A need for flexibility and speed has given rise to alternative lending sources, and new lenders are entering the market.
A need for flexibility and speed has given rise to alternative lending sources in commercial real estate. The demand isn’t waning, and it is driving new lending sources to enter the market. In fact, alternative lending sources are expected to rise in popularity through 2019. Some of these lending sources have gained a reputation for aggressive tactics, according to Gary Bechtel of Money360, but there are quality alternative lenders that are poised for long-term growth.
“Borrowers need flexibility and speed in ways traditional lending platforms can’t provide, which gave rise to alternative lenders,” Bechtel, CEO of Money360, tells GlobeSt.com. “As capital demands for alternative lenders continue to grow and as new lenders enter the market, there is a growing reputation of aggressive lending, but it’s important to note that all alternative lenders are not equal. The alternative lenders best poised for longevity uphold stringent underwriting standards that protect the brokers, borrowers and end investors.”
Rising interest rates are helping to drive borrowers to consider alternative lending sources, because these lenders are able to offer more flexible deal structures. “While interest rates are an important aspect of our business, there are more pressing factors that impact the lending space,” says Bechtel. “In particular, alternative lenders are better positioned to offer unique financing structures tailored to the borrower, which is where we are seeing the greatest demand for capital across the sector. Barring any major world events that could impact capital flows around the globe, we don’t anticipate a slow-down of activity in this industry.”
While rising interest rates will help to fuel activity in alternative lending, they are also a sign of a stable economy, says Bechtel. As a result, interest rate fluctuations likely won’t impact the alternative lending space negatively. “Rising interest rates are a function of a stable economy, which lends to stronger commercial real estate value, so as we continue on our current trajectory, we don’t anticipate rates to have a major effect on the business,” he says. “Certain asset classes (retail for example) are heavily dependent on a stable or growing economy, so a dramatic change or shift in consumer confidence impacts certain asset classes more than others.”
In addition to the rise in alternative lending, there has also been an upswing in bridge lending activity. “The bridge space is changing; before, we primarily saw borrowers using the bridge loans for acquisitions, but now we’re seeing more borrowers use bridge loans to make improvements, increase the value of the property and hold onto it long-term,” explains Bechtel. “For that reason, bridge terms have become more fluid, with terms as long as five years becoming increasingly normal. This trend is particularly true in secondary markets outside of Core markets, where you can find real rent/value growth over time. As more borrowers look to this debt vehicle to find better returns, the benefit of having a flexible financing option is attractive, and we anticipate greater demand for the remainder of the year and into 2019.”
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