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REAL ESTATE MERCHANT BANKING
Dekel Capital was in attendance at the Western States CREF Conference a few weeks ago, where, over the span of two days, we met with over fifteen lenders and funds (and enjoyed a few nice meals, as well). The majority of the meetings were with institutional debt funds and banks active in the bridge lending space.
The phrase “it’s competitive out there” came up in most of our conversations. New lenders continue to enter the bridge lending market – filling the gap as banks continue to pump the brakes on lending (despite economic drivers and data continuing to show positive trending through the end of the year). Interestingly, the increase in competition is consistent across loan size profiles – with players entering in the sub-$10M loan size space, up through mid-market and larger loans.
One quick takeaway is that lenders are differentiating themselves via pricing and structure – as opposed to purely pushing leverage on senior loans, which was pervasive in the past.
Bridge Financing
We noticed a clear distinction between bridge lenders focused on lighter value-add deals with in-place cash flow versus lenders that were more comfortable with heavier construction execution and lease-up risk.
Ground-up construction is firmly within the sights of the larger debt funds, which are looking for $25M+ loan requests and offering a non-recourse option to developers.
The “stretch-senior” bridge and construction loan product is one place the lenders are working to differentiate themselves – moving from traditional leverage of 65% up to 85% – 90% of cost by layering in an internal mezzanine debt piece.
A couple of additional thoughts from the conference…
When borrowers are willing to take bank recourse loans, they are capturing around a 100-basis-point discount to debt fund pricing, as well as benefiting from lower transaction costs.
We believe the gap between fixed and floating rate loans will continue to compress as rate indexes such as LIBOR, Treasury and Swaps finally start to inch upward.
Lastly, as a whole, there was not the sense that everyone was avoiding discussion of potential elephants in the room – underwriting standards appear to be holding, and lenders are exhibiting a healthy level of caution for deals outside of primary or secondary markets.