Evan Gentry, founder and CEO of Money360, believes 2019 will be the year the California bridge lender hits $1 billion annually in loan volume. Money360, which launched in 2014, has been doubling or tripling in size annually despite the entrance of Wall Street hedge funds into the bridge lending space, Gentry says.
“There’s a lot of opportunity in the market,” he notes. “Transaction volume was strong in ’18; we think it will continue to be strong in 2019.”
Money360 is one of hundreds of U.S. bridge lenders that still see plenty of runway at this stage of the real estate cycle, despite growing competition that has fostered a new level of aggressiveness, including higher leverage, lower pricing, no appraisal loans, innovative loan structures and originators willing to lend on non-cash-flowing assets.
This year “was one of our best years, even though it was very competitive,” says Marissa Wilbur, origination associate with Archway Fund, a Los Angeles-based bridge lender that doesn’t require appraisals and allows higher leverage than some of its competitors. “By the end of June, we had hit our (year-end) target goal.”
Still, Archway Fund has found itself becoming more conservative on loan-to-value (LTV) ratios than it was two years ago, now rarely going above 70 or 73 percent leverage where it had previously allowed 75 percent, according to Wilbur. The slightly more conservative stance is due to where the industry is in the market cycle, combined with tight cap rates in Southern California, where the company did about half of its lending in 2018. The fund uses broker price opinions to win deals that need a quick close and advertises an average closing of just five to 10 days. The private lender will close out 2018 with loan volume of nearly $150 million, Wilbur says.
This was also a strong year for Rodeo Lending, a Los Angeles direct lender, according to Principal Rich Katz. Rodeo Lending’s bridge loans range from about $3 million to $12 million on a variety of property types, including office, retail, multifamily and light industrial.
“We grew, and we had a lot of payoffs, which shows there’s velocity in the market; things are moving,” Katz said.
Rodeo’s loan volume in 2018 was up 15 percent to 20 percent over 2017, according to Katz, despite the lender's conservative stance amid growing exuberance. “We’ve been pretty careful about what we are lending on because we think the market is flattening … where some of our competitors have been very aggressive.”
Recent stock market gyrations could encourage even more investment in the space and that could lead to looser standards if lenders aren’t disciplined, he notes. “People are looking for a place to put their money, so it probably will get more competitive,” Katz says. “Some lenders will do some crazy things and when that exuberance starts, that’s when you know you have to be careful. That exuberance has been going on for a little while now and will continue into 2019. We are disciplined and look to do good loans with responsible borrowers.”
A competitive landscape
Zach Murphy, co-founder and managing director of Los Angeles-based Pender Capital, which operates its commercial real estate origination arm from Dallas, says the bridge lender has internally tracked about 150 U.S. bridge lenders that are making loans between $1 million and $20 million and whom it considers to be competitors.
Despite that competition, Pender was successful in bringing on several institutional investors that enabled it to grow its loan volumes significantly in 2018, Murphy notes. In 2017, Pender did less than $50 million in bridge loans, and for 2019 it forecasts $400 million in loan volume. Its 2018 loan volume will fall somewhere in the middle of those figures, according to Murphy.
“We are seeing a lot more players and a lot more capital coming into the bridge space,” Murphy says. “We see that trend continuing, pretty strongly, and I think that will be a challenge for everyone.”
Although Murphy forecasts the sector’s loan volume in 2019 will be on par with 2018, he expects individual lenders could see fewer deals due to new entrants.
Finding a niche
With the influx of capital, finding a niche is one way for bridge lenders to differentiate themselves. New York-based Greystone focuses its bridge lending on two niches: multifamily and healthcare, and promotes its full-service ability, which includes bridge-to-agency lending, says Anthony Alicea, head of bridge lending production. Greystone saw its multifamily bridge volume double and its healthcare bridge lending triple this year to finish 2018 with over $1 billion in bridge loans, according to Alicea.
In May, Greystone and its investors closed a $750 million senior debt fund that will allow it to leverage over $2.5 billion in loan products, including bridge and mezzanine financing. In September, it closed a $300 million CLO backed exclusively by bridge loans on healthcare- related properties, a first in the industry.
Conservative vs. aggressive stance
With the influx of alternative funds, the risk threshold can vary significantly depending on the bridge lender. Borrowers that have a quality deal have nearly unlimited options for funding, while investors with a less-than-stellar project will also find a lender, says Adam Finkel, principal at Phoenix-based commercial mortgage broker Tower Capital.
“Overall, I still see pretty conservative underwriting from the bridge lenders; in fact I’m seeing some back off on leverage in some markets because they are very wary about where we are in the cycle,” he says.
Money360’s Gentry says his company will be borrower-friendly in 2019, yet credit-aware and cautious even as it forecasts a doubling of its loan volume amid high optimism.
“We are seeing standards stretched a little bit, but not anywhere near what we saw in the last cycle,” he says.