Alternative lending in commercial real estate doesn’t feel so “alternative” anymore. Instead, it seems more mainstream.
Commercial Observer comments that more than a decade after the 2008 crisis, some banks remain cautious when it comes to financing commercial real estate. They add that banks are especially wary of new construction financing, which has resulted in more developers becoming lenders themselves.
And it appears there won’t be much of a slowdown in alternative lending in the near future, either.
In March, panelists at an Urban Land Institute (ULI) event in Dallas said they expected the pace of alternative lending to continue in 2019 as competition among all debt providers percolates in the capital markets.
“Commercial real estate lending, the bread-and-butter business for many smaller and regional banks, could pose challenges for banks in 2019 due to intense competition from nonbank lenders, rising delinquency rates and other factors,” American Banker reported in January.
More than 100 debt funds operate today in the U.S. commercial real estate sector, Mona Carlton, senior managing director at Dallas-based commercial real estate brokerage HFF, said at the ULI event.
Lance Wright, managing director of private debt fund ACORE Capital LP, went so far at the ULI event as to call the debt space “really frothy.” Larkspur, California-based ACORE focuses on transitional projects, including value-add deals and adaptive use projects. Loans range from about $30 million to more than $300 million.
ACORE and other alternative lenders are succeeding in an environment where many banks must adhere to strict federal regulations enacted after the Great Recession and have grown reluctant to make certain commercial real estate loans, according to ULI. As such, alternative lenders, including real estate developers, are stepping in to fill the void.
“Who better to assess the risk of a development deal than a developer,” Marty Burger, CEO of New York-based Silverstein Properties Inc., said at a December ULI session in New York on nonbank lenders.
Silverstein is among a number of U.S. developers that have set up their own lending arms as an alternative to big banks. Silverstein Capital Partners is a joint venture that provides senior loans, bridge loans, subordinate loans, inventory loans and “rescue capital.” Loan amounts start at $25 million.
Multibillion-dollar asset manager Brookfield Asset Management Inc. is another real estate player that has jumped into alternative lending. In 2017, Toronto-based Brookfield closed on Brookfield Real Estate Finance Fund V, which collected about $3 billion in equity. Brookfield’s fifth commercial real estate finance fund targets mezzanine debt investments in major U.S. real estate markets.
“We have already moved the market,” Andrea Balkan, managing partner at Brookfield Real Estate Financial Partners, said at the ULI event in December. “Banks are no longer looking to do ‘stretch’ senior loans. They are looking to us.”