Woodbridge Wealth, a Sherman Oaks, Cal.-based alternative financial solutions firm, recently released an eye-opening report on private lenders and commercial credit, as well as the U.S. commercial real estate market.
Woodbridge, which works with financial advisors, family offices, and high net-worth individuals, examined the transition “from traditional, U.S.-based commercial lenders to private ones, such as insurers, venture funds, hard money lenders, and real estate developers.”
While regulation changes and rising interest rates may make commercial credit more widely available in the coming months, the report forecasts that private money will continue to play a significant role in the commercial real estate market.
On the overall commercial real estate front, Woodbridge detailed a trio of major industry “impactors” that are moving the needle in commercial real estate right now:
● The Fed rate hike in June indicates the Fed’s continued confidence in the strength of the U.S. economy, and while it may cause borrowing rates to increase, it could also create a more favorable lending environment.
● The Financial Choice Act that passed the House in June likely won’t make it through the Senate, but some aspects could replace the Dodd-Frank Act. In particular, restrictions on community banks and credit unions.
● U.S. economic statistics also indicate a strengthening economy, as Gross Domestic Product (GDP) growth picked up in the second quarter. The unemployment rate continued to trend downward in April and May, which should boost lending activity.
Shift to ‘Alt Lenders’
InsuranceNewsNet recently took a deeper drive into the report, tracking the more important factors impacting the commercial real estate market with Dayne Roseman, managing director of Woodbridge Wealth. Here’s what Roseman had to say:
INN: What explains the shift toward alternative lenders in the commercial credit space? What’s transpired since the 2008-09 financial meltdown that spurred private lending?
Roseman: Even though the financial crisis is nearly a decade behind us, we are still feeling its reverberations. A few consequences of the financial crisis in particular have made funding from traditional lenders less accessible to commercial real estate investors.
In December 2008, the Federal Reserve lowered interest rates to 0.25 percent in response to the housing market crash. It took the Fed seven years to raise interest rates in 2015, and today, the key interest rate hovers between 1-1.25 percent.
Although higher interest rates make borrowing money more expensive, they are also considered a key indicator of the strength of the economy.
In response to the constraints placed on traditional lenders, a number of private institutions emerged, including insurers, venture funds, hard-money lenders, real estate developers, and foreign lenders. They began providing funding for commercial real estate projects where traditional lenders could not.
INN: What are the most intriguing private lending “impactors” on commercial credit and real estate you found in your report, and why?
Roseman: Private lenders benefit from unique advantages that allow for greater flexibility than traditional lenders have, even as the lending environment becomes more favorable. A key difference is that unlike banks, private lending does not involve systemic risk.
A key lesson of the financial crisis is that large, traditional institutions are not “too big to fail.” Their collapse had a significant negative economic impact and required a bailout from taxpayers. Private capital, on the other hand, is better equipped to absorb the shock of an event like the bursting of a real estate bubble.
INN: What impact will new regulations (presumably relaxed under Trump) and Fed rate policies have on private lenders in commercial credit space, and why?
Roseman: Our report explains that while it is unlikely that the Financial Choice Act (the House bill to repeal and replace Dodd-Frank) will pass the Senate, some aspects of it will most likely replace Dodd-Frank down the line.
This would ease some of the restrictions on banks that initially created an opportunity for private lenders to gain prominence. As mentioned above, rising interest rates should also encourage traditional lenders to broaden access to funding.
That being said, just because the traditional lending environment may become more favorable, we don’t expect private lenders to go away. Rather, we expect to see investors choose from a wider array of funding options based on which is most appropriate for each project.
INN: What is the “downside” risk of companies seeking credit in working with overseas private lenders right now, and why?
Roseman: In many cases, overseas lenders from countries like China have facilitated development where U.S.-based commercial lenders could not. However, investors seeking funding from these sources should be aware of the risks associated with them.
Many overseas lenders currently view the U.S. as a safe harbor compared to the real estate markets in their own countries, but this could change should their countries pass new policies that would make them more comfortable investing in their own markets.
This would create complications for REITs especially, which are dependent on reliable lease renewals and rental payments.
INN: What impact is China having on U.S. commercial real estate? Where are borrowers getting their financing for U.S. coastal properties — private or traditional commercial lending, and why?
Roseman: We are seeing most overseas investments coming from private lenders – a mix of individuals and institutions like real estate developers, private equity firms and insurers. While individuals are more likely to invest in residential real estate – to provide additional income or provide a place for their children to live in the U.S. – institutions are more drawn to commercial real estate.
Overwhelmingly, Chinese lenders are investing in real estate in New York, San Francisco, and Los Angeles.
INN: What is your outlook for private/alt commercial lending market for the next year or so? Bullish? Bearish? What are the key impactors going forward, and why?
Roseman: As mentioned above, we believe that private lenders are here to stay, even if traditional lenders become more dominant in commercial real estate. Political uncertainties are running high right now, including whether proposed legislation to loosen restrictions on financial institutions will be passed, and when.
Despite numerous signals that the U.S. economy continues to improve, the memory of the financial crisis still weighs heavily.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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