‘Shadow bank’ CRE lenders expect increased market share, CREFC delegates hear

Top non-bank lenders believe they will continue to pull market share away from a stumbling CMBS market and a bank system mired by existing and pending regulations.

Executives representing several of the top non-bank commercial real estate lenders in the US believe they will continue to pull market share away from a stumbling CMBS market and a bank system mired by existing and pending regulations, delegates heard at CREFC’s High Yield & Distressed Realty Assets Summit in Manhattan yesterday.

“It’s hard to see us not taking more market share,” said one executive on the non-bank panel, pointing to the existence of $130 billion in ‘dry powder’ that investors are looking to pump into property. “That money is on the sidelines and I’m sure people want to put it to work.”

shadow-bankingMade up mainly of debt funds, mortgage REITs and other privately funded vehicles, non-bank (or private) lenders largely escape the regulations of their bank counterparts. The so-called ‘shadow banks’ now make up as much as 15 percent of the total commercial real estate lending sphere, according to data presented at the event. But the executives resoundingly agreed that the figure will grow.

The non-banks continue to benefit from post-crises restrictions placed on banks; they are taking over riskier, higher yielding deals and finding more opportunities to team with the banks on large deals, while attracting top industry talent away from them. Meanwhile, new opportunity for growth exists as the CMBS market continues its months-long stumble. CMBS lenders are finding it harder and harder to price new loans competitively thanks to widening spreads and jitters over upcoming ‘risk retention’ regulations.

“I don’t see how we don’t gain from this,” one panelist said. “If you’re outside of that regulatory environment, you can make more fluid decisions.”

After a slow start to this year, many experts are slashing their yearly CMBS issuance predictions for 2016: last month Morgan Stanley lowered its issuance estimate by 30 percent to $70 billion, and Kroll Bond Rating Agency said earlier this month that it expects as little as $60 billion on the year.

Some CMBS originators are quitting. In one recent example, Redwood Trust threw in the towel last month. Redwood’s CEO Marty Hughes said in a statement that the “challenging market conditions” were worsening and “not likely to improve in the foreseeable future.”

“The escalation in the risks to both source and distribute loans through CMBS, as well as the diminished economic opportunity for this activity, no longer make our commercial conduit activities an accretive use of capital,” he said.

Existing non-bank lenders, including top names in the business like Blackstone, Starwood and Mesa West, continue to lend aggressively. And newer market entrants like ACORE Capital, for instance, continue to grow. By January the private lending platform, launched by four former Starwood executives, said it had already signed up or closed 30 loans for $2.1 billion after setting up shop just a half-year before.

Opportunities continue to exist in transitional and mezzanine lending, where attractive yields still exist; amid the unraveling wave of CMBS maturities, which the CMBS community itself is becoming less likely to refinance; in gateway cities, which remain strong; and also in the secondary and tertiary markets, where good sponsorship has become more prevalent, panelists noted.

But the non-banks aren’t shooing the competition away either. Banks are in a position, whether by choice or not, to team up with the private lenders. And they continue to be an essential source of capital, still holding 40-50 percent of the CRE lending market.

“Most of us are borrowing three-fourths of our capital so we need to be able to access that capital elsewhere,” one panelist said. “We need that side of the market to succeed in order for us to expand.”