Real estate lending could be due for the Hunger Games

Competition is pushing down yields in the highly competitive sub-$100M loan space

New York /
Jul.July 13, 2017 04:55 PM

With so many players in the non-bank real estate debt arena, competition could start pushing yields down to levels that are unsustainable for smaller funds. That could kick off a “Hunger Games” type scenario where only the strongest will survive, according to a new report.

There are now roughly 100 alternative debt platforms operating in the United States, a major increase resulting from Dodd-Frank, Basel III and HVCRE rules implemented in the wake of the 2008 financial crisis that have restricted lending by banks.

But competition has recently heated up, causing some of the funds to do deals with higher loan-to-value and loan-to-cost ratios and falling short of the yield they need to reap in order to pay acceptable dividends, the Commercial Observer reported.

“In the alternative lending space, focused on balance sheet transitional real estate loans, spreads are certainly tighter and there is more competition,” explained Jonathan Pollack, a senior managing director at Blackstone Real Estate Debt Strategies.

But while big lenders like Blackstone Group, Starwood, SL Green Realty, Children’s Investment Fund and Brookfield Real Estate Financial Partners operate at a scale where their size limits competition, the space is becoming much more crowded for loans under $100 million.

These “light transitional” deals are often sourced by brokers, which gives borrowers more leverage to ask for things like longer terms and longer interest-only periods.

“While rates have gone up, pricing has come down 30 to 50 basis points,” Madison Realty Capital’s Josh Zegen said. “The value-add debt market—those lenders are just trying to push market share.”

It’s this smaller space that’s easier for funds to pivot to, and most at risk of cut-throat competition that could weed out the weak.

“Scale does matter,” a source with a major debt fund told the CO. “The Hunger Games could happen.”

May the odds be in your favor. [CO]Rich Bockmann


Related Articles

arrow_forward_ios
With a cooling trade war, stocks perform well, including real estate. (Credit: iStock)
Real estate stocks push up this week as U.S.-China trade tensions ease
Real estate stocks push up this week as U.S.-China trade tensions ease
416 West 25th Street and Maverick Real Estate Partners principal David Aviram (Credit: Google Maps and LinkedIn)
Chelsea landlord claims “predatory” lender is charging a crippling interest rate as punishment after losing foreclosure case
Chelsea landlord claims “predatory” lender is charging a crippling interest rate as punishment after losing foreclosure case
The Torkian Group's Hersel Torkian and 250 East 83rd Street (Getty, Google Maps, The Torkian Group)
Torkian nabs $145M loan for Upper East Side development
Torkian nabs $145M loan for Upper East Side development
(Getty)
Life insurers suffer worst returns on real estate loans in decades
Life insurers suffer worst returns on real estate loans in decades
Triangle Equities' Lester Petracca with 533 Main Street (Triangle Equities, Getty)
Record East Orange project lands $317M financing
Record East Orange project lands $317M financing
From left: Trinity Place Holdings’ Matthew Messinger and Macquarie Group’s Shemara Wikramanayake along with 77 Greenwich Street (Getty, Trinity Place Holdings, Macquarie Group, Google Maps)
Trinity Place gets extension to finish pandemic-slowed 77 Greenwich
Trinity Place gets extension to finish pandemic-slowed 77 Greenwich
Estate Partners' David Aviram, FIA Capital Partners' David Goldwasser and Steve Croman (LinkedIn, Google Maps, Getty)
Steve Croman: I was duped by predatory lender
Steve Croman: I was duped by predatory lender
Ivanhoé’s Nathalie Palladitcheff, Cohabs’ Youri Dauber and James Grasso with Cohabs NYC co-living spaces (Cohabs, LinkedIn, Twitter/@ydauber, Ivanhoe Cambridge)
Co-living firm Cohabs raises $450M to continue expansion
Co-living firm Cohabs raises $450M to continue expansion
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...