Bisnow – Economic uncertainty, soaring interest rates and a working population that is behaving in unpredictable ways have created a dislocated lending environment for commercial real estate. Banks are pausing their activity, creating a vacuum that some alternative lenders are hoping to fill.
“There’s going to be a series of really interesting opportunities that come out of this on the other side,” said Warren de Haan, the co-CEO of ACORE Capital, one of the biggest nonbank lenders in the country. “What they’re going to be, I can’t tell you now until we do the work and we see how this plays out.”
Banks issued $20.6B of securities backed by real estate loans in the second quarter of this year, down from $29B the quarter before, according to Trepp data reported by The Wall Street Journal.
“In a normalized market, the rise in interest rates is typically not this steep,” Palladius Capital Management CEO Nitin Chexal said. “But in this case, rates have gone from essentially zero and then moved up so sharply so quickly, that it has definitely jarred the system.”
Lending sources told Bisnow there are some banks slowing commercial real estate lending now, as rates spike upward and the economic forecasts worsen. But the banks’ departure is creating a void where other types of lenders are looking to swoop in.
Take, for example, the $285.5M acquisition loan Square Mile Capital originated last month for A&E Real Estate’s $415M purchase of the 455-unit rental building at 160 Riverside Blvd.
“Certainly in the fourth quarter of last year, first quarter of this year, this loan would have just been a bank loan,” Mike Lavipour, a co-portfolio manager for credit at Square Mile, told Bisnow. “The combination of the size of the deal — which meant that many banks couldn’t participate without syndication — the disruption in the capital markets, which meant that many banks couldn’t syndicate to others, meant that it was ripe to be a loan for a debt fund.”
Lavipour said banks’ balance sheets are full, as the loans that would typically roll off to make way for more originations are staying put.
“Some of the big banks have announced that they’re not going to write any new loans for the next 60 days,” he said. “And those that do have money, it’s finite … They’re going to use it to support the clients that are more important to them historically.”
There, he said, is where alternative lenders can step in to make use of the current environment. Some are raising big funds to do so — AllianceBernstein closed its fourth U.S. commercial real estate debt fund with $1.3B in commitments, it announced Thursday.
Palladius, an Austin-based firm that provides both senior loans as well as preferred equity, is seeing more demand for what Chexal calls “creative financing” for refinancing for maturing loans and new acquisitions.
“Especially in the ground-up construction space where you have a lot of developers that anticipated receiving lending proceeds as part of their underwriting and those proceeds simply aren’t there today, because the markets have moved so fast,” Chexal said.
The Mortgage Bankers Association is now expecting originations to drop by around 18% this year, Moody’s Analytics Head of Commercial Real Estate Economics Victor Calanog said.
Lenders are more consistently asking for repricing on deals, telling their borrowers they are underwriting asset values 8%-12% lower than a few months ago, he added. Across the country, deals are coming undone, assets are being pulled and rapid repricing is taking place, Bisnow previously reported.
“The reason why that matters is that a lot of lenders function on things like loan-to-value [ratios], so when your value drops, a lot of lenders are gonna go and say, ‘Well, OK, so I can only lend you this much — or if you want more, the rate needs to be higher,” Calanog said.
Not everyone has experienced a large pullback in capital markets activity. Jillian Marriutti, a senior director at JLL Capital Markets, said her brokerage’s debt team put $48B of deals under wraps year-to-date, a 52% increase from last year.
“It’s no surprise that we’re in very volatile times right now, but what I will tell you is business is holding up,” Marriutti said.
Real estate players are quick to point out that no one asset, or market, is the same. But the office sector is of increasing concern, with little clarity on how much workers intend to use their offices long-term or how companies will respond to economic downturns.
Square Mile’s Lavipour said in late 2022 and early 2023, he foresees many owners of Class-B offices will be weighing whether to sell, spend on renovations in an environment where cheap debt is no longer available, or “cut losses” and hand the keys back to lenders.
“Today’s office is yesterday’s retail in our ability to underwrite and assess the outcome,” said Toby Cobb, the co-founder and managing partner of 3650 REIT, which he describes as an alternative lender with institutional capital. Still, he said, his firm is enjoying activity.
Of 3650 REIT’s $8B portfolio, Cobb said there are no loans in special servicing, in default or in distress.
“It’s a lender’s market, we have wider spreads for the same level of credit risk than we had six months ago and we are putting money out, frankly, with greater alacrity than we were four months ago,” Cobb said.
ACORE’s $19B commercial real estate debt portfolio is almost entirely healthy, de Haan said. But if the economy turns and borrowers struggle to make payments, they are likely to be treated differently than they were in 2020. If borrowers in distress behave in a certain way and put more money into their projects, then he expects the lending community will follow suit and grant extensions.
“The prospective view that most people have is that more difficult times are ahead of us,” de Haan said. “So the idea of whether or not we’ll provide forbearance in the future, we’ll have to cross that bridge when we come to it.”
ACORE is still originating loans, he said, especially in migration markets like Atlanta and Miami where companies continue to move. The same can’t be said for Class-B office buildings in urban core markets.
“We look to provide capital where there is no capital and provide liquidity to our borrowing base, when there is no liquidity. Now, it might come at a higher cost,” de Haan said. “We’re staring at this, and we’re not sure which way this is going to go. But we are preparing ourselves for that, for a situation where liquidity might be needed.”