Non-bank lenders at CREFC say yields have dwindled

Though regulation and volatility have handed more business to non-bank real estate firms, some are finding lower returns then they had a couple years ago.

Though well-positioned in today’s commercial real estate market, non-bank lenders still grapple with shrinking returns in the transitional debt space, delegates heard last week at the CRE Finance Council annual conference in Manhattan.

Marriott Marquis, New York
Marriott Marquis, New York, the site of the conference

Though regulations and volatility among the banks and conduit lenders have allowed non-bank real estate firms to grow market share, some are earning lower returns then they did in recent years, according to the group of private real estate firms on the Alternative Lender Perspective forum.

A CEO with one of the real estate debt platforms said that a transitional loan yielding a 14 percent return two years ago is generating, at best, just a 10 percent return today.

“The chase per yield is getting worse, not better, due to interest rates,” added another speaker, a senior director and head of originations with another firm.

Despite this, 2016 is still a good time for non-banks in the transitional markets, when providing relatively large loans in gateway cities, speakers noted, adding that there’s a sweet spot on senior loans in the 65-80 percent loan-to-value range as banks pull away from higher LTV transactions.

“We stick to the gateway markets because they’re the most liquid, have the most institutional ownership and growth,” one speaker said.

Particularly attractive are office and retail properties, while hospitality counted for only 10 percent of one firm’s deals due to the asset type’s volatility, particularly as the cycle progresses into its latter stages.

“Hotels are a better property to own rather than lend on,” said the executive with that firm.

But, while these non-bank lenders may be picking up a lot of business from the volatile CMBS market, one speaker cautioned that it’s still imperative for his firm to borrow capital from competing banks in order to get the returns he seeks.

“Liquidity on the banking side is also your best friend,” he said.