Simran Bindra, a banking and commercial finance partner based in Los Angeles, spoke with Institutional Real Estate about the tightening credit environment in commercial real estate and potential opportunities for nonbank lenders.
The current U.S. banking environment is one of rising interest rates and more conservative lending standards,” Simran told the publication. “The net result is reduced liquidity, which has had a significant impact on the current real estate market.”
For all of the new financing options that have gained popularity over the years — such as EB-5 consortiums, crowdfunding options, etc. — banks and the liquidity they provide remain the grease that makes the commercial real estate market run, Simran said. “Unfortunately, there is a bit less grease out there.”
He pointed out that transactions at the top end — those involving institutional, well-funded buyers — are still moving forward, as are distressed opportunities. “But the vast middle of the market is almost seized up, as there is a mismatch between the ability of buyers to obtain sufficient financing — whether in terms of proceeds or on sustainable terms — and sellers who look longingly at the sale prices that were being obtained just two short years ago and wondering why they cannot achieve the same results.”
The publication reported that the tighter financing market has had a significant effect on buyers and sellers of real estate.
Smaller and regional banks play a huge role in the financing of commercial real estate transactions, specifically smaller and middle-market commercial transactions,” Simran said. “In the current environment, however, lenders are more conservative in the loans they are willing to offer. This plays out in two ways. First, these lenders prefer to focus on more creditworthy sponsors, who tend to be larger and more institutional. Second, lenders are much more circumspect in terms of the proceeds they are willing to lend in an environment, which is already impacted by increasing interest rates.”
He noted in the article that lenders are seeing reduced loans-to-value and are becoming less tolerant of structures that may appear risky, such as permitting additional mezzanine or subordinate debt or preferred equity to make up funding differences.
As a result of this tightening of the credit market, there are fewer buyers than before, since financing options are reduced. Reduced lender proceeds also mean a greater need to raise equity to bridge the gap. That is a challenge in a high-interest-rate environment, where the projected returns need to be increased to attract investors.” In addition, buyers also need to look at their ability to service debt on properties after they are purchased, Simran noted, which is difficult in an environment with higher interest rates. “The net effect of all of this is to squeeze the number of buyers and the amounts they are able to offer sellers,” Simran said.
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