|BRIDGE LENDING TIGHTENS
Borrowers will see available bridge capital, although many previously active players are now on the sidelines. The illiquidity in the market, particularly amongst the banks, will continue to apply pressure to bridge lending. Credit funds/debt funds that truly rely on their banks for financing to support that business, which has dried up significantly over the past 12 months, along with a significant widening in the cost of borrowing within a very short period of time, has pulled some lenders out of the market. However, the bridge lenders actively providing capital will continue to fund deals and come up with creative structures to meet the needs of borrowers. There is money available; bridge lenders just need to find a deal that works for them.
Look for 7% to 10% all-in rates. Rates with soft bridge lenders that are backed by a life company will start around 7%, while debt fund bridge loans will see 10% to 13% pricing. Floating-rate bridge loans will likely be priced at one-month Term SOFR+ 350 and above basis points. Leverage will be harder to underwrite as all lenders are trying to understand where values are in today’s market. There are not enough deals getting done. Watch for most bridge lenders to provide leverage at 65% to 70% of stabilized value. Some lenders will push to 75% but these deals will be debt service coverage constrained.
Look for Arbor Realty Trust, Madison Realty Capital, Related, LoanCore Capital, Churchill, CrossHarbor Capital Partners, Argentic, Money360, Pensam, Basis Investment Group, Romspen, Emerald Creek Capital, Lone Oak Fund, LaSalle Debt Investors, Columbia Pacific Advisors, UC Funds, Post Road Group, Avant Capital, Edgewood Capital, AVANA Capital, Artes Capital, Barnett Capital, BridgeInvest, Revere Capital, Pangea Mortgage Capital, W Financial, Bolour, Enact Partners and Red Oak Capital to be the most active. The big players such as Blackstone and Starwood are in a wait-and-see period.
A select few banks are still in the bridge market including Centennial Bank, Alliance Bank, Northeast Bank and the Los Angeles-based UMTB. Life companies such as American Life Financial and Security National will also fund loans.
Bridge lenders will be more concerned about their take-out than in the past. Anticipate them to stress underwriting rates and push down exit values. Look for bridge lenders to put a cushion on cap rates when underwriting because of rising rates. Refinance tests to get out of the loan are changing. Insurance and
Lease-up bridge deals for well-located assets nearing the final stages of lease-up will be the most sought after. This type of financing has allowed developers to buy some time without having to sell in current market conditions or refinance into long-term perm debt in an increased rate environment. Multifamily and industrial will continue to be the most desired property types. Expect a push toward retail centers, especially ones that can prove they can bring in more value by filling vacant space. Bridge lenders will be drawn to retail this year because of strong rent growth and little new inventory set to come online in the space. Also, watch for more available bridge dollars for hotels as the sector continues to see favorable numbers. Indoor malls and office will be the toughest to finance.
Growth markets with strong employment and net migration trends will be the focus. There will need to be a compelling business plan with strong metrics and an experienced sponsor to achieve competitive pricing and leverage. Smile markets such as Atlanta, Dallas, Austin and Nashville, Tenn., will see plenty of available capital. Watch for a renewed interest in deals in the Midwest. Lenders will shy away from markets with oversupply. Lending will still be cautious in New York City, Philadelphia, Chicago, Los Angeles and San Francisco.
Lenders will be focusing on opportunities with very well-capitalized sponsors with a significant track record in the specific asset class and market. Count on more scrutiny when it comes to the sponsor. Standard net worth and liquidity requirements will remain, but there will be an increased focus/requirement on track record and experience. Bridge lenders will prefer borrowers they have worked with previously. First-time borrower/sponsors will need to show enough net worth and liquidity to hit the required metrics.