Capital of Consequence: Bridge Lending is Trending
Andrew Foster is Associate Vice President in MBA’s Commercial/Multifamily Group. He is a former Analyst with S&P Global Ratings and Fitch Ratings as well as a regular contributor to MBA NewsLink. He can be reached at afoster@mba.org or 202/557-2740.
Bridge lending remains an active piece of the commercial real estate finance pie heading into the anticipated economic recovery in the second half of 2021. Short-term loans with floating interest rates that are higher than longer term fixed-rate loan rates are written for properties in transition.
These properties involve situations in which a borrower develops a business plan to invest capital, re-tenant or reposition an asset to a more stabilized level in line with other properties in its submarket. These products and the large number of institutions offering them to sponsors are defining features of an economy in transition.
Long considered a realm of banks, this cycle has seen a number of non-banks enter the bridge lending field including funds, mortgage REITs, life insurance companies and the GSEs. Given the long recovery cycle post-Great Financial Crisis and the proliferation of nonbank lenders, the conventional wisdom has been that an economic downturn would likely cull this herd of funds. While the narrative certainly isn’t over, the current chapter includes increased participation rather than less with notable strategy shifts occurring and growth prospects. How different capital sources compete and collaborate is being slightly redefined as the market continues to evolve.
The Numbers Game: Sizing Non-Bank Growth
“Nobody goes there anymore. It’s too crowded.” -Yogi Berra
Commercial Mortgage Alert reports in March, “High-yield real estate debt funds are on the hunt for a record $75.9 billion of equity.
An annual review of the fund universe by sister publication Real Estate Alert identified a record 82 vehicles that primarily invest in debt, up from last year’s high of 74. The number of operators ticked up to 70 from 65 a year ago, matching the high-water mark set in 2019. The surveyed debt funds already have raised $46.8 billion of equity, according to the review. That’s up 4% from $45 billion in last year’s survey, but short of the record private debt market.”
While these entities are far from the only market participants active in bridge lending, their growth story is significant on the heels of pre-COVID years of growth. MBA’s Annual Origination Survey tracked $32 billion of mortgage debt intermediated to investor-driven lenders in 2016, $52 billion in 2017 and $67 billion in 2018. In the first half of 2019, 10 percent more volume was intermediated to investor-driven lenders than during the first half of 2018.
Not captured in the statistics above and carrying a significantly different funding profile are Mortgage REITs. These entities, many publicly traded, are also substantial players in the non-bank bridge lending marketplace and look to take advantage of the strong growth outlook after a rocky 2020 for commercial real estate.
Behind Every Great Nonbank is a Great Bank
Sometimes it can be lost in the conversation that when we discuss non banks and their competition with banks for lending assignments, they are generally collaborating with banks to win deals. That is because they are generally lending money to borrowers but also borrowing from banks via warehouse lines. This product line for banks is a growing one and 2020 performance was relatively solid for commercial whole loans as compared to negative expectations and sentiment in the market during 2nd quarter 2020.
Where Capital Sources Fit In
One characteristic of the last cycle was the blurring of the lines between capital sources. At MBA’s CREF Convention in 2019, alternative lending was on everyone’s lips. Covering a panel dedicated to the topic, Commercial Property Executive reported here.
“Much of the discussion surrounding opportunity funds, which offer investors a relatively secure and short-term equity alternative late in the cycle, was about whether or not these maturing vehicles will expand their narrow product scope and become a fiercer competitor.”
Sticking with this feature, 2021 has seen a flurry of new acquisitions and partnerships formed between non banks and insurance companies outlined below:
–Apollo announced it would buy the roughly 65% of Athene it did not already own for $11 billion.
–Blackstone Group announced the purchase of Allstate Corp.’s life insurance business for $2.8 billion.
–KKR & Co. closed the $4.7 billion acquisition of Global Atlantic Financial Group.
–Adam Street Partners announced a $2 billion strategic partnership with American Equity Investment Life Insurance.
–Aflac Global Investments, the asset management subsidiary of insurer Aflac Inc., announced partnership with alternative investment firm Sound Point Capital Management LP to form a new real estate credit manager, committing an initial $1.5 billion to the new business.
–Sun Life Financial Inc. completed the acquisition of a 51% stake in credit manager Crescent Capital Group LP, adding to its money management business, Sun Life Capital Management.
As detailed in Pension & Investments article, A Perfect Match: Alternative Firms Join Insurers:
“Apollo Global Management Inc.’s recent announcement that it would merge with insurance company Athene Holdings Ltd. is just the latest example in a flurry of the mergers, acquisitions and strategic relationships struck between alternative investment firms and insurance companies.
Money managers say the moves produce a perfect match, adding a big influx of permanent capital to their assets under management.
Insurance companies and non banks increased M&A activities represent an evolution and interesting strategic development alongside the many M&A transactions that have occurred among banks and agency lending platforms in recent years. The results of these transactions and the continued evolution of the industry landscape will occur against a backdrop of increased demand for bridge loans.
