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