Short-Term Financing Opportunities Are Looking Mighty Appealing
At MBACREF 2018, financiers discuss the attractive but crowded market for short-term, floating rate loans.
Where traditional banks have found competition a drag in some areas, they’re being aggressive in the floating rate, short-term financing space.
“There’s been a blurring of the lines between bank lenders and occasionally life companies and alternative lenders,” said Charlie Rose, a senior director at Invesco Real Estate (IVZ), said at MBA’s Multifamily Expo in San Diego on Tuesday. “We’re just bumping up against banks in many instances, and oftentimes it is that outlier bank bid that [wins because it] may be a few million dollars short on proceeds, but it’s 70 basis points inside of the alternative lenders.”
Uncertainty over monetary policy and potential changes in the market has resulted in a herd of yield-seeking lenders looking at avenues for short-term financing.
Jim Flynn, the president of Hunt Mortgage Group, said this year he expects his firm’s lending volume to be close to flat with 2017, at roughly $400 million. “We would’ve liked to do more, and that number could come down, but several factors are coming into play,” he said. “There has been a lot of capital that has flowed into the floating-rate space over the last 18 months. A lot of that is the fear of interest rates, their ability to achieve an acceptable yield as an investor as well as the short duration; it’s all played into a liquidity in the market that we haven’t seen since pre-crisis for bridge lending. That’s put a lot of pressure on spreads”
Flynn and Rose each spoke on the Bridge Lending and Mezzanine Financing panel along with several other officials from financiers—including moderator Rob Brown, a managing director at JCR Capital, and Jack Maher, a managing director at Hartford Investment Management—at MBA’s annual CREF Multifamily Housing Convention and Expo at the Marriott Marquis in San Diego.
With the increased competition, there’s differing views on how to gauge opportunities.
“If you look at what’s happening in the CLO and bridge market, you’re seeing deals come out that have stabilized loan-to-value ratios in the 75 percent or higher range, which suggests that there’s either bad product or there’s not a lot of juice between them,” Flynn said. “Some of the leverage is just moving into the floating rate market rather than the fixed market. We’re expecting continued competition, and we’re also taking a relatively conservative view of credit over yield.
“[We’ve been around for awhile], and when the cycle changes, we’ll still be a real estate company,” Flynn added.
Rose, on the other hand, heads up a new debt platform at Invesco that’s aimed at reaching a $1.6 billion target this year. Credit is non-negotiable. “We’re taking a credit-over-risk approach… Borrowers want a downside-protected strategy. If we have to give up on one of three things to close on a loan—sponsorship, asset or pricing—we’re going to give on pricing, unfortunately. We’re maintaining our discipline on [the other two factors].”
Banks have also been careful in the construction mezz space, paying close attention to the sponsor of each deal—especially with small balance loans—which has created a void, Maher said. Banks have also seen a chance to get ahead, taking advantage of the agency lending arena; they’ve been very aggressive, according to Flynn, as evidenced by Fannie Mae and Freddie Mac’s record-setting numbers in 2017.
“In the small balance world, banks are our main competition,” Maher said. “There will typically be an outlier bid, and it’s typically a bank. They win primarily on pricing. In the smaller balance space, these guys are showing up.”