Small-Balance Loan Strategies: 6 Questions with Sabal Capital’s Pat Jackson
- Jul 24, 2019
Demand for small-balance loans has been growing for the past two years. Lending volume reached $51.7 billion last year, Arbor Realty Trust Inc. noted in a recent report. Although interest rate hikes in the second half of 2018 set the stage for a slow start to 2019, lending is expected to return to normal during the second half of the year.
Agency lending programs are diversifying rapidly, observes Pat Jackson, CEO of Sabal Capital Partners, which averages $1 billion-plus in small-balance agency loan volume annually. In February, Sabal Capital launched a small-balance lending program for commercial real estate. He contends that the availability of a diverse palette of small-balance loan programs can help alleviate the affordable housing crisis.
How has the demand for small-balance loans changed so far in 2019?
Jackson: We saw more growth in the early part of 2018 compared to this year. However, it’s not dramatically different, since 75 percent of the SBL business is driven by refinances, which are pretty constant. Our year-on-year “opportunities pipeline” continues to grow; however, the agencies may be more or less competitive at various points in time, and therefore it may appear to be up and down when rates fluctuate. The agencies were priced a little above the banking market for the first three to four months of 2019, therefore this period of time was more challenging. Currently, they are back in line, so we’ll see how the next months pan out.
Which markets have been the most active for small-balance loans since the beginning of the year, and why?
Jackson: Historically, our strongest markets are Texas, New York and the Chicago area. We’ve always been one of the top four lenders in each market for Freddie Mac’s Small Balance Loan (SBL) program but year-over-year, number one in the Midwest. Some lenders seem to turn up their nose to secondary markets but we think that’s where the need is greatest, and look to continue our leadership in those smaller markets.
A year ago, you pointed out in an interview with CPE that small-balance debt solutions can help alleviate the country’s affordable and workforce housing crisis. Tell us more about where this stands.
Jackson: The country is still in the midst of an affordable housing crisis. Unfortunately, the issue is so complex and widespread that there are no immediate [single] solutions. The public and private sectors are both going to need to play an active, joint role in helping to ensure Americans have access to housing they can afford.
That said, there is headway being made on the capital side. There are some attractive small balance debt solutions, both agency and non-agency, available for affordable and workforce rental properties. Freddie Mac and Fannie Mae are both widely active in providing this financing and Sabal is a partner lender to both agencies in those endeavors. These programs are accessible for assets located across the country and are experiencing wide adoption because demand for finance in this category of real estate is high.
However, it’s important to note that small-balance loans are much more accessible for the acquisition and refinance of existing affordable apartments. New construction loans are much harder to come by today for a variety of reasons. This is further constraining the delivery of new supply of affordable housing.
In February, your company launched a new small-balance loan program. How does it fit into the market?
Jackson: Our CRE program is a finance offering for core commercial real estate nationwide. This program serves borrowers with non-recourse loans in the range of $2 million to $20 million for acquisition or refinance of eligible assets across numerous categories, including multifamily with five or more rental units, student housing, mixed-use, mobile home communities, multi-tenant office, multi-tenant retail, credit single tenant standalone retail, self-storage, flagged limited service hotels and multi-tenant light-industrial/warehouse/flex/R&D. We launched this program to answer industry demand for a single solution focused on small-balance loans.
Which loan program is most in demand right now?
Jackson: We’re seeing tremendous attention on our small-balance CMBS product right now, in part because we’re new to the market and, I’d like to believe, because of our business model. One shocking part is just how much multifamily is flowing into the CMBS side of the house, and how much is coming via our traditional agency clients. It’s nice to have a full suite of products to provide the right solution to the clients’ specific needs.
Sabal Capital was recently designated a Fannie Mae Small Loan Lender. How will this impact your company’s strategy going forward?
Jackson: Participation in the Fannie Mae program doesn’t shift our strategy. What our participation does is add the Fannie Mae program to our rapidly growing suite of small balance commercial real estate debt offerings—encompassing both agency and non-agency options—and gives brokers and borrowers an even wider selection of quality solutions from which to choose.