Frozen Regional Banks Allow Alternative Lenders To Step In With Billions To Spend

While some regional banks are looking for solutions for maturing loans overflowing on their books, alternative lenders are salivating at the market opportunity opening up before them.

Global private equity and venture funds have racked up more than $2.6T of uncommitted capital, according to S&P Global. Real estate credit funds specifically raised $9.1B in the second quarter after pulling in $2.3B the prior three months, according to Preqin.

Now, with a clearer view of moneymaking real estate in a postpandemic economy, with falling interest rates and traditional lenders going through their own forms of distress, those alternative lenders are ready to strike. 

“It's capital that's been organized around an investment strategy or philosophy that's focused on outsized yields from distress opportunities, and once that capital starts to enter the market, I think we're going to see a lot of activity happen,” Greystone Capital Advisors President Drew Fletcher said at Bisnow’s National Commercial Real Estate Finance conference last week.

“I think it's going to take a little longer than people might predict for the banks to really start lending again because they are so capital-constrained.”

Smaller and regional banks are five times more exposed to commercial real estate loans than larger banks, according to the International Monetary Fund. That includes large amounts of office and multifamily debt, for which delinquencies are stacking up.

Earlier this year, that exposure led S&P Global to downgrade five regional banks — First Commonwealth Financial, M&T Bank, Synovus Financial, Trustmark and Valley National Bancorp — from a “stable” to a “negative” outlook.

It doesn’t help that a few such banks have recently added to their exposure, taking on loans from the collapse of Silicon Valley Bank and Signature Bank.

In March 2023, First Citizens BancShares, which has a history of acquiring failed banks, acquired most of SVB’s assets, including approximately $2.6B in CRE loans. Two months later, it pulled back from the real estate market, announcing it would no longer draft general office loans.

Similarly, New York Community Bancorp bought a chunk of Signature’s assets, including $13B in loans, last year. However, that acquisition caused NYCB to spiral, nearly collapsing itself before receiving a last-minute $1B cash infusion from a group of investment funds led by former Treasury Secretary Steven Mnuchin. 

The new leadership was forced to reevaluate the bank’s loan book, which revealed even more problem loans and resulted in a quarterly loss of $333M.

Panelists at Bisnow’s event last week, held at a Convene in Times Square, said many banks are unaware of what is on their own loan books given rapid changes in valuations. 

“We have to do a lot of our own homework to understand where value is today,” Canyon Partners Director Nicholas Baccile said. “You can’t look at 100 trades and say, ‘85% LTV — I feel great about this.’ You have to really understand the markets. You have to understand what's happening in those microlocations to be able to determine what that value looks like.’” 

Earlier this year, it was reported that even investment management behemoth Blackstone, which led a joint venture that purchased a stake in a $17B portfolio of Signature loans, was looking to offload more than 10% of that purchase a month later.

Blackstone Managing Director Tony LaBarbera doubled down on the asset manager's position at the Bisnow event.

“You can have all of our Signature loans,” LaBarbera joked onstage with Oaktree Capital Management Managing Director Katy Mao.

But regional banks are in an even stickier position than the real estate giant, which has less than a 2% exposure to the U.S. office sector.

“The lifeline of those regional banks is the deposits that, of course, the real estate industry gives them,” LaBarbera said. “So how can they actually continue to service clients if they can't increase their CRE exposure or they can't put more loans on the balance sheet?”

As banks are stuck examining their loan books, developers are looking elsewhere for capital. 

Enter the alternative lenders, who have spent the last few years sitting on the sidelines and quietly growing their funds. That includes some of the biggest names in real estate, such as Blackstone, Starwood, TPG, Apollo Global Management and KKR & Co. 

And with fewer liquidity sources in the market, these new players have the opportunity to be picky. Panelists discussed eyeing everything from distressed trophy buildings to residential conversions to niche properties like data centers and cold storage — and avoiding the beleaguered office sector.

“[Lenders] spend a lot more time negotiating much tougher loan documents. They push that risk onto not just the sponsors, in general, but the guarantors as well,” PH Realty Capital founder ​​Peter Hungerford said. “There is a rule that we live by, and that is, ‘He or she with the gold makes the rules.’”