Higher Rates, Greater Investor Interest Create ‘Broadened Opportunities’ In Bridge Lending

Volatile capital markets coupled with feelings of uncertainty have led institutional lenders to tighten their capital requirements, and CRE investors are starting to feel the squeeze.

Commercial lending is expected to drop by 38% this year to $504B. This is a far cry from $816B in lending activity the industry saw in 2022, and it is worrying investors across the nation.

While many investors have taken a back seat to the market turbulence, holding on to their assets and trying to weather the storm, others remain eager to get deals done — and some are turning to alternative financing methods, such as bridge lending, to get their projects across the finish line.

“The alternative lending universe has been largely institutional for quite a while,” said Justin Chausse, managing director at Invesco Real Estate. “Alternative lenders provide financing options that are differentiated from banks, life insurance companies and agencies, mostly in the areas of leverage and structure. And we believe there's continued demand for this offering.”

Invesco Real Estate, or IRE, is one of the largest global real estate investment managers in the world. The firm invests globally across asset classes as well as up and down the risk spectrum, from core to opportunistic and equity to debt. It manages more than $90B worth of assets globally.

Chausse said the firm has seen opportunities broaden in the bridge lending space compared to 18 months ago. This is due to a convergence of several factors, but it is largely because of the numerous interest rate hikes.

The Federal Reserve has raised rates 11 times since March 2022. This has affected CRE values negatively through decreased loan coverage ratios, ultimately impacting the flexibility and willingness of debt providers. 

“The banks are focused on managing their balance sheets and meeting regulatory capital requirements, and that has resulted in reduced lending,” Chausse said. “Higher base rates have translated into agency sizing that's reduced loan proceeds, and the volatility of the capital markets has also made securitization less efficient. All of this has combined into less supply, but there’s still ample demand.”

Many owners are choosing not to sell into this environment; instead, they are interested in shorter-term bridge refinancing solutions, Chausse said. 

He added that the risk-return profile in the bridge space is “notably attractive” right now because on the risk side of the equation, the rapid increase in base rates and relative lack of sales have resulted in opacity in commercial real estate values. Being at a lower place in the capital stack with material equity subordination helps insulate on this front, he said. 

On the return side of things, Chausse added that a combination of the rise in the Secured Overnight Financing Rates, or SOFR, with comparatively reduced leverage, improved loan structure and business plans that are often less transitional can make for attractive risk-adjusted returns. 

Market participants with whom Invesco routinely speaks agree that when rate hikes eventually stop, it should lead to a better view on value and decreased capital markets volatility, he said. 

“With that being said, the change in the market has been so rapid that I could see the current bid-ask gap between buyers and sellers persisting for an extended period, as well as investor and lender demand and liquidity continuing to vary greatly based on asset class,” he said.

Despite market uncertainty, the IRE team has remained active in the credit space this year with a focus predominantly on light transition bridge loans for multifamily and industrial properties, as well as alternative asset classes, Chausse said. The firm closed recently on a $136M acquisition loan for a repeat sponsor on an industrial property in Phoenix. 

“We’ve also just closed on a $74M acquisition loan for a repeat sponsor on a multifamily property in the Williamsburg neighborhood of Brooklyn in addition to an $85M construction loan takeout for a new sponsor on a multifamily project in Santa Monica,” he said. “Loan sizes we work with are typically from $30M to upwards of $500M, and we lend on all asset classes, focusing on the top 30 cities domestically.”

Navigating the risks of the real estate market is nothing new to IRE, as the team has focused on building investment programs and strategies that seek a healthy return profile for clients for 40 years, he said. 

“Invesco’s credit platform is essentially an extension of the equity platform, and that allows for relationship-oriented lending with flexible and borrower-friendly loan structures,” Chausse said. 

This article was produced in collaboration between Invesco Real Estate and Studio B. Bisnow news staff was not involved in the production of this content.

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