Many new and renewed forms of alternative lending have emerged to supply the necessary financing for commercial real estate projects nationwide — some of which appear to be quite inexpensive. Although the additional capital is much needed and the terms may seem compelling, mortgage brokers should take care to scrutinize these
opportunities. Rising interest rates and the maturation of the real estate cycle may make these financing
options seem less compelling to your clients.
Savings and loan (S&L) institutions, also known as thrifts, dominated the commercial real estate
financing industry until the S&L crisis of the 1980s and 1990s, when thousands of thrifts failed nationwide. The modern CMBS market — which involves pooling mortgages and issuing securities backed
by the revenue streams from those mortgage pools — was born from efforts to liquidate the assets of
The CMBS structure was employed to pool large numbers of mortgages into a single issuance. It also
was designed to address the sheer number of mortgages that needed to be processed, as well as transfer
risk from the lender to the bondholder. In the subsequent decades, CMBS financing seemed to have
structural advantages to protect both the borrower and the lender.
In the past few years, CMBS financing has begun to regain footing in the lending landscape, although
new rules are in place. The originator and securitizer of the loan has to retain “skin in the game,”
meaning that they must hold onto some of the loan risk. Despite this regulation, CMBS issuance in the
U.S. exceeded $87 billion in 2017, up 27 percent from 2016.
Many investors agree that volume is likely to be slightly lower in 2018, however. Although the market
has adapted to the risk-retention rules, sourcing new loans could become a bigger challenge as industry
growth slows. The credit quality of new loans also could be compromised by decreasing property
values and rising capitalization rates.
These factors could lead to a decrease in the overall quality of CMBS issuances. Lenders that originate
and retain a piece of the CMBS issuance also may face challenges this year. If the market reaches capacity and lenders are unable to sell the pieces they hold, they could face liquidity issues.
Debt and alternative funds
Debt funds, often backed by foreign investors, are starting to play an increasingly important role in
the alternative-lending space, offering bridge and mezzanine loans for borrowers who seek more
permanent financing. North American-focused private-equity real estate debt funds raised $18.3 billion
in 2017, nearly double the $9.9 billion raised two years earlier. Much of this financing is coming from
foreign lenders, who have a lot of dry powder, or cash reserves, they are looking to deploy.
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quality of new
loans also could