Some people 'live' at the office. But imagine offices becoming condos?
This article was produced in partnership with Kennedy Funding.
Desmond Devoy, of Mortgage Professional America, sat down with Kevin Wolfer, president and CEO of Kennedy Funding, a direct private lender, to talk about how, with rising interest rates and tightening rules, more people are turning to private lending for their commercial real estate needs, and how his company prides itself on a quick turnaround time.
Traditional lending markets are drying up, because of tightening rules and rising interest rates, and commercial real estate borrowers are turning more to direct private lending as a funding solution.
“We’ve already started to see, in the commercial real estate markets, the banks and traditional lenders tightening, thus making it extremely difficult to borrow money, even if it is a well-experienced borrower with income-producing property,” said Kevin Wolfer (pictured), president and CEO of Kennedy Funding, based in New Jersey. “So there is a real opportunity for private lenders in this market and a need for private lenders, particularly direct private lenders, like Kennedy Funding.”
Reuters said last month that 46% of banks surveyed by the Federal Reserve reported a tightening of lending standards during the second quarter of 2023. That is compared with 39% in the fourth quarter of 2022. As such, commercial and industrial lending has slowed to $2.76 trillion at the end of April, down from $2.82 trillion a month earlier, according to data from the Fed.
Even back in March, CNBC ran a headline reporting that “Banks pulling back real estate loans creates opportunities for private lenders.”
“This is a real important time for the private lending industry,” Wolfer said. Such deals are an outlet for “someone who doesn’t have vast experience or doesn’t have the amount of cash equity to put up that a traditional bank would require. We’re seeing more of those types of opportunities.”
Challenges for office space sector
Wolfer said he is seeing a lot more opportunities on industrial and multi-family properties, but the biggest change he has seen in the past three years has been the office space market. The big banks are very hesitant to invest in them, and many are predicting a continued decline in that sector as more people remain working from home.
CBS News reports that places like New York and San Francisco are seeing less than half of their office spaces occupied, even after the pandemic’s end. This raises the prospect of a “financial meltdown,” the network reported. Morgan Stanley reports that $1.5 trillion will be due by the end of 2025 on these office buildings, raising the threat of loan defaults.
In Canada, the federal government is looking to offload up to half of its office buildings across the country, according to CTV News.
But even here, Wolfer sees some opportunity. An idea floating around the sector would see some former office space converted into condos, apartments or other housing. When asked if that idea held potential for him, Wolfer replied: “Yes, definitely,” in part because an office building that once would have sold for $20 million can now be bought for $4 million, and even if as much as $10 million is needed to convert to multi-family apartments or condos, it makes sense.
Read more: What is multi-family real estate investing?
When it comes to the office space sector, “I don’t know if it will ever get back to the levels where it was.”
About seven years ago, his company made a $3.5 million loan on a property in Bensalem, Pennsylvania. The land approved for medical and office, was valued in excess of $7 million and was situated in a good location.
“I’ve been to the site many times and you can’t sell that property for $3.5 million today because there’s no need,” he said. Further, the local government will not permit a re-zoning for housing for the property. “We’ve tried numerous times so it does create some obstacles, but many locations do permit you,” to change the zoning.
A history of big, quick deals
Kennedy Funding has been around for 36 years and have closed more than $4 billion in loans. They specialize in providing bridge loans for workouts, working capital, acquisitions, foreclosures, refinancing on all types of properties including land.
Their biggest loans tend to be land deals, such as:
- Saguaro Ranch, Tucson, Arizona for $40 million+
- Brightwater Club, Clearwater, Colorado for $47 million
- Liberty Harbor, Brunswick, Georgia for $55 million
Not only does Kennedy Funding deliver loans where others may fear to tread, but it also offers a speedy process.
“We can close very quickly,” Wolfer said, without the red tape of a big bank. “Someone can call us on a Monday, we give them a letter of interest that same day, enter into a loan commitment a day or two later. We really focus on the value of the hard assets and real estate securing the loan.”
While less documentation is required, a survey, title and a clean environmental are still needed.
“Those are the main items,” he said.
The company receives a one- or two-page loan application and can issue a letter of interest the same day.
Kennedy has relationships with several appraisal firms, including CBRE, Colliers and Newmark. “They know what we’re looking for,” he said. They provide “appraisers who are experienced, knowledgeable, down to earth and know what something is really worth and we trust them. We put faith in those appraisal firms, and we can move quickly based on their appraisals. We don’t have to physically go look at the property ourselves.”
The company can get an appraisal completed within two weeks, he said, and “we don’t ask for a full-blown appraisal,” where some banks will. They will instead ask for a short form restricted appraisal or a collateral analysis.
Kennedy’s lawyers also work fast and can provide a closing checklist within a day or two. “So many loans do take longer than we would like to close, but we’ve closed loans within a week,” he said. “And more often than not, we closed within a month.”
Kennedy does not focus on creditworthiness or even on the ability to service the debt.
This does mean that the risk is higher for them. Where a bank would see a 1% default rate, for Kennedy’s types of loans, they often deal with a 20% default rate.
“That’s not unusual,” he said. There are workarounds during defaults, such as finding a group who wants to take over the defaulted loan. He stressed that Kennedy does not sell or assign any of their current loans, but they sometimes look to unload them if they are in default.
About 90% of the company’s loans originate in the United States, but they have multiple loans around the world, including:
- Dominican Republic
- St. Barts
Wolfer is certain that there will be a recession this year, but his is not a dire prediction.
“We don’t think it is going to be as bad as the Great Recession of 2008/2009,” he said. “I think the recession will be a little softer than people think.”
To find out more on Kennedy Funding, visit them online at: www.kennedyfunding.com