Sara Havlena
With fewer lenders in the bridge lending space and rates continuing to rise, 2023 will likely be a slow year for bridge lending, with sponsors turning to other products. Expect more conservative underwriting and a major shift toward cash-flowing deals. Exit caps are hurting bridge lending. Lenders will have to focus on markets where values are low and cap rates are high. All bridge lenders are looking to de-risk in today’s market and will not give up on structure as they have done in the past. Look for more focus on in-place cash flows and bridge lenders will be more hesitant to take on deals that have large interest carry. Property values will be the biggest challenge. Values are starting to come in below the purchase price, or at what lenders are underwriting to in their analysis. Watch for the bridge lending market to open wide once inflation gets under control.
Debt fund and private money lenders will remain active but more selective than what was seen the past few years, as many of the banks have now moved to the sidelines. Borrowers have flocked to debt funds, leading to more people chasing less available dollars. As the debt funds are flooded with deals, they can come up with more reasons to say no to a borrower. Despite this pullback in the bridge dollars, keep an eye out for players that traditionally provide equity coming into the bridge lending space.
Well-capitalized established bridge funds such as Mesa West, Prime Finance, Blackstone and Invesco Real Estate will grab the most market share. Also, count on ACRES Capital, Lument, LoanCore Capital, Arbor Realty Trust, Lone Oak Fund, LaSalle Debt Investors, Parkview Financial, Columbia Pacific Advisors, BridgeInvest, Pensam Capital, Money360, Thorofare Capital, CrossHarbor Capital Partners, UC Funds, Post Road Group, AVANA Capital, Sheridan Capital, A10 Capital, Security National Commercial Capital, W Financial, Avant Capital, Emerald Creek Capital, Basis Investment Group, Revere Capital, First Bridge Lending and Pangea Mortgage Capital to all be active.
Leverage will be constrained by the permanent debt market and the uncertainty of rates. Bridge lenders want to know that once the business plan is executed, there will be perm financing available to pay them off. Borrowers will see 60% to 65% maximum leverage, with a few lenders pushing to 70% for the strongest deals. Fixed rates will be in the 7% to 10% range, a 2% to 3% increase since the beginning of the year. Floating rates will start at SOFR+ 400 basis points. Rates will really depend on the asset class, location and the nature of the request. Bridge lenders were underwriting stabilized debt yields as low as the 6% range. Now with fixed rate debt in the high 5% to low 6% range, the math no longer works. Stabilized debt yields will need to be 8% plus. Expect lenders to conservatively underwrite expenses due to the increases in categories such as insurance and payroll.
Multifamily and industrial will be the most sought after; however, watch for more available bridge dollars for retail and hotels. There will be a continued challenge in office since people do not know the fundamentals. Class B and C office will be obsolete and have a tougher time find financing, although well-positioned office that is being converted to multifamily will be considered.
Bridge lenders will target the top 100 MSAs with low vacancy rates. Look for more bridge capital to target STEM (science, technology, engineering and math) job growth cities such as Raleigh, N.C., San Diego, Boston and East Bay San Francisco, along with lower cost markets in Arizona, California’s Inland Empire, Boise, Idaho, and throughout the Rust Belt. Bridge lenders will become more cautious in smaller secondary and tertiary cities.
Strong sponsorship and experience will be critical. An excellent track record in value-add plays with a proven ability to take multiple deals full cycle will be sought after. Bridge lenders will typically target a minimum net worth equivalent to loan amount with liquidity of 10% to 15% of loan amount. Count on bridge lenders to initially request full recourse, although for a really strong borrower and deal, they can offer partial recourse. Non-recourse money will be available for lower leverage loans.
