Private lenders, in pole position as high interest rates leave them as the sole option for many in the commercial real estate market (CRE), are turning more selective and worsening a liquidity gridlock in a sector facing trillions of dollars of maturing debt.
In recent months, banks looked to rework terms on maturing CRE debt to stave off loan defaults, but they required additional infusion of equity capital allowing private lenders an opportunity to provide rescue financing through mezzanine debt, preferred equity or fresh common equity, industry sources said.
Borrowing costs for the CRE market have risen more than income, a situation prompted by the steepest jump in interest rates in decades. Exacerbating factors include tighter lending standards after the March regional bank failures and falling office occupancies post-COVID. Two-year interest rate caps that protected against rising rates mature in coming years, and new caps that used to cost thousands now cost in the tens of millions of dollars, said several industry players.
"The market is strained for liquidity; it's an absolute gridlock. Even with a massive drop in valuations in vacant buildings, there is no guarantee you will generate returns to justify the investment," he added. "There is a paucity of lenders in the market. Last year we would regularly compete with 5 to 10 lenders when issuing a new quote but this year, oftentimes, we are the only lender submitting a quote," said Alex Horn, managing partner at BridgeInvest, a private CRE mortgage lender.
Some private lenders faced the risk of ending up paring their portfolios that were expensive to manage, he added.
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