#CREF2020: Investor-Driven Lenders Evolve

SAN DIEGO–Investor-driven lending is evolving and affecting the larger commercial real estate industry, analysts said here at the MBA 2020 Commercial Real Estate Finance/Multifamily Housing Convention & Expo.

(l-r) Peter Smith, Jeffrey Fastov, Justin Dennett, Michael Comparato

Investor-driven lenders such as debt funds and mortgage real estate trusts are competing for and winning more loan assignments, said panel moderator Jeff Friedman, Principal and Co-Founder of Mesa West Capital LLC, Los Angeles.

Friedman noted people have been predicting an economic downturn for years. “Even with the economy as strong as it is, I thought rates would be higher,” he said. “The strength of the market for this long is surprising.”

Justin Dennett, Chief Investment Officer, Morrison Street Capital, Portland, Ore. said he is also surprised the economic expansion has not slowed. “It feels like the longer it goes the less soft a landing might be,” he said. But he noted the expansion did not slow down very much last year.

“One big surprise for me is the surge of CLO [collateralized loan obligation] issuance, the fact that the market is letting a lot of folks play in that space,” said Michael Comparato, Managing Director and Head of Commercial Real Estate with Benefit Street Partners, New York. “That has really commoditized the bridge lending space.”

Peter Smith, Managing Director and Head of Originations with TPG Real Estate Finance Trust, New York, said the CLO market is getting close to the cycle’s prior peak in 2006 and 2007. “The leverage levels went from 78 to 79 percent in 2018 up to 85 percent now and people can toss in mezzanine loans as long as it’s attached,” he said. “So it’s really gone to the far end of acceptability there. The governor on those transactions is being able to sell the bonds.”

But Jeffrey Fastov, Managing Principal with Square Mile Capital Management, New York Fastov, noted the loans themselves feel much healthier today than those originated 13 or 14 years ago. “Pro-forma underwriting is nothing like the old days; advance rates are nothing like the old days,” he said. “In the old days people would do an 85 to 90 percent explicit advance rate on an acquisition and then lend half the equity on a bridge basis, too. That’s pretty full. People don’t do that anymore.”

Fastov said in 2007 lenders would make “wholly unrealistic” lease-up assumptions and growth rates. “Today the underwriting is very in-place,” he said. “I think everybody looks at no-growth scenarios when they are sizing loans today. There is a lot more equity in the deals from the sponsors than before.”

How a lender finances its positions is where risk can creep in, Fastov said. “If [a lender is] not match-funded, or CLOs are 85 percent or there is five-and-a-half turns of leverage, that’s a lot,” he said. Fastov said Square Mile sells mortgages to banks. “We like doing that because then you are totally match-funded,” he said. “If there was a default in the term you can actually keep that funding in place. But if you’re using a warehouse facility you lose the funding if there is a default.”