder of what it can be like when the capital markets shut down. A lot of these debt fund investors are driven by warehouse lines, repo [lines] and CLOs and there was a dramatic pullback that shut down the markets. It was a quick stroke of reality of what can happen to the market and how subject to change [these players] can be.

Servicing your own loans is a key strategic advantage. Most business plans have a lot of twists and turns and having a counter party who understands the underlying real estate and business plan and can act quickly is key.

The current playing field is a good one for borrowers. ...there’s always a desperate lender out there that doesn’t have enough deal flow and they’ll price through the market. .. there’s enough desperation that you see pricing collapse quickly on some deals.

Lenders are more cognizant ....It used to be all about price per foot, and now, the first question we’re asked is how many units are above $10 million.

Lenders who can’t necessarily compete on price are trying to entice the borrower with a little bit more leverage to win deals, so you’re seeing people pulling different levers.

The equity markets are cold right now, which is only adding to an aggressive debt fund market. In many cases, people are just refinancing properties with cheap sources of capital rather than selling, because they can live another day. It’s a weird dynamic that we’re seeing.

We’re seeing new business plans with more regularity, like co-living and coworking and other, less traditional plans, such as micro-units. People are trying to figure out a different angle in order to maximize value.

Unfortunately, lenders are data driven and want to see data on the co-living and what happens in a downturn and whether its sustainable, so we’re having to find alternate sources for those business plans until they gain more acceptance in the marketplace.

I get requests for marijuana all the time. It’s become more prevalent and there are single-purpose funds raised solely to lend into the cannabis space—I think that’s what we’re calling it—but it’s a real industry that’s only going to grow, no pun intended. It’ll pose a challenge on the financing side until it’s legalized at a federal level. Until that happens, you’ll see banks stay away from the space, leaving some outsized opportunities for funds to make returns.