Among all the market updates and meetings at the Mortgage Bankers Association Conference last month, the one revealing note was that a handful of New York-based bridge debt funds will be opening up offices on the west coast, specifically in Los Angeles.
These debt funds continue to see opportunities to gain market share in a growing niche, as bank financing for the acquisition and recapitalization of transitional assets continues to be curtailed in the face of cumbersome regulatory frameworks.
Beyond expanding their footprint, the bridge debt fund peer group is also enlarging the strike zone – taking on smaller deals, reemerging aggressively as an option for properties with little in-place cash flow, and looking at smaller markets – a change from the sense in the market as recent as six months ago.
With the increased competition in the lender peer group, our clients are benefiting from tighter spreads and lower fees, specific to west coast deals where having boots on the ground allows lenders to fully understand the story and its risk mitigants.
A couple of capital market factors are helping propel this growth in bridge lending. (In order for these debt funds to achieve their targeted low to mid-teens return, they leverage their capital with either bank financing or securitized vehicles, CLOs.)
Firstly, banks are playing a significant role, as more banks focus their lending capacity (away from construction lending) to providing increased leverage and relaxed terms to the debt funds – expanding the amount of lending capacity of these debt funds who are typically capitalized via committed funds or allocations for hedge funds.
Secondly, the securitization market for floating rate debt has returned (CLOs) and offers additional access point for debt funds to recycle capital.
Lastly, as a mitigant to lower origination volume expected in 2017 as a result of the volatility experienced in 2016 and the new risk retention rules that came into effect recently more CMBS lenders are offering floating rate, short-term debt products as a lead-source for fixed rate CMBS execution.