A Good Time for Bridge Lenders
- Sep 27, 2018
The alternative lending sector really took off in recent years and it seems that in 2018 it’s more competitive than ever. Bridge lenders are struggling to stand out by loosening financing requirements and taking on more risk. While this thriving business may also come with higher percentage of defaulted loans, there are no imminent dangers in sight.
Uanderson Benedetti, managing director with Millbrook Realty Capital, is certain that bridge loan volume will remain strong in 2019. In an interview with Commercial Property Executive, he reveals the factors behind the rise of alternative lenders and why smaller borrowers are essential to the business.
What can you tell us about bridge loan volume in 2018 compared to 2017?
Benedetti: Bridge loan lending activity is substantially higher than last year, and we expect volume to remain strong in 2019 based on a variety of factors. We’re operating in an environment where conventional lenders have tightened their qualification standards and become highly selective on the types of projects they will finance. Moreover, rising interest rates have also contributed to the spike in bridge lending activity.
These dynamics have made flexible capital harder to come by for smaller, non-institutional investors, and created an opportunity for bridge lenders to fill the capital void. At Millbrook, we’re seeing more investors and developers taking out bridge loans to finish their projects, so they can refinance in the short-term and lock in a lower interest rate on a long-term loan. This is happening across all asset types, in markets throughout the country.
How do you see the high competition in today’s bridge lending environment?
Benedetti: The environment is highly competitive, and we expect it to remain that way for the foreseeable future. This is largely due to the number of new players—including debt funds—that have entered the space over the last few years seeking to capitalize on the strong demand among investors for short-term financing.
Currently, there’s an abundance of capital in the market, which is compressing spreads. The stiff competition is forcing some lenders to increase their risk profiles by offering higher leverage, while others are making changes to their underwriting criteria. There’s a time horizon on much of this capital and in order to put it to work, some lenders are considering deals that are slightly riskier than they originally would have considered.
In this vein, some alternative lenders are getting more aggressive on their terms offering higher loan-to-value ratios, lower interest rates, lower minimum interest and shorter loan terms. Each of these factors increases the potential for defaults on bridge products. We anticipate that the more aggressive lenders will see a higher percentage of defaulted loans in their portfolios, creating business opportunities for funds or firms like us, who purchase distressed debt notes.
Sophisticated bridge lenders are working hard to find ways to differentiate themselves from the competition—they don’t want to be viewed as commodity capital. This differentiation can often be achieved on the types of terms lenders offer, the speed at which they are able to close and the types of assets they will lend against, among other things.
Tell us about bridge lending activity in New York City. Is demand increasing or decreasing?
Benedetti: Bridge lending activity in New York remains very strong across most of the boroughs. As mentioned above, fears of interest rates ticking up further are prompting investors to secure short-term financing now so that they can close their transactions and worry about securing a traditional bank loan later. These borrowers are willing to pay more on interest upfront to ensure certainty of closing.
In terms of opportunities, we’re seeing a lot of stabilized and value-add multifamily projects come across our desk. We’re also seeing a number of smaller condo projects where approximately 15 percent of the building needs to be completed. In many instances, these projects could be financed by a bank. However, the original lender can’t release any more proceeds. In order to finish the project, the developer will come to us for capital because we are able to close quickly—sometimes in as little as three days.
Millbrook has refinanced several properties in Brooklyn. What can you tell us about real estate financing activity in this borough?
Benedetti: We know Brooklyn extremely well and love the opportunities we’re seeing across the market. There are strong economic and demographic fundamentals supporting continued real estate investment in many of Brooklyn’s neighborhoods. We intend to continue to be front and center when it comes to being a capital source.
Downtown Brooklyn and Williamsburg are seeing the most investment activity from big name sponsors, and that’s where many lenders prefer to do business. We love these areas as well, but believe they’re oversaturated. In our view, there’s plenty of opportunity in Brooklyn’s growing niche markets like Crown Heights, Bay Ridge, Sunset Park, Red Hook, Bed-Stuy and Flatbush. In our eyes, the future of Brooklyn’s commercial and residential development is in these areas.
Does Millbrook provide financing for ground-up construction projects. What can you tell us about this category of borrowers?
Benedetti: We are not currently providing financing for ground-up construction projects. We can lend on these projects, but we see greater opportunity financing land acquisitions and heavy-duty rehab/construction projects. There a lot of banks and large debt funds that are very active in ground-up construction lending, creating a lot of competition especially on apartment, condo and industrial projects. We’re focusing our time and resources serving the capital needs of small and middle-market borrowers who need flexible capital to execute their investment strategies whether its opportunistic, value-add or core.
What are your expectations from the industry going forward?
Benedetti: We anticipate the bridge loan market will remain very busy in the years ahead. This has to do with rising interest rates, the continued rise of e-commerce and its impact on retail property vacancies, the ongoing redevelopment of obsolete space, and the wave of loan maturities coming due. Each of these factors, among a variety of others, is a catalyst for increased bridge lending. Due to their speed and flexibility, alternative lenders should continue to remain an attractive financing partner for investors. This is especially true, as more banks dial back their construction lending activities.
Tell us a few key points in Millbrook’s strategy for the coming years.
Benedetti: Our goal is to continue to grow the platform and execute larger loans, while still maintaining our close relationships with our smaller clients who are growing their portfolios. We believe there’s always going to be a gap in the availability of financing for the smaller investor and we have every intention of continuing to fill that void. Continuing to originate small- and medium-size loans will allow us to maintain a healthy volume of lending at the rates and terms we’re comfortable with. While we’re a national lender today, the bulk of our business activity is in New York. We aim to look more aggressively for deals outside of the New York area to diversify our loan portfolio and cultivate relationships with new sponsors. We also intend to ramp up purchasing of distressed debt from commercial banks and savings institutions, as well as from other private lenders.
Image courtesy of Millbrook Realty Capital