Traditionally, commercial real estate borrowers have been limited to approaching institutions like banks or individual lenders as sources of capital. This year, increased reserve requirements and risk retention rules within the commercial mortgage-backed securities (CMBS) industry have forced many traditional institutions to limit their capability to provide commercial real estate loans for the construction of new properties, refinancing of existing loans or any other forms of debt. The introduction of these regulatory constraints, combined with an increase of loan maturities over the next 18 to 24 months, will create a need in the market for alternative sources of capital.
As a result, to keep up with the demand for capital, new lending options, including increased market participation by non-regulated lenders, have become more readily available and popular sources of capital. Recently, the market has turned toward technology and, in particular, marketplace lending, to help bridge the gap between the need for and availability of capital in the commercial real estate industry.
What is marketplace lending?
Online marketplace lenders are entities that raise capital via an online platform and match borrowers with investors who fund the loans. The online marketplace lender sources, underwrites, and services the loans, all while marketing the loan to investors for funding. The lenders set the rates and terms of the loans they originate, making them competitive with the larger marketplace.
While technology is an integral component of marketplace lending for commercial real estate, the business itself relies on industry expertise and experience. It is important that a marketplace lender's platform is backed by a solid team of commercial real estate finance professionals who possess years of experience in underwriting loans, creating solid investment opportunities that fit the needs of the borrowers and investors alike.
What’s in it for the borrowers?
Many of the commercial real estate borrowers searching for capital from non-traditional lenders, like marketplace lenders, may not be able to source debt from traditional lenders (e.g., banks) for a variety of reasons. Marketplace lenders open opportunities for these borrowers by bringing alternate and previously untapped sources of capital (via individual, accredited investors) to the marketplace—all of which are accessed through technology-driven platforms, creating a streamlined, faster and more efficient process.
What’s in it for investors?
While online marketplace lenders offer borrowers much-needed access to capital, there are substantial opportunities for investors. Through these platforms, investors are offered direct access to a wide range of commercial real estate debt at varying rates of return on investment opportunities secured by professionally-valued commercial real estate. More often than not, investors receive fixed income returns that are highly competitive with, or surpass, other available fixed income investment options.
Now’s the time
Marketplace lending has been successfully deployed in several debt markets, including student loans, credit card and small business debt. But it has yet to substantially impact the commercial real estate debt market. Compared to the other debt markets, there is significant opportunity—to the tune of nearly $3 trillion—for debt financing and investor participation in the commercial real estate market.
Combined, the large opportunity for investors and the demand for more capital by the industry create a need for marketplace lending in the commercial real estate space. Over the next several years, the industry will likely see increased adoption of these platforms, resulting in a shift in the fundamental way that commercial real estate finance operates.
Gary Bechtel serves as president of Money360. Prior to joining the company, he was chief lending/originations officer with CU Business Partners, LLC, one of the nation’s largest credit union service organizations (CUSO).