Trends Watch: Short Duration Bridge Loans
April 15, 2021
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Salman Khan, Founder Stabilis Capital.
What is your outlook for bridge lending?
We’re focusing on senior secured short-duration bridge loans to borrowers who utilize their commercial real estate as collateral for the loan. We believe that this bridge lending strategy has tremendous tail winds, especially for small to medium-size loans. Given that the commercial mortgage-backed securities (CMBSs) and the commercial real estate collateralized loan obligation (CRE-CLO) markets were fairly dislocated in 2020 and remain conservative in 2021 for the types of deals that they will fund, we believe the bridge lending market for niche players will be robust. There is also a strong pipeline that continually replenishes of deals that have some complexity to them, or that need a fast response, or that in some way are not cookie-cutter enough for traditional lenders. We see a substantial pipeline through Q2 at 50-60% loan-to-values (LTVs) and feel comfortable that this pace of deployment will continue through 2021 and 2022.
With the Fed’s policy of liquidity and forbearance, the distressed cycle remains some distance away. However, this is really an all-weather strategy: Companies needing short-term financing that can’t access traditional lenders will always need the short-term bridge solution.
Where do you see the greatest opportunities and why?
While we are agnostic across real estate sectors and will look at all types of real estate collateral, what we feel is the biggest beneficiary of an improving economic outlook is the hospitality sector. Industrial and multi-family have remained solid sectors throughout the COVID-19 crisis while hospitality took a real beating. As COVID-19 fears subside and travel bans recede, hospitality assets should see a surge in demand.
Other sectors that we look at opportunistically are the office and retail sectors. While we are not overly excited about these sectors, we feel that over the next three-to-five years we may see certain segments of these sectors improve and will continue to keep an eye on the opportunity set.
What are the greatest challenges you face and why?
Unnatural exuberance. Having always maintained the mindset of a distressed manager, we have always looked at unnatural exuberance as a precursor to a distressed cycle. As bridge lenders, this same phenomenon can lead to easy access to capital from traditional lenders. This is what we witnessed in 2018 and 2019. While we found plenty to do, there were traditional lenders looking to put assets to work who were willing to provide capital to firms that may not have met their criteria in 2020.
What keeps you up at night?
Our normal state is being worried regardless of what is happening across the market. It is the nature of bridge lending and is a good thing; it keeps us focused on discipline! Pre-COVID-19, the fear was an inverted yield curve and the bond market signaling some sort of downturn. These signals were correct, but the form of the downturn was a global pandemic. Now emerging from the current crisis, we are seeing ample liquidity provided by the Fed and a steepening yield curve. The bond market is signaling inflation, which may force the Fed’s hand and result in rates rising faster than expected. This risk is further exacerbated by the $1.9 trillion fiscal stimulus that has just been injected into a growing economy. A tight monetary policy with rising rates could be in an environment of an austere fiscal policy, where if the Democrats succeed in raising taxes and then lose the Congress in the mid-terms, we go back to gridlock. This could cause a declining stock market and the next business cycle. Such a scenario is a worry, but in reality is unlikely over the next 24 months. Near-term, the issue is high asset pricing, and the risk of creating the next bubble.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper LLP.