Why more US mid-market lenders are becoming one-stop shops

Debt providers including Hudson Realty Capital, ACRES Capital, Archway Capital and M360 Advisors have expanded, or are looking at ways to grow, their product offerings.

US commercial real estate mid-market debt providers are expanding their lending platforms to accommodate a greater number of financing solutions for borrowers.

Lenders that spoke to Real Estate Capital believe the shift is both logical and practical. The impact of the covid-19 pandemic means sponsors that might have turned to a relationship lender for a loan on a stabilised property might now need a shorter-term financing solution from an alternative source.

In addition, a larger product offering generally means robust relationships with sponsors, noted Mark Fogel, president and chief executive of ACRES Capital.

ACRES, a New York-based mid-market lender, expanded its value-add and construction lending business into bridge and permanent financing via the acquisition of the management contract of Exantas Capital Corp, a publicly traded mortgage real estate investment trust, subsequently rebranding the REIT to ACRES Commercial Realty Corp.

As a balance sheet lender, the firm believes the ability to offer a one-stop shop is a key part of its produce offering, Fogel said.

“We are heading toward a strong year of originations for both businesses because we are able to offer a one-stop solution by introducing bridge loans and permanent finance,” Fogel told Real Estate Capital. “We can now provide a permanent loan solution with more flexibility than a commercial mortgage-backed securities or agency loan. It also makes sense in that you are dealing with the same people from dirt to stabilisation.”

Adding an FHA platform

Hudson Realty, a New York-based mid-market specialist that lends nationally, had a similar line of thinking when it announced a new platform to originate multifamily loans insured by the Federal Housing Administration. The boutique lender is active across all the major real estate asset classes and believed that an FHA platform would allow it to be a true one-stop shop, said Perry Freitas, managing director.

“We have always been an active bridge lender but have seen that space become more active and competitive,” Freitas told Real Estate Capital. “We began exploring other debt products and FHA jumped out at us. We have never been able to provide long-term permanent financing, which has real synergies with bridge financing. It’s a natural extension to what we have been doing.”

The jump to originating FHA-insured loans was relatively smooth given the firm has an in-house institutional underwriting and servicing business and its hiring of senior executives that specialise in this part of the market from X-Caliber Capital, Wells Fargo Multifamily Capital and Bonneville Real Estate Capital. The firm also acquired Greater Southern Realty Capital in late 2020 as part of the push, Freitas said.

The pandemic has made it more important for the firm to be able to lend throughout the capital stack. “We are also seeing short-term multifamily investors pivot into longer-term holdings and the ability to offer bridge and permanent financing follows that trend,” Freitas said.

The company lends nationally, and Freitas hopes the FHA product will give Hudson Realty an edge as it looks to expand in fast-growing markets in the Southeast and Texas. “We are looking to expand that further and go into new markets where we haven’t traditionally been active,” Freitas said.

Demand for longer-term strategies

In addition to diversifying its product offering for borrowers, Los Angeles-based Archway Capital believes there is investor demand for longer-term debt strategies. The firm, historically focused on senior bridge lending, is now originating first mortgages, mezzanine debt and preferred and co-GP equity through a new $150 million platform, Rockford.

The initiative has been in the works for more than two years, with Tom Noble, senior vice-president and chief operating officer, telling Real Estate Capital that the mid-market lender wants to tap into what it saw as an illiquidity premium in different parts of the capital stack.

Archway targets value-added and opportunistic acquisitions and recaps of transitional assets, working through a series of open-ended funds, joint ventures and separate accounts. A key difference to its bridge platform, however, is that the Rockford platform will not have regular distributions, given the nature of the investments, Noble added.

Bigger picture, more sponsors want to have a flexible relationship with lenders, according to Matthew Koelliker, president of M360 Advisors. The mid-market bridge lender has tracked a jump in demand for both transitional loans and permanent loans. The covid-19 pandemic meant that the pool of borrowers seeking transitional capital has risen steeply. As a result, the company is now looking at launching a core lending product for small to mid-balance loans and could even look farther afield.

“Construction lending does not currently fit in our core programme but might be an area we want to explore,” Koelliker told Real Estate Capital.

ACRES’ Fogel noted that this broader shift toward full-service lending is similar to the services that banks used to provide.

“It’s a customer-focused, end-to-end solution from value creation to stabilisation and like what we used to see in the old days from banks,” Fogel said. “Banks can’t really do that anymore, but we are stepping into that space.”