Skip to content
a low angle view of a building

Niche Real Estate Lending in a Volatile Debt Market

Nov 14, 2023

EisnerAmper recently hosted a discussion with a private commercial real estate lender based in New Jersey, to discuss volatility in the debt market and the role alternative lenders are playing as traditional commercial mortgage lenders become choosier with how to deploy their capital.

Higher interest rates and tougher underwriting standards have made it increasingly difficult for borrowers to finance property development and repositioning strategies, as well as refinance existing debt. Banks, traditionally the largest lender to the real estate sector, have largely pulled back their origination volume. Private lenders are filling this gap.

Alternative lenders typically originate commercial and multifamily bridge loans that fund property redevelopments or provide short-term capital until the markets settle down. These types of loans are meant to be an interim solution for borrowers and are usually repaid through the borrower’s refinancing of the debt through more traditional sources or disposition of the underlying property.

Focus on Underwriting 

The higher interest rate environment has resulted in a downturn during which property values are falling. Valuation uncertainty is a key driver of the lack of both equity and debt transactions. All lenders must be laser focused on collateral valuation and alternative lenders are no exception. 

Many alternative lenders compete in the market by underwriting deals more quickly than traditional lenders and look for quality properties where they can provide more leverage than banks. To do this, capital providers need to know the markets they are lending into and see the potential in the collateral. 

Of course, not all markets are doing poorly. The multifamily and industrial sectors remain strong in New Jersey and therefore carry less risk for lenders. Financing is still available for many of these lenders. On the other hand, the market for office properties carries many uncertainties as companies look to downsize or move to new spaces to bring employees back into the office. This is creating the potential for further increases in already high office vacancies. 

Irrespective of the type of property and its performance, most real estate is leveraged, and the loans are coming due to the tune of about $500 billion each year. In most cases the borrower will need additional capital to work through the refinance of maturing loans. Private lenders are filling the gap and increasingly providing preferred equity to borrowers, allowing them to keep the property while seeking to refinance. But that financing is expensive. As more and more loans mature and values remain uncertain, alternative lenders will be providing more rescue capital as the industry moves through the cycle.

What's on Your Mind?

a black and white logo

Dennis R. Mascali

Dennis R. Mascali is an Audit Manager with the firm's Real Estate Services group .

Start a conversation with Dennis

Receive the latest business insights, analysis, and perspectives from EisnerAmper professionals.