Bridge Loan Demand Surges as Economy Recovers

March 23, 2021

Like everything else in 2020, commercial real estate investment slowed to a snail’s pace in the spring and early summer. Naturally, the uncertainty of how owners of multifamily buildings and senior housing centers would manage the logistics of the pandemic and economic shutdown made investors wary. But by the fourth quarter of 2020, investors began to return to commercial real estate. Experts are optimistic and anticipate a resurgence of investment in 2021.

“Some of this optimism comes from the perception that there’s a light at the end of the tunnel,” says Mark Jarrell, head of Greystone’s Portfolio Lending Group. “We’re not as in the dark about what’s happening, such as what it will cost to operate senior housing post-COVID-19. Things have settled down in the multifamily space, too, especially in the secondary and tertiary markets where garden apartments in particular have survived well.”

During this transitional phase in CRE investing, a bridge loan that offers flexible short-term financing to investors before they switch to a long-term financing option may be particularly valuable.

“Bridge loans basically represent the financing of people’s hopes and dreams,” says Jarrell. “People buy commercial real estate because they see something suboptimal in the way the property is being managed or maintained and they have a plan to tweak it to grow income or create value.”

A bridge loan, which typically offers 24 to 36 months of financing with a minimal prepayment penalty and interest-only payments, allows investors to wait to commit to long-term financing until they have added value to a property.

“Bridge loans are designed to buy time for dream fulfillment for owners,” says Jarrell.

Bridge loans anticipated to be in high demand

The pandemic created hesitancy among investors and reduced financing availability because of the lack of clarity around when occupancy and rents would stabilize and when expenses would return to normal, says Jarrell.

“Most bridge loans – probably 75% or more - are acquisition loans rather than refinancing,” says Jarrell. “In 2020 there was a pause in acquisitions because of the uncertainty about how to price properties.”

Now that investors have more understanding about the long-term prognosis after the pandemic, Jarrell is seeing a revival of investor activity, particularly for multifamily properties.

“The number of new deals in our pipeline as of March 2021 is three to five times what was in the works in April and May of 2020,” says Jarrell. “We’re basically back to the level of the fourth quarter of 2019.”

CBRE Research found that multifamily investment during the fourth quarter of 2020 totaled $56.7 billion, more than double the third quarter of 2020 and slightly more than the fourth quarter of 2019. The second half of 2021 is expected to see a higher volume of multifamily investment, according to CBRE Research.

“We’re expecting to see a relatively normal pace of activity in 2021 plus a boost of additional activity that shifted from 2020 into 2021,” says Jarrell. “Pent-up demand will turbocharge CRE investment in multifamily and senior housing compared to 2020.”

Bridge to future financing

Bridge loan underwriting evaluates investor plans to raise value such as through capital improvements, better rents and/or increased occupancy.

“Our bridge loans are non-recourse loans, so the loan is collateralized just by the property,” says Jarrell. “We’ve financed more than $6.5 billion in bridge loans since 2004 with less than $6 million in losses, so we have a good track record.”

Greystone develops, owns, operates and manages commercial real estate property in addition to its lending arm. Staff from those divisions are on the loan committee, which means that multidisciplinary inputs are part of the process.

“We develop an exit path with bridge loan borrowers from the beginning so we can provide asset management support that will make it easier to transition into a Fannie Mae, Freddie Mac, FHA or CMBS loan,” says Jarrell. “We evaluate their alternatives and calibrate everything to that exit plan, following up on the requirements for their chosen option so that there are no hiccups as they “graduate” from the bridge to their chosen permanent financing loan.”

As Jarrell explains, Greystone offers a one-stop-shop with vetting to make a seamless transition from bridge to permanent financing.