Rising rates, mismatched pricing and market volatility are all causing dislocations to emerge across the real estate debt space – and warehouse lenders are the latest capital source to feel the impact from the these changes.
Dan Lisser, a senior director at New York-based advisory Marcus & Millichap, told Real Estate Capital USA that it is now more difficult for a lender that relies on a warehouse line to originate loans.
“The whole securitized market – CMBS, conduit, single asset single borrower, and the CLO market, which is primarily the market that that we’re talking about – has seen a slowdown,” said Lisser.
In a less volatile environment, warehouse lines – a short-term destination for loans slated for securitization or sale in the secondary market – would have an advance rate of around 75 percent.
“Certainly in this era of volatility, as pricing and rates have increased across the board, [warehouse lenders] costs to fund has increased,” said Lisser. “So even if you keep your credit margin the same, your base rate has increased, and due to the volatility, the advanced rate [of what used to be] 75 to 80 percent might look more like 65 to 70 percent.”
Many bridge lenders are unable to originate because their warehouses line are full. “They’re unable to monetize the loans because selling them in the market [means] they will take a loss,” said Lisser.
There is a difference in the market between bridge lenders who are not dependent on the warehouse line, or are still able to lend, versus ones that are somewhat constrained due to the limited capital, he added.
“In this environment, their exit or their perceived ability of the borrower to execute on the business plan, and they’re taking a second look at that,” Lisser continued.
The current picture might be bleak but the future is looking brighter. “In the short term, there’s going to be a lot of ‘wait and see’ going on in the market, then they will come back,” Lisser said. “We’re just in a higher rate environment after the 10-year was below 1 percent or 2 percent for a long, long period of time – it has doubled in almost six months.”