The Power of Private Money in the CRE Marketplace

As we approach the decade point since the market crash, private capital may save commercial real estate lending in the U.S., argues Woodbridge Wealth Managing Director Dayne Roseman.

DayneRoseman_FINAL_loresIt’s hard to believe we’re approaching the 10-year anniversary of the 2008 market crash and subsequent Great Recession. It’s perhaps most difficult because its impact is still being felt quarter after quarter. As we enter the final months of 2017, commercial borrowers continue to navigate a variety of market factors: higher interest rates, the shifting regulatory climate and uncertain world affairs, just to name a few, which have caused traditional lenders to tighten their standards.

Bottom line: In 2017, commercial credit remains difficult to secure.

However, as lending standards have reached their tightest levels in the U.S. since the years following 2008, borrowers have found themselves in a unique position that has opened the door to private lenders. As banks become less realistic options for funding, private lenders have gained a foothold. A wide array of institutions formed this coalition, including insurers, venture funds, hard money lenders and real estate developers.

Private money benefits from special advantages that allow it more room in the current U.S. commercial real estate market, and borrowers are finding sure footing with such lenders. The impact on the CRE market has been profound, and as we approach the decade point since the market crash, it appears private money may save commercial credit in the U.S.

How is private money filling the gap?

It’s clear the commercial real estate market in 2017 has seen increased numbers of private lenders rushing in and filling the gaps left by tightening commercial lending standards, but what are the implications of this activity on the market?

The first thing to note is that commercial real estate investors and developers haven’t suddenly stopped participating in the real estate market—they just don’t have the same access to funding from traditional lenders that they once did. Legislation such as the Dodd-Frank Act has placed additional restrictions on banks, leaving the door open for private firms to lend. As a result, available alternatives are becoming preferable to borrowers, since it’s often the only way to get funding for their projects.

What are the potential advantages and risks?

Risk is inherent to all lending. A key difference between private lenders and traditional lenders is the systemic risk involved, which was one of many lessons of the 2008 financial crisis. As opposed to large institutions such as those deemed “too big to fail,” which resulted in a taxpayer bailout, private capital is naturally better suited to absorb the shock in the event a real estate bubble bursts. Private lenders and their investors are primarily the ones set to lose money should a project or deal sour.

However, there are always potential negative impacts from this influx of private funding, particularly when it comes from institutions in China, Canada, Europe and other international markets. While many investors currently view the U.S. as a safe harbor, they may bring their funds home if they eventually feel comfortable with their own markets again. For development-heavy private investors, this could potentially create situations down the line for REITs in which lease and rent aren’t reliably returned to owners.

What is the role of private money as we near the end of 2017?

While a strengthening economy hasn’t had much impact thus far on the availability of commercial credit from traditional lending institutions, the final quarter of 2017 has the potential to carry some substantial changes to the lending environment. Shifting financial regulations and rising interest rates could lead institutions to loosen some of their lending standards.

Either way, commercial borrowers should carry the lessons they’ve learned about the power of private money long into a more credit-friendly future.