Well-capitalized commercial real estate debt funds have been increasing their repeat business with high-quality borrowers in the US market since the start of the pandemic.

The phenomenon was evident prior to the outbreak of covid-19. However, it accelerated in the early days of the pandemic as some segments of the commercial real estate lending market worked to shore up the liability side of their balance sheets and were less active, thereby opening the door for debt funds.

“There are high barriers to entry in terms of bringing on new clients and
I think the pandemic opened up the ability to access new client entry points,” says Michael Lavipour, managing director of investments at New York-based manager Square Mile Capital. “A lot of what we did in the third and the fourth quarter of 2020 was picking up new clients while others might have been restructuring from margin calls or other issues.”

Growth market

Part of the firm’s ability to expand its client base is tied to a move to grow its lending platform to include construction, value-add and stabilized financing across different segments of the market, Lavipour says.

There is another factor supporting the increase in repeat business – large institutions want fewer, more meaningful relationships, says Jason Hernandez, head of US real estate debt originations at investment manager Nuveen Real Estate.

“Our clients want to work with companies that can give them multiple offerings,” Hernandez tells Real Estate Capital USA. “We’ve done a lot more with the big groups where we can buy from them, sell to them, originate loans with them or bring them in as an equity partner.

“This game is all about scale and the quickest way to get scale is to create repeatable, reliable investment processes and counterparties.”

Being able to provide clients with a full slate of lending products is another way to make it easier to establish a deeper relationship.

New York-based KKR Real Estate, which has expanded its debt product offering over the past year so it can provide a wide range of loans, also sees a practical part of these relationships for buyers and sellers.

“You’ve got loan documents already in place with existing clients,” says Matt Salem, partner and head of real estate at KKR. “These are hundred-page loan documents, and you can use a lot of the infrastructure and have negotiated many of the hot buttons already, which means that the probability of success is much higher.”

Deeper relationships also mean stronger relationships, says Jonathan Roth, co-founder of balance sheet lender 3650 REIT.

“If you are the decision maker and you have lived through multiple cycles, you have been left at the altar several times,” he says. “The reality is that you want to go where there is a reliable source of capital and you can pick up the phone and have a conversation about real life issues.

“We are seeing that borrowers will pay up for that relationship, to be able to make that call and get an answer and not have to go through layer after layer of bureaucracy to get that decision.”

Full-service lending

ACRES Capital, a Westbury, New York-based mid-market specialist, has expanded its lending platform over the past year by growing its value-add and construction lending business through the acquisition of the management contract of Exantas Capital Corp. Exantas, now ACRES Commercial Realty Corp, added bridge and permanent financing to the firm’s range of lending options.

Mark Fogel

“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,” Mark Fogel, president and CEO of ACRES, tells Real Estate Capital USA. “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 stabilization.”

Fogel notes that this broader shift toward full-service lending is similar to the services that commercial banks used to provide. “It’s a customer-focused, end-to-end solution from value creation to stabilization and like what we used to see in the old days from banks,” he says. “Banks can’t really do that anymore, but we are stepping into that space.”

Experienced sponsors wanted

While borrowers are seeking well-capitalized lenders, the lenders are also seeing experienced sponsors.

“We are looking for experienced sponsors with a strong business plan,” Fogel explains. “I won’t look at a deal where someone needs to refinance an office building where they are highly levered and there is no understanding of where that building will play in a particular market on a go-forward basis.”

Jeremy Beer, chief financial officer of CP Group, concurs that as a borrower it is important to be able to demonstrate a strong track record. The Boca Raton, Florida-based investment company, which was formerly known as Crocker Partners, has around 14 million square feet of space under management in the Southeastern US and focuses primarily on office properties in markets that it believes have a strong outlook.

Lenders are often showing a preference for known properties with in-place income that are being operated by a strong sponsor, Beer says.

This was the case when CP Group was in the market for financing for its recent acquisition of One CNN Center in downtown Atlanta, carried out via a joint venture with funds managed by Miami-based Rialto Capital Management. Beer notes that the partners favored the property because it is a critical workspace in a core location.

“In debt fund investment committees, it’s easier for someone to get a deal through when the property and the operator are known quantities,” Beer says. “From our perspective, the lender is looking at a CP Properties deal, at a loan that is in a perimeter market of Atlanta and is a known asset – it’s very easy for an investment committee to understand.”

One-size-fits-all strategy

The strategy is also being seen for boutique lenders.

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, says Perry Freitas, managing director.

“We have always been an active bridge lender but have seen that space become more active and competitive,” Freitas tells Real Estate Capital USA. “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 is a natural extension to what we have been doing.”

The company lends nationally, and Freitas hopes the FHA product will give Hudson Realty an edge as it looks to expand its footprint 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 says.

The pandemic has made it more important for the firm to be able to lend throughout the capital stack, he adds: “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.”

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 and longer-term loans.

The pandemic has 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 further afield. “Construction lending doesn’t currently fit in our core program but might be an area we want to explore,” Koelliker says.

As lenders seek to enhance their client relationships, the thinking is that there will be further additions to their suites of lending products in the near term.