Bank Funding For Commercial Real Estate Continues To Be A Hard Ask, But Creative Investors Remain Undaunted

It's safe to say that today's economic lending environment has contributed to an enhanced need for creative financing unlike anything seen since the 2008 depression. 

Commercial real estate (CRE) owners and investors have been seeking out secondary lending sources as banks continue to pull back on lending. That scenario, fueled by continued interest rate hikes by the Federal Reserve, has caused banks to clamp down on CRE underwriting, with many properties, like office buildings, in financial peril. The lack of available funding has put the sector in crisis mode because of the $1.5 trillion in CRE loans that are expected to mature by the end of 2025. But even with the bank loan retreat, somehow, deals are still getting done. 

With a mix of available cash on hand and high-interest secondary lending opportunities, investors are making a bet that the short-term interest rate future will feature a drop from its 22-year high and deals are plenty.  

The reason for the optimism varies. A national housing shortage has helped enhance multifamily opportunities, brick-and-mortar retail has rebounded, warehouses are in demand and a few options exist for transforming empty office space into housing. But there are also those owners and investors scrambling for quick funding if only to pay for escalating balloon payments for mortgages tied to escalating Fed interest rates.  

"Even some of the more established private debt investors are also slowing down as they work to address issues on their existing balance sheet caused by recent disruptions," Margaret Grossman, managing partner and president of middle-market real estate debt and equity investor T30 Capital, told Commercial Property Executive. "That said, we are also seeing new entrants into the market looking to capitalize on increasing rates."

Many investors have been banking on high-interest short-term loans to tread water for bridge loans or until rates begin to come down. Moody's Analytics recently released a report showing that banks now account for barely over one-third of outstanding CRE loans (39%), with regional banks at 14% of outstanding loans. 

Banks have also become more risk-averse because of regulations enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act during the Great Recession of 2008 when home loans were handed out like candy. According to Moody's, banks account for just 39% of outstanding CRE loans, with regional banks holding only 14% of outstanding loans. A report from Axios also shows that average loan-to-value ratios (LTVs) of CRE loans have steadily decreased following the financial crisis. 

In spite of the bank lending pullback, Nasdaq.com predicts that investors will have more funding. 

"We believe there will be pain to come in the near future for many real estate assets that were underwritten at inflated values due to low-interest rates," according to Nasdaq.com. "We also believe that there are still attractive lending opportunities in today's market, particularly in residential assets in prime locations like NYC. Supply-constrained residential markets saw fewer housing starts and delayed constriction because of the pandemic."

Check out:

• Elon Musk has reportedly bought 6,000 acres of land just outside of Austin. Here’s how to invest in the city’s growth before he floods it with new tech workers.
• Investing in real estate just got a whole lot simpler. With as little as $100, average investors are becoming landlords thanks to this Jeff Bezos-backed startup.