The bridge lending space has exploded, Gary Bechtel, president of Money360, said on the Debt and Equity Financing: The Issues Affecting Deal Flow panel at RealShare Apartments this week. He estimated that there are 130 to 150 bridge lenders in the space, serving a wide range of spreads and deals. Gary Tenzer, co-founding principal at George Smith Partners; moderated the panel, which included speakers Jordan Goforth, director of Ready Capital Structured Finance; Jerome Fink, co-managing partner of The Bascom Group; Jason Haye, national sales director at Velocity Mortgage Capital; and Jeff Burns, managing director of Walker & Dunlop, along with Bechtel.
Goforth and Fink are seeing the same growth in the bridge lending space. Goforth said that deals with strong cash flow are, of course, the most popular and are getting bid down; however, even bridge lenders even have a strong appetite for deals without cash flow. “Competition on all of these deals is huge,” he said. Fink added that even with the increase in bridge lenders, he hasn't seen any lender that hasn't been able to perform. Instead, he said the biggest challenge is filtering through the amount of bridge debt available.
With so many bridge lenders active in the market, every niche is being filled. Most are focusing on the $5 million to $40 million range, but Goforth said that there is a lot of activity in general in the sub $10 million. That is a space where is firm saw big opportunities in the market only a few years ago, and today it is being saturated by competition. Lenders are responding to the strong borrower demand, which is not only coming from the value-add space, but from construction debt that is maturing or that needs to bridge during lease-up or from bridge debt that is maturing. “We have a bridge product in house for every agency out there,” added Burns about the activity. “I have done more of that product in 18 months than ever before.”
While this was the biggest trend in the capital markets, the panelist also discussed rising interest rates, agency lending activity and financing opportunities in secondary and tertiary markets. For Fink, rising interest rates were not a concern. He said that it is a variable that the firm cannot control, and they have had zero conversations about it in the office. Instead, they underwrite an investment with the interest rate available at the time, and make a decision. The other panelists also didn't seem particularly concerned with rising interest rates. Instead, Fink said that Bascom is more concerned with their ability to make deals pencil under current market conditions. “We are seeing the lowest projected returns on paper,” he said. “It seems like there is a lot of private capital entering the space, and institutional funds are having a hard time placing capital because the returns are too low.”
With yield's narrowing, investors are looking for opportunities in secondary markets. Fink, in particular, liked the Inland Empire, but other panelists named Portland, Denver, Salt Lake City and Phoenix as strong secondary markets with better opportunities. In fact, Goforth says that the firm has doubled its activity in secondary markets this year. Bechtel, on the other hand, said that he is skeptical of secondary markets. He takes a close look at population and employment fundamentals, and said, “If they are going in the wrong direction, I am not a lender.” Haye agreed with the sentiment, saying, “We won't lend in some softer markets,” and added that it is important for borrowers to do their homework on a market or a deal before bringing it to a lender. If there is a reason they are increasing their leverage requirements, there is a reason.
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Kelsi Maree Borland
