4 Things to Know About the Current State of Debt Financing

Nearly 10 years ago, the Great Recession occurred. This caused the debt financing landscape for commercial real estate to evolve, leading to banks becoming more cautious in their commercial lending. But, banks are still originating loans and financing options are still available. Here are 4 things you need to know about debt financing:

1.)      Banks lending for U.S. commercial real estate has surpassed pre-recession levels, according to a study conducted by the Federal Reserve Bank of Richmond. This boost can be attributed to low interest rates, foreign investors appetite for U.S. property, and a strong renter demand to led to an apartment building boom.

2.)      CMBS (commercial mortgage-backed security) loans have skyrocketed, amounting to $66.6B last quarter which is a major improvement from the $49.9B issued during the same time period last year. In August alone, lenders issued 335 loans totaling $10.65B, which is a huge spike compared to zero loans issued in January.

3.)      Alternative lenders are stepping in and filling a void left by big banks. The country’s top five nonbank lenders – Blackstone Group, Mesa West Capital, Starwood Capital Group, TPG Capital and Mack Real Estate Credit Strategies – together funded $20B in bridge loans in 2016.

4.)      Traditional banks lenders and alternative lenders are becoming increasingly competitive. There are two primary buckets of capital in the commercial lending game – price leaders and proceeds leaders. Price leaders are the traditional lenders, giving borrowers a lower rate, but only about a 60% loan-to-value ratio. Proceeds leaders, or debt funds and alternative lenders, give higher rates than traditional lenders but compete with a higher LTV ration, which is usually about 60%. The market is divided as traditional lenders and debt funds are trying to find their niche.

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