those that remain in equity are definitely “a little more finicky.”
None of this is to say that equity has retreated from the
market. For example, David Blatt, CEO of New York City-based
specialty investment bank CapStack Partners, points to a rise
in more equity vehicles, which do not have the traditional insti-
tutional, private equity profile. “These smaller funds are target-
ing the individual investors, which is a hugely growing space.”
WHAT HAPPENED TO THE DEBT MARKET?
Nonetheless, Booth’s story resonates; it’s the flip side to a
larger trend that is dominating the CRE debt and equity markets. The strong flow of financing has become a highly sought-after piece of the capital stack. There is no flight to quality here
and no need to painstakingly educate a skeptical lender,
although underwriting standards have remained fairly intact.
Instead, this is a story about a market flush with new providers
competing for deals, and providing pricing to match.
This trend has had an impact on many segments of the capital stack, including some of the traditional ones such as CMBS.
When all was said and done, CMBS conduit originations
posted a poor showing in commercial real estate lending for
the third quarter. At 14.6%, the category captured the lowest
share of the four major lender types, according to CBRE, and
was down substantially from its 36% share a year ago.
It is a turnaround from the CMBS market’s strong activity at
the start of this year, and the slowdown may be attributed to the
volatility in the equity markets. Indeed, it’s debatable whether
CMBS’ year-end total will meet the $87.8 billion that was origi-
nated last year. Why? In part because growing competition from
other debt providers in the alternative space is taking a toll.
Some hundred-plus of these lenders have come into the
market, according to Preqin. It has found that private real
estate debt funds had a record fundraising year in 2017, and
2018 looks on course to match those record levels, pushing
real estate debt dry powder past $50 billion at the end of 2017
to stand at a record high of $57 billion. It also reported that the
average fund size for the first three quarters of 2018 was $526
million, a record high for the strategy.
These funds are providing bridge and gap financing, and all
kinds of more structured debt, says Brian Stoffers, CBRE
Capital Markets’ global president of debt and structured
finance. In general, borrowers feel as though the debt funds are
a good option, especially when they look at the servicing of
those debt vehicles, which can be more favorable than under
the CMBS architecture, he says. He adds, though, that the new
CMBS loans are being structured in such a way that the
post-closing experience should be better for borrowers.
But most salient of all for borrowers, Stoffers continues, is
that “pricing has come down dramatically with debt funds.
That’s probably because of the sheer volume of their business
and the fact that there’s a lot of equity behind the firms that
want to place money and get decent risk-adjusted returns.”
These companies have lowered their spreads in order to meet
the competition because there is so much supply, he adds.
In fact, it is alternative lenders that are punching far above
their weight. This category, which not only includes debt funds