The non-bank lender offers an alternative approach to earning CRA credit and eliminates balance sheet risk and full-service business lending expenses.
The biggest CRE market opportunities every investor should know
David A. Cohen, a leading national bridge lender, shares the biggest CRE market opportunities and challenges he sees this year in value-add real estate, from more traditional multifamily to creative examples of adaptive reuse. This is a unique glimpse for sponsors into the value-add lender's mindset.
David A. Cohen is a Managing Director at Ready Capital and serves as the Chief Production Officer and Co-Head of Bridge Lending. He has a unique perspective on the biggest opportunities for sponsors in commercial real estate (CRE). David is both a close follower of market trends from above and of client needs on the ground, leading a team that closed 180 bridge loans totaling approximately $3.7 billion in funding in 2021 alone.
You might say we were interested in what David had to say about how things are looking for 2022.
David, in what area(s) of commercial real estate do you see the biggest business opportunity for CRE sponsors in 2022?
Multifamily continues to be the favored asset type for value-add bridge financing as sponsors continue to purchase multifamily properties that are in need of capital improvements to create an upgraded and desirable living environment, to enable them to increase rents to “market.” In a similar way, industrial assets — whether large distribution facilities or smaller localized warehouses with flex office space — are also a predominant asset type for value-add bridge financing as industrial assets are contributing to a dynamic growth trajectory, especially driven by increasing e-commerce and particularly the last-mile delivery of goods.
I’m glancing at a list of top investment strategies for 2022. Rental housing is right there, and that’s precisely what we’re here to discuss. What are the top benefits of value-add real estate investing ?
The multifamily tailwinds should continue when observing the tenant’s desire for a suitable and affordable living and/or live-work environment in combination with a general housing shortage and ownership affordability factors. The reality is that there is a secular need for housing in the United States as the current housing stock just doesn't cut it. As an investor, this creates a supportive environment for all housing development projects and notably for multifamily, value-add deals. Sponsors with a strong business plan and the right financing partner can invest successfully in this market.
What is the biggest challenge you anticipate in 2022 as a direct lender in commercial real estate?
With the changing markets, the constant challenge is to consider which transactions to provide bridge financing for. We consider each deal with a myriad of factors, including the headwinds, the sponsor’s experience with the asset type and market, the credibility of their business plan and the tangible attributes of the property. We aim to ensure that the market and property metrics — basis and tenant absorption, among other metrics — coincide with the sponsor’s exit strategy and a lender’s assurance of exiting a loan with debt metrics (such as debt yield) in that particular market. The strength of our value-add bridge lending program is that it provides a sponsor with a loan structure and capitalization that matches up well with their value-add business plan.
What is your company’s lending or debt placement strategy for 2022? Are there any new lines of business or opportunities that you are pursuing?
As a national value-add lender, we have the ability to bring multiple lending products to our clients and provide bridge loans that offer floating-, fixed- or hybrid-rate alternatives to match a sponsor’s optimal loan structure. Moreover, we combine that approach with our ability to offer creative loan structures to accommodate a sponsor’s business plan. We are seeing and executing more complex transactions, such as adaptive reuse projects, especially with retail-into-industrial, hotel-into-multifamily and select other conversions. Since we consider each opportunity on its own merits, we will continue to offer alternative and opportunistic loan products as the markets change.
The opportunity in adaptive reuse projects seems huge. Are some sponsors proving to be better equipped to execute these sorts of deals?
We have been seeing some exciting, imaginative adaptive reuse projects. For example, our team has seen deals converting hotels and industrial buildings into multifamily properties, resulting in tremendous increases in profitability for the sponsor. These projects tend to be more complex than value-add deals that do not include the adaptive reuse component. Sponsors typically face unique issues with construction, zoning and a range of other concerns that materialize only in a conversion project. In our experience, not all business plans have an equal chance of success, so an adaptive reuse project, with increased complexity, puts even more pressure on the sponsor to chart a winning course.