Bridge Lenders Get Ready to Enter the Recovery Fray

Even with vaccines beginning to roll out, 2021 will be an uncertain year in commercial real estate. E-commerce has conventional, brick-and-mortar retail under siege. Many offices and hotels are sitting empty.

“In the grand scheme of things, all asset classes are under pressure right now,” says Billy Meyer, SVP of real estate lending at Columbia Pacific Advisors.

Right now, it is hard to have confidence in the pro forma economics of any deal because of uncertainty about supply and demand, according to Meyer.

In this environment, Meyer thinks conventional lenders, whose rates and cost of capital will remain low, will work with established sponsors. “I believe they will remain disciplined in their underwriting practices and lean towards working with sponsors that they have existing relationships with,” he says. “Conventional lenders will want to confirm that their sponsors have the financial strength and the experience to execute their strategy and have the financial wherewithal to weather the storm.” 

Meyers says that opens the door for private lenders to provide bridge and recovery capital. 

“In 2021, I think the banks will remain disciplined in their underwriting practices, which opens up the door more for reliance upon private lenders and short-term lenders that can bridge sponsors through this uncertain period,” Meyer says.

Many private lenders are creating funds in reaction to COVID. For instance, Columbia Pacific Advisors, an established private lender, is putting together a fund for seniors housing.

“It’s a new fund strategy that we’re creating in response to COVID,” Meyer says. “It’s currently in seniors, but we’re tossing the idea around about making it more of a general recovery fund. There will be more of us that are doing things like this.”

These special situations funds provide recovery capital to sponsors who have been hit hard by the pandemic. In many cases, these private lenders are coming in when a property has lost a significant amount of value.

“The existing lender is not interested in staying in the deal because the value of the asset has been significantly reduced,” Meyer says. “Their loan-to-value is out of balance for them. So this is where the bridge lender would come in.”

As demand grows, Meyer sees more groups entering the space. They will focus on providing bridge money for one to three years and recovery capital.

“Until the confidence is built on proforma economics and there’s more certainty in supply and demand, I think there will be an increased volume of new private lenders entering the space,” he says. “There’s more of a need today than there ever has been. Private bridge lenders will have an ability to increase their volumes because of the discipline that banks and conventional lenders are showing as a result of COVID and the uncertainties that are ahead of us in the short-term future.”