How the Pandemic is Helping CRE Bridge Loans Make a Comeback

David Cohn
Aug 15, 2021
Bridge Loans

The COVID-19 pandemic has brought about monumental changes in the commercial property lending market.

Now that 2020 is well past us and we’re well into 2021, it’s a good time to look at how commercial mortgage loans fared and what changes borrowers can expect going forward.

In this blog, we’ll talk about the performance of lenders that focus on bridge lending.—what measures they’ve put in place to survive the thick of the pandemic and how their underwriting standards and processes have evolved. These lenders have solid systems for quantifying risk because many of their lending activities involve repositioned and transitional properties.

Overall industry performance

The gist: Bridge lending had a relatively stable 2020 because loan originators relied on fundamental analysis—and lots of patience. It was not surprising that loan originations dipped in the second quarter.

The 2020 4th Quarter Origination Index released by the Mortgage Bankers Association showed that insurance, CMBS, bank, and agency loans plummeted by over 30% during this period. But the bridge lending industry showed relative resilience in the face of the health crisis, pivoting successfully to the new environment.

By summer, loan originations have bounced back to register a 12% increase by the third quarter.

Even more impressively, new loan production posted an additional 75% increase in the last quarter of 2020.It looks like 2021 will also be a good year for bridge loans.

Harbor Group International—a leading commercial real estate investment focusing on apartment complexes for over three decades—sold its first bond recently, backed by construction projects and properties considered riskier.

The company offers Commercial bridge loans for beleaguered apartment-building developers and owners who need short-term funding for repurposing, rehabilitating, or stabilizing their properties.

These borrowers typically need funding immediately while waiting to secure permanent financing lines from traditional lenders like Fannie Mae and Freddie Mac.

Harbor Group International entered bridge lending amid a pandemic while other property lenders—notably real estate investment trusts and debt funds—struggled in meeting margin calls.

The company closed its first bridge loan on apartment complexes late in the summer. It also recently sold a CRE collateralized loan obligation (CLO). The firm plans on becoming a programmatic issuer of CRE CLOs, slating a second deal later this year.

According to a spokesperson from the company, the pandemic was a catalyst for them to enter the multifamily bridge lending market. They sensed liquidity shortfalls for mortgage rights and bridge lenders dealing with many challenges due to COVID-19.

They stepped in to fill a void for some borrowers after Fannie Mae and Freddie Mac decreased the size of their multifamily lending caps for 2021. This development opened up opportunities for bridge lenders to do business in more stabilized and fully occupied properties.

The company adds that the Sunbelt market (the southern US, including California and Florida) is showing a lot of promise as rents grow in these areas.

Capitalization rates are offering higher prices and better returns for Sunbelt apartment buildings compared to pre-COVID numbers. In addition, many people have benefited from unemployment top-ups and stimulus checks, driving better rent collection and occupancy from an operations perspective.

The firm expects strong growth rent and performance in 2021 as the economy comes out of the pandemic, especially in the southwest and southeast part of the country.

Analysis and structuring during COVID-19

Bridge lenders hardly stopped despite the economic fallout from the global pandemic. Instead, they focused on parsing out relevant information and synthesizing evolving data. Some trends:

  • Many lenders implemented a bottom-up strategy for their analysis. It is focused on scrutiny on business plans and tenant credit. They started asking questions like: How would the tenant fare out should there be further prolonged shocks to the local economy?
  • Some lenders now require interviews with potential tenants. They look closely at store sales and collection histories and related data points when dealing with retail tenants. On top of this, estoppels to confirm leases and payments are now being required in many. Bridge lenders are careful not to overstretch; due diligence is more important than ever, and they do reject borrowers that cannot produce what they deem to be critical information.
  • There’s also been a shift in most bridge lenders’ positions regarding market conditions. Less credit is given for improving cap rates, occupancy, or near-term leasing assumptions without substantial support. Deal underwriting is now based largely on current instead of future market conditions. Bridge loan lenders don’t want to get ahead of what is currently going on, but many are willing to adjust their assumptions if conditions improve.
  • Industrial and multifamily properties are still being prioritized. Many bridge loan originators continue to shy away from hospitality and other troubled asset classes, including retail spaces that the stable drugstore or grocery tenants do not anchor. They still do deals involving riskier/less-favored property types, but LTVs were limited to 55% to 60%.
  • Some bridge loan lenders also require “COVID Reserves” these days. They want to see the lender put at least six months (ideally 18 months) of loan payments into a reserve account.
  • Additionally, many bridge loan originators have shortened their loan terms two 24 months (maximum) to mitigate weak recovery risks.

What it’s like to get a bridge loan during the pandemic

It’s still possible to get a bridge loan even during this pandemic. But it’s essential to be prepared if you’re looking to get a bridge loan in today’s environment. Here are some of the things you can expect:

  • Be prepared to come up with additional equity for your project. Market fundamentals are still soft, and if conditions suddenly worsen, a potential leverage reduction of 5% to 10% remains possible.
  • Do your research on various lenders. Find out if they have discretionary control of their capital (as in the case with balance sheet lenders) or if they require the approval of their capital partners.
  • Expect more stringent loan structures in any new bridge loan, given the many uncertainties in the economic environment.
  • Make sure to gather as much information as you can about the tenants of a property. Lenders will thoroughly investigate tenancy, seeing it as a critical factor in this market.
  • It’s not always a good idea to choose the lowest-cost lender. In this down market, you may be better off working with a ‘flexible’ bridge loan lender instead. Timeliness and versatility provide better value for you as a borrower in this climate.

The bottom line

It’s a little bit more challenging to qualify for commercial bridge loan lenders these days, but the good news is that there is ample liquidity.

Best-in-class bridge loan lenders are continuing to fund solid projects even in this challenging environment. As a result, there is optimism that the market will finish more robust in 2021.