The Growth Of Alternative Lending Has Finance Experts Wondering If There Is A Shoe Waiting To Drop
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Over the past two years, a slew of equity investors and developers have moved into the lending game, looking to capitalize on greater caution from banks as the cycle has kept going. Now, some commercial real estate players question if all those deals will stand the test of time.
“What it's doing is, it's allowing people that shouldn't be doing deals to get capital to do deals,” ACORE Managing Director Tony Fineman said at Bisnow’s National Finance Summit last week. “A lot of traditional equity guys ... if you talk to them, the reason [they are doing it is] the equity returns and what they perceive as the debt returns are the same, maybe debt returns are better.”
Plenty of big developers have started lending, zeroing in on a gap in the market. Last year, RXR Realty formed a joint venture with a Canadian pension fund, reportedly kicking off with $300M of equity and plans to invest across the office, residential, industrial and retail markets, and Silverstein Properties partnered with a sovereign wealth fund and a pension fund to offer construction loans.
“There were a lot of banks that couldn’t handle the loans,” Silverstein CEO Marty Burger told Bloomberg last October when his company announced its debt vehicle, which is called Silverstein Capital Partners. “We’re a developer at heart, and we usually do very large projects, and we found that there was just a gap in the financing markets where there were large loans needed for complicated projects.”
Earlier this year, Silverstein and Otéra Capital Inc. provided a $664.1M loan to JDS Development to start construction on 9 DeKalb Ave., a residential building which is slated to be Brooklyn’s tallest tower.
Matthew Scoville, a partner at Hunton Andrews Kurth’s capital finance and real estate practice, said many of the deals he has worked on for traditional equity players are ones banks wouldn't get involved in.
“We haven't yet seen a major stress on any of the deals that we worked on, so fingers crossed,” he said, saying so far there have been positive returns.
Hunton Andrews Kurth has been doing a lot of educating of traditional equity players who have entered the New York market and want to get into debt, Scoville said, but don’t know much about what risks are involved.
“[But there is a] query of whether the next six-to-eight months or year — we're going to start seeing the dominoes fall down on some of these deals,” Scoville said.
Still, JLL New York head of debt Michael Gigliotti pointed out, many of the players breaking into debt have a wealth of experience. He thinks equity players and developers are still prudent in what they are financing, just less restricted than banks.
“These aren’t unsophisticated people … They know what's going on, and so they are working really hard to get these deals closed,” he said. “Those types of deals die three times before they get done … I think these cap stacks are well thought through by extremely smart people.”
The best way to score debt and equity in the current climate, the impact of New York's stricter rent regulations on asset values, and how to make the most opportunity zone program were all discussed at the daylong conference Tuesday.
Some of the nation’s biggest real estate operators, Blackstone and KKR among them, talked about the types of assets they see as the safest bet right now. A potential downturn, and how it may affect various markets, was also a major topic of discussion.
In New York, panelists said buyers' and sellers' expectations are still out of step, and land costs make it almost impossible for many ground-up projects to pencil out.
Greystone Capital Advisors President Drew Fletcher said it has been a long time since buyers have been able to get land for a price that would justify a ground-up multifamily development.
“Sponsors and developers have been trying to get creative in how they structure their transactions … We've seen a lot more joint ventures with landowners, a lot more ground leases,” he said. “Building a project ground-up is really, really difficult in this environment because sellers haven't adjusted their expectations. They are still basing their benchmarking value based on where land was trading for condo developments three years ago.”