Commercial market: Is the tide shifting towards private lenders?

Regional bank struggles creating opportunity for private entities, suggests executive

Commercial market: Is the tide shifting towards private lenders?

The well-documented woes facing small US regional banks in the commercial sector show little sign of easing, a trend that’s likely to see consolidation and a further swing towards lenders in the private space.

That’s according to Alex Horn (pictured), managing partner and founder at private lender BridgeInvest, who told Mortgage Professional America that a “huge pullback” by institutional lenders despite a large volume of transactions requiring refinancing had opened the door for other entities to step forward and plug the gap.

“From 2015 until now, you’ve got a trillion dollars of commercial loans that are sitting in small regional banks who are completely overexposed on their commercial real estate books,” he said. “So you’re seeing a lot of the bloodletting of commercial lending in those portfolios.

“We have a very strong view that in the near future, you’re going to start seeing a lot of consolidation of these banks, and I think if you look at it on a macro scale, there’s a big necessity right now for this consolidation.”

Should regulators embrace a shift towards commercial private solutions?

A “stalemate” is likely to prevail for the better part of 2024 and into 2025, Horn added, with doubts over the current value of banks’ real estate and loan books throwing their present ability to buy another bank – or get purchased themselves – into question.

Regulators would likely welcome that consolidation as a step towards stabilizing the space, although Horn said they should also understand the ability of private lenders to provide solutions where overexposed banks cannot.

“I think they actually should be encouraging more the proliferation of the private debt and private lending world, which by all means already have grown a lot,” he said. “It’s become a much bigger part of the lending ecosystem in the last 10 years.

“But what it actually does, and it does well, is it shifts away the risks from depositors and in turn FDIC [Federal Deposit Insurance Corporation], from these banks that are doing riskier deals, to private lenders who are capitalized by sophisticated institutional investors who are very aware of the deals that they’re doing.”

That would be good for the system, Horn said, transferring risk to investors who profit if things go right, but who also have the capital to lose if the loan goes sour. “It’s not like your grandmother down the street is losing her money because the bank did a bad construction loan that they shouldn’t have done,” he pointed out.

“I think we’re going to start seeing that evolution in 2024 and 2025, and I think there’s going to be a lot of support from government to do that.”

Which asset classes are strongest in the current commercial market?

While uncertainty continues to swirl around the future of the office sector, prospects for other asset classes on the commercial front appear more promising – most notably on the multifamily side.

A bright picture for the multifamily market is partly because there’s likely to be a limited supply of new construction starts in the coming years, according to Horn, meaning a supply-demand equilibrium will probably re-emerge after recent years saw an oversupply of deliveries.

“Even the properties [where] we’re seeing weaker fundamentals right now in major markets are then in the medium term going to start seeing rents escalate again as we reach this equilibrium of supply and demand balance,” he said.

The industrial sector, meanwhile, still has “very strong fundamentals” with many firms focusing on supply chain resilience – and nearshoring and onshoring – amid continuing geopolitical tensions between the US and China.

A noteworthy trend on that front has been the growth of industrial outdoor storage as an asset class, Horn said, which has become a “much more established niche” – and retail has also witnessed a strong rebound since the chaos of the COVID-19 pandemic.

Hospitality was another asset class that was pummeled by pandemic-era shutdowns but has recovered well despite early challenges emerging from that fog.

“While we expect to see some headwinds in the hospitality market, specifically because of the slowing economy in the US, we still are very actively looking at hospitality deals,” Horn said, “and borrowers that have already trained to put large amounts of equity into that transaction.”

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