Bridge Lenders Evolve In Face Of Rent Control, Downturn Speculation
The nation’s largest real estate markets are being roiled by two major forces — fear of an economic recession and the rise of rent control legislation — and bridge lenders are caught in the middle.
Since rent control legislation reduces how much landlords can raise rents after renovations and vacancies, it discourages owners from flipping assets, depressing deal activity for bridge lenders. But as banks pare back their lending to prepare for a downturn, borrowers are asking bridge lenders to step in more frequently and for larger chunks of the eventual capital stack.
“The result is more competition for fewer projects,” said Mike Ramin, head of business development at Sharestates, a real estate crowdfunding platform that provides a variety of bridge and perm loans. “To win deals, we can’t just offer the best rates, we have to offer the best array of products and the best service.”
Though it operates nationally, Sharestates’ largest market is New York, where the state legislature passed a slate of rent reforms in June. The new laws were hailed as a historic victory for tenant advocates, but the real estate industry decried the reforms, saying that they would discourage landlords from renovating and improving their properties.
Sharestates has taken on larger and larger multifamily projects since its inception in 2012, but much of the lender’s business still focuses on fix-and-flip renovations of small multifamily properties — the kinds of projects that analysts expected to dip in the face of the new laws. Though the company's origination volume grew by 16% in 2019 overall, it saw less deal volume in Q4 2019 than in Q4 2018. Ramin saw that slowdown as a direct consequence of the rent stabilization rules.
“There has definitely been a drop in multifamily value-add properties,” Ramin said. “A lot of investors in N.Y. aren’t buying smaller one-to-four-family buildings , as they were in the past. Many have moved on to commercial properties or special use, saying that they don’t want to deal with smaller residential properties.”
But when one door closes, another opens, and Ramin said borrowers have increasingly been turning to Sharestates for loan products outside the world of multifamily renovations: construction loans for ground-up developments, for retail-office conversions, and for office and warehouse repositioning projects.
Lenders like Sharestates are playing increasingly important roles in real estate deals. Some banks and other traditional lenders have begun to reduce the amount of leverage they are willing to take on for real estate, citing growing fears of an impending recession. To fill in the widening gaps between equity and mortgages, bridge lenders are being called in.
With over 300 bridge lenders vying for those deals, Ramin said Sharestates has learned to go above and beyond for its borrowers in order to beat out the competition. In building out its lending platform, Sharestates has worked to streamline every part of the process, including building a pricing engine that generates term sheets, and enabling automatic deposits and background checks for investors and borrowers alike.
Diversifying its loan products has also brought in business; Sharestates began offering perm loans in the form of five-, seven- and 10-year adjustable-rate mortgages, allowing borrowers to seamlessly move from short-term to long-term capital.
“New products are being created and increasing the demand, which has helped make up for deals that have gone away thanks to rent control measures,” Ramin said.
Bridge lenders may have to gird themselves for longer hold times than they have been accustomed to in the last decade’s bull market. Properties that might otherwise have stabilized in two to three years may take four or five, Ramin said. He added that the Sharestates underwriting team is taking special care to make sure that its borrowers’ appraisals adhere to the new laws and that their forecasts for rent growth are within reason.
But he added that Sharestates is no stranger to long-term relationships with its borrowers. The model the company has built allows small developers to grow their project pipelines from a handful of properties a year to a handful of properties a month.
“We’ve always thought of ourselves as a long-term partner for our borrowers,” Ramin said. “That much will hold true no matter the political or economic climate.”
This feature was produced in collaboration between Bisnow Branded Content and Sharestates. Bisnow news staff was not involved in the production of this content.