Adaptability: How EagleBank Has Dealt With Changing Conditions For Lenders

The pandemic has found lenders of all types sitting on vast amounts of undeployed capital and facing a limited pool of potential borrowers. Partner Insights spoke to Ryan Riel, Executive Vice President and Chief Real Estate Lending Officer at EagleBank, to learn how they’re navigating today’s challenging lending environment.  

Commercial Observer: The lending environment right now is flooded with capital. How is EagleBank adapting to the current market, given a shortage of borrowers?

Ryan Riel: There may be a shortage of borrowers, but there’s certainly no shortage of opportunities, at least within the D.C. Metro market. We’ve seen plenty of opportunities cross our desks every week throughout the pandemic. The biggest challenge in our world is not necessarily the shortage of borrowers but the abundance of lenders, and how competitive the lending environment has become. This is why EagleBank’s client-first approach, deep D.C. expertise and the flexibility to offer unique lending solutions is critical in this environment. 

That being the case, what are some steps EagleBank is taking to address this competition?

As we have since inception, we continue to take a blank-sheet approach to each and every opportunity. We don’t tell the customer what solutions and products we can offer before we know the problems or challenges they’re facing. That unique take has made us a more flexible and tailored lender to our customers, and that has served us and our customers very well during this pandemic. Having said that, the competitive forces I just referenced have dropped loan pricing and returns through the floor. It has taken us some time to come to grips with that, frankly, and be able to win transactions in today’s very competitive pricing environment.

As part of being more competitive in this environment, are you broadening your consideration of the type of borrower you’re willing to lend to?

We’ve seen plenty of situations where good people can lift up not-so-great transactions, and we’ve seen the opposite of that as well. So the quality of sponsorship is always the primary consideration, and drives our decision making even in this competitive environment. 

Green building is an increasingly significant priority for developers. What sort of projects are you seeing in this area?

When green building first took hold, there was a significant cost differential between green standards and traditional building. That cost gap has closed over the last decade or so. Green initiatives are now part of the vast majority of projects we look at, and they’re growing in numbers. You see green roofs, energy-efficient lighting, etc. There are many green aspects developers take into account very early in the design process.

Do green building initiatives affect the sort of loans EagleBank can offer?

Not necessarily the sort of loans, but it does impact ancillary or supplemental financing options. As an example, there are some green initiatives, specific cost items you can get through an entity like PACE financing that provides mezzanine-type financing. But from a repayment standpoint, it looks very much like a public loan — you’re typically not paying over and above bank rates for that higher-tiered capital.

How has the pandemic affected the demand for bridge loans, and how is EagleBank responding to this demand?

The pandemic has created greater uncertainty, and bridge loans are typically bridging what is now and what will be in the future. So, we’ve seen more opportunities in the bridge lending space. We’ve also seen some bridge lending opportunities that have come up because the property type is no longer the highest and best use for that particular address, and the developer needs time to go through the process of figuring out what the highest and best use for that property is going forward.

Eighteen months into the pandemic, where does the construction lending market stand today?

It’s very active, especially in Washington, D.C. There are greater concerns around cost certainty, and when we’re evaluating a transaction, we’re digging deeper to provide as much certainty as we can on the cost side. For one recent example, we closed a construction loan for an affordable, multifamily housing project in Northeast D.C., and the general contractor was north of 50 percent bought out on their subcontracts. Under normal, pre-pandemic circumstances, they would have been somewhere in the 10 percent range. Uncertainty surrounding the future of construction costs is an area we are extremely conscious of given the recent volatility in material and labor costs in recent months.

Has the pandemic led to an increase in adaptive reuse projects?

Yes, because the highest and best use of certain properties pre-pandemic is different than it will be going forward. By way of example, pre-pandemic trends saw a number of office-to-multifamily conversions, and COVID has continued, if not enhanced, that trend.  

The U.S. is in a supply chain crisis. How has this affected lending, and how is EagleBank helping customers deal with the ramifications?

From a construction lending standpoint, we’re making sure that the budgets we’re putting together for projects have substantially more cushion than they would have had pre-pandemic, to account for any cost overruns along the way. Construction lending 101 requires us to make sure there’s enough money to finish your project on day one. We now face the supply chain crisis, volatility in the products that go into it, and a labor force that has seen a huge increase in costs on the construction side. So we’re fine-tuning those cost numbers much earlier in the process than we ever have before. We’re requiring things like two to two-and-a-half times the contingency than we would have had before, and making sure there’s agreement and legal commitment to meeting the cost figures that are put forth.

Are there any other significant lending trends people should know about?

EagleBank has historically been a value-add/construction lender, very much getting the property to its highest and best use and then getting repaid through the permanent financing market. That’s a place where we want to play more now. We are looking to facilitate our FHA lending platform, as well as stabilize a portion of our balance sheet with more longer-term products. That’s not something the general market in D.C. usually attributes to EagleBank, and we want to make sure everybody is well aware of our willingness and ability to provide permanent financing, not to mention the certainty of execution EagleBank brings to the table.