DALLAS — Although many saw a capital markets downshift during the latest economic downturn, other commercial real estate players embraced the opportunity to get creative and think outside of the banking box. The slowdown created an opportunity for private capital to step in, noted Mike Jaynes, president of HALL Structured Finance (HSF). GlobeSt.com reached out to Jaynes to discuss why many CRE developers have turned to nontraditional financing during COVID-19.
“Some banks have put their construction lending program on complete pause, while other institutions have pulled back,” he said. “They’re more conservative in the way of overall leverage and product type, as well as favoring major markets versus secondary ones.”
When institutional lenders retreat in the face of increased risk, the private capital market steps forward with their eyes on greater reward. Nontraditional lenders provide more options to CRE investors of limited wherewithal and track record, as well as a faster, more nimble approach in a tighter market.
“Private lenders typically offer an overall larger percentage loan-to-cost while also being flexible in terms of structure, pricing and timing to meet customers’ goals,” Jaynes said. “Our focus is not just on primary markets, but also developers that may have a great opportunity in a secondary market.”
“Hotels, restaurants and various retail property types were “hit so hard” during the pandemic, requiring a lot more time to stabilize,” said Jaynes. “It’s natural for big banks to avoid those asset types, but there are always exceptions, and there’s plenty of success to be found outside of conventional wisdom,” Jaynes noted. HSF, which has proven itself adept at reviving stalled CRE projects, plans to fund $600 million in construction loans this year for multifamily and hotels, as well as bridge loans for existing hotels.
In effect, nontraditional financiers further market meritocracy over majority opinion and asset class-based categorization. “With a contrarian mindset,” says Jaynes, “private lenders can look at a lot more projects and evaluate opportunity rather than type, including locational fundamentals.”
He added, “As a result, private lenders always do very well in economic downturns, focusing heavily on the current opportunity – is it a well-conceived project and in a good long-term market?”
Instead of trying to make a deal fit its lending requirements structure, nontraditional financiers structure their offerings to fit the opportunity at hand. When the beaten capital path looks, well, beaten, and institutional lenders seek safety in numbers, private lenders are the bold, independent SUV seen in the commercial going off-road for better views while staking against the status quo.