Can You Fill That Bank-Shaped Void in CRE?

Main / News - 06/27/2023

Regional banking crisis blocks traditional financing channels but paves the way for non-bank lenders

As seen on ConnectCRE

Scroll down to listen to a discussion of this article: industry leaders providing further insight and a look forward on the rising importance of non-bank lenders in commercial real estate.

Since May gave way to June, many sectors in commercial real estate are heating up in terms of deal flows. When banks are still back in winter with frozen transactions, non-bank lenders are busy filling the void. For them, it might be the best summer since the pandemic.  

“We’ve been very busy,” said Zachary Streit, founder and managing partner of Way Capital, a mortgage broker based in LA. “We have closed five deals in the last three weeks, so it’s great to see the market picking up.” 

Those five deals totaled around $200 million, with one preferred equity transaction and two ground-up build-to-rent deals, one co-living construction deal, and one opportunity zone joint venture into a hybrid build to rent and multifamily deal. “For us, we started to see an uptick in the second quarter. It’s interesting because April was a weak month for transactions,” said Streit. 

“There’s a lot of banks out there that just aren’t actively lending right now because of increased market uncertainty, and that puts us in a really good position because people need us more than ever,” said Steven Sperandio, executive managing director and head of debt & structured finance at RIPCO Real Estate. His team focuses on ground-up construction and bridge financing.  

“No question there is an explosion of deal flow,” said T.R. Hazelrigg, co-founder and president of Avatar Financial Group LLC, a nationwide lender that lends on various property types. “Also not just deal flow, but we are seeing an improvement in the quality of the borrower and the underlying real estate,” noted Hazelrigg. 

He recalled a recent panic call his firm recently received from a client. The borrower took out a loan from a local commercial bank on an industrial building in Park City, UT, and the bank decided at the last minute not to extend the loan when it came due at the end of May. “So, in the next week, we’re going to underwrite a bridge loan, get that sent over to the bank, pay off the initial debt, after which the borrower can turn around and find a new lender,” said Hazelrigg. 

With the recent regional banking crisis, cases like that happen more often.  


“Due to a couple of bank failures, a lot of the community banks are trying to shore up their equity positions, and you don’t do that by expanding your portfolio. You do this by retracting your portfolio” 

T.R. Hazelrigg, Avatar Financial Group LLC


For the banks that are still lending despite the industry turmoil, a stricter underwriting process is being implemented. 

“Most of them are not writing non-recourse loans anymore,” said Streit. “They’re looking for full recourse on deals they do. They are also looking for depository relationships in addition to full recourse to shore up liquidity on their balance sheets.” 

“In the last 30 to 45 days, we’ve definitely seen an increase in activity on our side,” said Chinmay Bhatt, senior managing director of JV Equity and Structured Capital at Berkadia. “And in talking with a lot of our experience clients across the country. They’re also seeing more deal flow coming to them.” 

Bhatt said there is a big increase in experienced developers or owner/operators reaching out to his team for assistance with identifying equity partners because their go-to sources may be on the sidelines. 

However, with the long-awaited deal boom, there are challenges that come with it.  

For us, the biggest challenge we’re finding in today’s market is, even though we’re seeing an increase in opportunities being presented to us, when we underwrite the project and dig into the information, most of the deals that we’re looking at are not going to be a fit for institutional equity partners,” said Noam Franklin, managing director and head of Eastern US, JV Equity & Structured Capital Group at Berkadia.  

For Berkadia, more than half of the business historically has been raising equity for ground-up projects. The other half has been arranging equity for existing multifamily products.  

“What we hear from institutional equity is that a developer needs to be building to at least a 6-percent untrended yield on cost, depending on where they’re building,” Franklin added, noting a gap between the expectation and reality budgeting the cost of land, labor, and financing, resulting in deals not being penciled out during the underwriting process.

Close to $1.5 trillion of US commercial real estate debt will come due for repayment before the end of 2025, according to a recent estimation from Morgan Stanley. With that gigantic debt looming, borrowers reacted in different ways. Some choose to pretend and extend and look for bridge financing, and some seem to have adopted the position that a new reality is here, and they need to face it.


“I’ve never seen a better opportunity than exists right now for distressed lenders and distressed investors.” 

Adam Friedman, Olshan Frome Wolosky


“I’ve never seen a better opportunity than exists right now for distressed lenders and distressed investors,” said Adam Friedman, partner at New York-based law firm Olshan Frome Wolosky, who has been working in distressed real estate space since 1993. “There are these huge distress signals that are happening, so we are seeing a lot of non-bank lenders trying to find opportunities. They are looking at foreclosure cases, bankruptcy cases, and CMBS loans.” said Friedman.  

“There is definitely more talk of distress and preferred equity than there ever has been,” agreed Streit. With many conversations around revaluation and restructuring, Friedman said his team is trying to convince lenders to agree to fair valuation. “I have not seen what I’ll call capitulation or price discovery by the existing lenders. Most of my deals are on extensions right now,” he noted. 

Unprecedented times call for creative financing strategies, one of them being the so-called A-B note structure, where the borrower creates a second loan that stands separate from the new valuation. 

“In the event that things turn around drastically, maybe the lender gets more value out of it,” said Friedman. But to be able to do that, the loan needs to first be right-sized, so the existing cash flow can service a suitable mortgage. Friedman thinks the real question is how long will it take to cycle what he calls underwater assets and repurpose them so that new money and new investors can come in and turn them around. 

Looking into the next quarter, Hazelrigg predicts a continuing dislocation and retrenchment in the conventional lenders and new debt funds arriving in the space. “All borrowers that have debt maturing in the next three years should really start contemplating their options and exit strategies…you can see the storm coming on the horizon. It just hasn’t gotten here yet,” he said. 

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