3 CRE Q&A: Impact of CMBS Market Contraction

Money360 recently surpassed the $100 million mark for closed commercial real estate loans. The company, a leading commercial real estate marketplace lending platform, is experiencing exponential growth due in part to contractions in the CMBS market. Connect Media talked with Money360 founder and CEO Evan Gentry about trends in the industry, and how marketplace lending is filling a void for both borrowers and investors.

Q: Money360 has seen a 100% increase in applications from borrowers turned down by bank and CMBS institutions. Under what circumstances are these borrowers typically coming to you, and how are you able to help?

A: The increase in applications that we are seeing are primarily coming from borrowers who have historically obtained financing with banks or through the CMBS market, yet they are now being turned down by these sources. In many cases, the borrowers have bank or CMBS loans maturing, which creates great urgency to find permanent or bridge financing. They are coming to Money360 because they know we can move very quickly in assisting them with their financing needs.

Q: What distinguishes marketplace lending from traditional bank lenders, and how does Money360 help to fill the void resulting from this contraction in the CMBS market?

A: Traditional bank and CMBS lenders have very stringent underwriting criteria, with much of it being driven by regulators. The terms under which a bank will lend have adjusted to the disadvantage of the borrower as banks compensate to meet the new capital reserve requirements under Basel II, which requires financial institutions to maintain enough cash reserves to cover risks incurred by their operations. At the same time, the CMBS market is beginning to adjust to the Dodd-Frank Act risk retention rules, that go into effect at the end of 2016, which place restrictions on the way these institutions can do business.

Non-bank, alternative lenders are not obligated under the same rules and regulations because they do not pose the same systemic risks that exist when banks and CMBS lenders are more aggressive. As a result of these and other regulations, the lending landscape is certainly shifting to the advantage of non-bank/non-CMBS lenders, which not only serve a broader scope of borrowers, but also tend to produce higher yields for investors.

Q: What role does technology play in filling this void? How are borrowers and investors embracing this new platform?

A: Commercial real estate lending is complicated, and requires significant experience and expertise. We do not believe that human proficiency can be replaced with technology in CRE loan underwriting. However, technology is being used to significantly boost the efficiency of the process. In addition to pricing, we are told time and time again by borrowers that they highly value “speed” in the closing of their loans. Technology allows us to access a lot more data in almost instantaneous terms, and significantly streamline the underwriting and loan processing times.

Additionally, as a marketplace lender, we interface with numerous investors on our platform. We typically close loans with internal funds or a warehouse line, but then leverage technology as we syndicate our loans to our various investors that range from institutional investors, hedge funds, banks, credit unions, accredited investors and family offices.