Innovative Financing Programs Offer Owners New Options in the Current Capital Markets Environment

March 2024

Capital Availability Continues to Shift in Favor of Nontraditional Capital Providers

Over the last twelve months, commercial real estate industry headlines have focused on tighter capital market conditions and the struggle many owners have faced in obtaining loans, especially for construction projects. At the same time, equity has become more difficult to source over the past year as negative occupancy and rent growth headlines have elevated perceived risk levels for many equity investors. The good news for owners is that some capital providers have rolled out innovative lending programs in recent months to accommodate market demand and elevated refinancing volumes, thereby helping to fill voids caused by pullbacks from equity and traditional bank financing. In addition to nontraditional capital providers, select regional banks continue to lend against certain asset classes on advantageous terms.

Life Companies Extend Capital into Construction and Pre-Stabilized Bridge Programs

In recent months, there has been a pivot among life insurance companies as they continue to see demand for construction financing and, in response, they have rolled out new loan programs to meet that need. Additionally, life companies have begun lending against multifamily and self-storage assets that are not yet stabilized but are expected to achieve full stabilization over the short term. For owners interested in life company financing, it is important to note that some life companies partner with non-bank lenders to market the program. For example, our team conducted a survey and identified a capital provider that partners with a life company to offer financing on deals that are expected to stabilize within twelve months. They offer programs featuring nonrecourse, fixed-rate debt in the high 6% range with full-term interest-only options and flexible prepayment terms.

Debt Fund Managers are Pursuing Growth as Bank Volumes Remain Muted

Debt funds have become more significant capital providers in recent years as fund backers continue to be attracted to the idea of filling the financing void left by the pullback among traditional banks. Debt fund managers are aware of the massive volume of loans scheduled to mature in 2024 and the additional large amount of debt that will come due in 2025. As a result, debt funds are likely to continue increasing the amount of capital deployed in 2024 compared to prior years. While debt fund capital may be priced higher than other sources, programs have been rolled out in recent weeks that offer aggressive leverage levels and are available to finance deals where traditional financing is more difficult to obtain. One newer program is offering mezz and pref equity financing on ground-up construction and value-add self-storage projects at up to 85% leverage with the ability to close on aggressive timelines.

Bank Capacity Shows Bright Spots Amidst Broader Constraints

During the first quarter of 2024, banks have continued to shy away from funding construction projects due to concerns about the volume of construction debt outstanding across the sector. At the same time, many owners have steered away from taking on bank debt because of deposit requirements that must be met to secure funding. Although regional banks have made headlines over the last year because of ongoing struggles, a few lenders are providing capital in specific markets. Our team has been working with a regional bank that recently merged with another institution and is actively seeking to lend against stabilized multifamily and self-storage assets. Additionally, limited recourse bridge loans are available on non-stabilized assets, and a construction loan program is expected to go live in the coming months. Meanwhile, an international bank is offering fixed rate, non-recourse, 2-3 year pre-stabilized bridge loans in the $30-$75 million range secured by industrial, multi-family, self-storage, and select retail assets.

Final Thoughts

In recent months, lenders have rolled out a series of nontraditional loan programs to meet market demands and fill some of the capital voids the industry has been struggling with since early last year. Now is a great time for owners to understand the diverse range of available capital solutions and reassess all the existing financings within their portfolio. Early exploration can yield significant benefits, including the ability to lower portfolio financing costs, successfully execute business plans, and position the portfolio for future growth.