Bank Collapse: Navigating the Future of Lending and Opportunities
With 270 billion in commercial real estate loans set to expire this year, there are many questions about what’s next for commercial real estate. Especially with the recent failures of SVB, First Republic, and Signature Bank, the question remains what is next for the commercial real estate market (Apartments would be included in that). We are not an economist. We do keep up with some of the latest news and regularly speak with movers and shakers in our markets.
Bridge Loans
One of the principal loan categories that are at the most risk is Bridge loans. What are bridge loans? Bridge loans are short-term loans meant to stabilize properties. Many of them have floating rate debt and were able to take high LTC (loan-to-cost) loans out. So, they would take the purchase plus the work and 70-85% of that. They mostly valued how the property would be performing in the future. Since rates increased so fast, many of these properties are now bleeding cash due to a lack of debt coverage; some even have higher loans than they are valued today. Some of these loans are now coming due. They will either have to sell for a big hit, refi, and bring money to the table, or get foreclosed. So, it will be interesting to see how that plays out.
The data
Based on the data gathered in the OKC metro of large apartment complexes in the last 3 years that have sold, about 25-30% of them either have loans coming due (12-18 months) or have bridge debt and/or floating interest rate. We don’t see colossal distress coming from this, but there will be good a good chunk of owners that need to make a serious move soon.
Regional Bank Lending
There is some concern in the market that the hit to regional banks will limit access to capital. This is something we are watching but have less worry of. Most of the loans we are doing on our acquisitions are Fannie/Freddie loans which have the best-fixed rate and other terms and are backed by the federal government. We can do these loans for most of our investments because they are cleaner deals with higher occupancy with meat left on the bone. It will be interesting to watch what happens with regional bank commercial real estate lending in the coming months.
How JB2 prepares
Ultimately all this doesn’t change how we do things much. What happens with rates will impact how egregious the distress out there will be. All of our debt is fixed for years into the future. We are focused on tightening our operations to work as efficiently and effectively as possible. We continue building relationships with our investors to take advantage of the opportunities that present themselves. The fact that we are focused on operations and better systems/processes at this time will put us in place to quickly absorb new deals when we take them on. We also spent the last few years intimately getting to know our markets and the asset class and building strong broker relationships that we should be ready to take on what’s to come and much more.