Bridge Loans as a Solution to CMBS Maturities
While the CRE loan market has seen positive growth since 2010, the outlook in 2017 isn’t quite as simple. Many of the loans originated in 2007 (just before the financial crisis took hold) are now reaching the end of their 10-year terms, and because of the sheer volume of loans originated that year, 2017 could see the financing sector flooded with CRE borrowers looking for refinancing options. This is the so-called “Wall of Maturities” that has been making people nervous for the past several years; increased demand is already pushing financing rates up.
Unfortunately, the lending outlook in 2007 was particularly optimistic, and many projects that may have had no problem obtaining low-interest financing ten years ago are not generating the levels of income needed to service the higher interest rates lenders are asking for today.
But as traditional CRE lenders may have grown more hesitant about refinancing real estate projects originated during the height of the real estate bubble, new lenders have arisen to fulfill borrower needs; mezzanine and bridge loans are stepping in to fill that gap.
This is particularly the case among distressed assets, where bridge lenders have been able to offer borrowers loans with two or three-year maturities at interest rates of 8% to 12%. Although these loans are being offered at significantly higher rates than longer debt instruments, bridge loans can nevertheless provide CRE borrowers with more cash and lower pre-payment restrictions and fees. Non-recourse bridge loans (in which the ratio of the loan value to the economic value of the underlying collateral can be as low as 50%) are becoming an increasingly popular way to provide short-term financing to distressed assets. While traditional lenders may not be able to address the wall of maturities, bridge lenders and other investors are stepping up to the plate. For many CRE borrowers, bridge loan financing can be an excellent solution.