Bridge lending expected to steadily increase and expand asset classes

Image: Carolyn Franks/Adobe Stock. Article written for The Crittenden Report. Click here to view on The Crittenden Report site.

While the first few months following the pandemic saw a slowdown across the commercial real estate industry, that deceleration was relatively short-lived for many bridge lenders.

Overall and unsurprisingly, multifamily and industrial remained strong and have only seemed to become stronger throughout the pandemic. And while retail, hospitality and office asset classes have been more affected by COVID-19, lenders see upcoming opportunities across each asset class.

With this boom in bridge lending, George Kruse, advisor for Arena Investors, LP, believes the biggest change this year will be the expansion of types of bridge lending deals, with lenders branching out into other “riskier” asset classes.

Bridge lending always changes; it’s a dynamic field,” Kruse said. “Now more people are getting comfortable with the other asset classes, like hospitality, and are starting to branch outside more traditional assets like multifamily.”

Since the market began to pick back up in Q1 2021, more and more lenders have seen an increase in hospitality and retail deals that they anticipate will continue into 2022. Hospitality, in particular, seems strong thanks to the reemergence of tourism following decreased pandemic restrictions in many markets. However, it remains to be seen if business travel will resume to pre-pandemic levels of frequency. 

Holding onto southern markets and low interest rates

As optimism grows for the commercial real estate market, underwriting is expected to follow a similar path, with potential for a bit more flexibility and fewer contingencies for borrowers. Lenders say the main focus in the near future will be refining exit strategies for borrowers.

In addition, lenders are continuing to see Southern markets explode, in large part to the lack of restrictions on businesses related to COVID-19 and other business-friendly legislation. More and more people have also been flocking to Southern areas in the last year thanks to remote and flexible work options. Florida, Texas and other Southeastern states are expected to remain popular for investors going into 2022. As other markets, such as Seattle and Portland, Ore., lift their restrictions, lenders anticipate activity will slowly pick back up in those areas.

While he’s confident the market will continue to outperform and see smooth waters ahead, Ray Cleeman, principal and head of Capital Markets for Pensam, said a change in interest rates may affect the number of deals lenders will see in 2022.

“There’s an interesting confluence of incredibly low interest rates, and those interest rates seem to be the one thing that will dictate what happens in the near term,” Cleeman said. “Low rates have opened up opportunities for lenders, but it’s unclear what will happen if the interest rates are raised in 2022.”  

Mark Jarrell, head of portfolio lending at Greystone, agrees the direction of interest rates would have a significant effect on the industry and hopes interest rates continue to stay low enough to encourage transactions.

“If you get any inflation shock, that will add a chilling effect on demand for financing,” Jarrell said. 

Bridge Lending is continuing the momentum for 2022

For now, more and more investors have become comfortable with bridge loans as a financing option, and lenders are feeling the heat of the demand.

“During COVID, a lot of our bridge lending competition shut down or slowed down,” Jarrell said. “A ton of people have come back, and we’re now seeing new competition emerge that I think will continue into 2022.”

Other lenders have taken note of the additional competition entering the bridge lending scene. Kruse said this growth speaks to the rise in popularity for bridge loans that he believes is set up to last well beyond the coming year. 

“Bridge lending is going to be resilient and always be an option,” Kruse said. “Now, you’re going to start seeing even more bridge lenders since more investors are seeing bridge lending as a viable option.”

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