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REAL ESTATE MERCHANT BANKING
As we head into the 4th quarter of 2018 we are continuing to see the liquidity in the capital markets grow and reach a point of saturation where lenders are loosening their underwriting standards and reducing their spreads in order to remain competitive and meet production goals.
In the bridge lending space, the number of lenders continues to grow. In recent weeks we met with three new lenders that recently entered the debt fund space (we have lost track of the number of debt funds in the bridge lending space). All this growth in the bridge lending space is being fueled by a number of factors that have created a “perfect storm” for bridge lending; general institutional investor sentiment that we are late in the real estate cycle resulting in risk aversion and appetite for debt fund investments, financial regulation severely limiting the participation of finance companies in CMBS lending, and the resurgence of the CLO (“collateralized loan obligation”, a securitized warehouse lending facility), giving bridge lenders access to seemingly unlimited, cheap, capital to lend.
As competition for deals grows, we are seeing underwriting standards loosening. Today many lenders are willing to provide higher leverage at tighter spreads on senior loans than they had at the beginning of 2018. Although leverage is still nowhere close to 2006-2007 levels of leverage, it has definitely reached the highest levels we’ve seen in the last 10 years.
Here’s an example of a bridge lending program that was recently pitched to our team highlighting the aggressive nature of today’s bridge lending market: From a Bridge lender with a close affiliation with to a major life insurance company:
Lending Programs Expand
As the competition in the bridge lending space intensifies, a number of lenders are venturing into both construction financing and into mezzanine or preferred equity in order to remain active, maintain yields, and differentiate their product offerings. This is providing developers greater access to non-recourse construction debt at higher LTC ratios as well the ability to forgo utilizing 3rd party equity by layering in preferred equity or mezz.
Below an outline of terms for a recently launched construction lending program that provides higher leverage at lower pricing than had been available in the market until recently:
Non-Recourse Construction loan program:
In summary, 4Q 2018 will be a “borrowers’ market” with lots of liquidity to finance a wide range of investment opportunities at highly compressed spreads and higher leverage.
If you have a pending transaction in need of financing, contact a member of the Dekel Capital executive team to discuss how we can assist in getting your project over this hurdle and finding the best capital source for your needs.