Secondary Lenders In The CRE Sector Are Playing A Growing Role As Loans Become Due And Banks Retreat

The origin of the phrase “cash is king” is hard to trace but is believed to have reached the height of its cultural zeitgeist around 1987. It’s as true today as it was then, especially in the real estate market. 

With a slight alteration to “capital is king,” 2023 is poised to be a year where that capital is increasingly coming from secondary lenders, especially in the commercial real estate (CRE) space.

CRE investors are also now turning toward the relative certainty of real estate debt as a popular alternative investment class, according to a new survey by CBRE. 

But a more significant issue for CRE owners and investors is that banks, the primary funding source, are drastically slowing their lending as they hunt for more deposits to match loan originations. 

“The general sentiment I’m hearing from talking to bankers is that they’re lending significantly less this year because their depository relationships have shrunk with people taking money out of their accounts. The other issue is that people are sitting on their current fixed-rate loans and are not refinancing,” BridgeInvest Managing Partner Alex Horn told Benzinga. Not coincidentally, Horn’s company has put itself in a position to fill that loan void. 

Miami-based BridgeInvest is a private real estate lender with more than $1.3 billion financed over the past decade and focuses predominantly on CRE customers in the multifamily, industrial, student housing, build-to-rent and retail sectors. 

Horn’s company fills the gap when commercial mortgage-backed securities (CMBS) loans come due, and CRE investors find it much harder to get an extension. 

“Loan delinquency rates keep going up. When you look at the Fitch Ratings (a provider of credit ratings and global capital markets research) and see that $26 billion of their rated bonds are coming due, we have found the opportunity to fill that void,” Horn said. The BridgeInvest founder refers to his company as a transitional bridge loan program that steps in where banks drop off. “We’re a hair more expensive than what you find in traditional bank loans, but we are more flexible and have quicker moving capital than banks.” 

But like banks, secondary lenders have to do their homework on properties that will or will not survive higher interest rates, a recession and fickle consumers. Though not the company’s biggest lending target, Horn is bullish on some retail strip malls. With anchor tenants like Bed Bath & Beyond Inc. continuing to close stores, it’s been difficult to hear anyone publicly championing a piece of CRE that many investors have been shying away from since the pandemic. But from a secondary loan perspective, Horn is willing to take a chance at those retail locations with grocery store anchors that are “fundamental to communities.”

But Horn also adds that BridgeInvest is most focused on customers seeing loans in the rent-to-own, student housing and multifamily sectors because “there is still a housing crisis in this country.”

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