Presented at CREW Miami’s Luncheon Meeting, June 19, 2019
|Melissa Rose, Managing Director, Ackman-Ziff
||Giulia Auricchio, Vice President of Credit & Underwriting, Starwood Property Trust
Javier Herrera, Partner/Managing Director, IP Kore Funding
Cristina Zampieri, Relationship Manager/Vice President, Commercial Real Estate, Amerant (formerly Mercantil Bank)
The panel’s experts provided a detailed look at forces behind the surge in non-bank financing for commercial real estate transactions. Moderator Melissa Rose
of Ackman-Ziff invited Giulia Auricchio
of Starwood Property Trust to give an overview of the recent shift. Auricchio
related that global fundraising by private debt funds/REITs totaled $28 billion in 2018, compared with $5 billion in 2010. By March 2019, more than a hundred alternative funding sources were competing with traditional banks and Wall Street broker-dealers for a share of the real estate financing market. Banks and CMBSs made up 80% of real estate lending in 2007, but by 2018 those traditional sources, with some overlap, had shrunk to a bit more than 50% of the market. Statistics show that the demand for financing remains healthy, with current loan origination volume slightly ahead of $510 billion, the pre-2007 number.
What is behind the shift?
Non-bank lenders are not subject to the tighter, increasingly complex regulations that were imposed on banks following the country’s 2008 economic downturn. Today’s cash-heavy insurance companies, REITS, pension funds, sovereign funds, and other investors are eager to originate financing, particularly for the speculative developments and risky transitional (non-stabilized) commercial properties that traditional lenders must now avoid.
Why are investors heading for the debt market?
Non-bank lenders and debt funds seek profit-generating niches that occur in the gap between pricing and structure, and lead to economic payoff. They can offer faster closings when timing is an issue. They grant higher leverage by layering on top of senior loans so owners’ equity can be less, although borrowers pay for that flexibility. Debt funds provide the availability of recourse vs. non-recourse loans and other elements that borrowers find useful. “Banks can match alternative lenders’ rates on stabilized assets and offer some equally favorable terms,” Amerant’s Cristina Zampieri
said. “Banks avoid lending on transitional and speculative properties but they still have the largest market share.”
IP Kore Funding’s Javier Herrera
said his firm’s niche is in mezzanine lending where they offer a layer of debt that allows developers to proceed with less equity. Asked whether developers might view debt funds as predators who might be prospective owners, panelists indicated that was rarely the case. Herrera
recommended, as a side note, that borrowers ask competing funders how they plan to handle draws “because poor loan servicing can ruin a loan.”
How do borrowers decide among the alternative lenders?
Differences may include speed and timing, certainty of execution, terms, and customization. “When so many financing deals offer identical terms, you win by going face to face,” Herrera
said. “Seventy percent of proposed transactions fail to close, so if you actually close a deal, you’ve gained credibility.”
Despite the shift to debt funds, Cristina Zampieri
, Amerant’s VP for commercial real estate, does not see them replacing traditional banks. “At Amerant we are relationship lenders; we look carefully at terms, and honor them.” She noted that, in addition to serving specific targeted markets where they are strong, banks provide warehouse financing for private loans made by alternative lenders. Herrera
confirmed that a portion of the loans their firms make are underwritten by traditional banks.
How healthy are capital markets, and what if there is a disruption?
Panelists did not feel that too much capital was chasing the same deals, nor did they think the availability of credit was creating a bubble, due to the fact that lenders are more disciplined and prices are being adjusted. Zampieri
is “cautiously optimistic” about the health of capital markets, and Auricchio
said her firm plans to remain cautious with 70% to 75% loan to cost. Should liquidity be disrupted, she predicts that “everyone will get conservative, and the youngest funds will be the first ones out of the market.” Herrera
observed that “disruption is happening now, but the pipelines are full and the downward trend is a shallow one. We can ride it for 24 to 36 months before a correction.”
What do you not finance?
said Starwood does not fund speculative office projects. Zampieri’s
bank does not finance land, does little with condominiums/luxury apartments, and avoids hospitality due to rising labor costs. Herrera’s
firm finds the multifamily sector too competitive, but offers aggressive mezzanine financing for office and industrial situations. He noted that cold storage is a hot product nationwide—he likes the idea of housing/storing food for a McDonald’s.
The above article was updated August 8, 2019, to correct previous statements about IP Kore Funding’s business model. The firm does not finance ground-up construction, nor does it have ownership plans for land or for any projects it funds. CREW Miami regrets the error in a blog posted July 15, 2019.