As Regional Banks Pull Back, Private Lenders Step In To Fill The Void

It’s a challenging time for commercial real estate borrowers.

Rising inflation and interest rates paired with the regional banking crisis brought on by the collapse of Silicon Valley Bank and others have led to a wholesale pullback in CRE lending across the country.

“Historically speaking, regional banks were, on average, the largest source of capital for CRE borrowers outside of the [government-sponsored enterprises] for the last few years,” said Desmond Vindici, senior vice president at Slate Asset Management. “If you remove that source of liquidity and add in all the other macro headwinds CRE is facing, there’s a real crunch on today’s CRE borrower.”

In 2021, Slate Asset Management completed a $2.3B debt portfolio and platform acquisition from Annaly Capital Management and launched its U.S. private credit business, Slate Real Estate Capital. Vindici said that as a private lender, it is Slate’s mission to understand the challenges CRE borrowers are facing and find debt solutions that work for them. 

Bisnow spoke with Vindici and Slate Managing Director Brendan Shanahan to learn more about how private lenders are stepping in and finding creative solutions to help borrowers navigate the turbulent waters they are wading through today. 

Bisnow: As regional banks are pulling back, who is filling the CRE lending void? 

Vindici: On top of regional banks shying away from CRE loans, there are not a lot of commercial mortgage-backed securities getting done. Some of the larger balance sheet banks are also pulling back and choosing to hold capital in the event that they're overexposed to struggling asset classes, including office. For CRE borrowers, this leaves lower-leverage life insurance companies that still have allocation and private lenders like ourselves.

Shanahan: As a private lender, we recognize our higher cost of capital in general, but in order to make up for that, we find flexible structures or leverage that meet borrowers’ needs and allow them to hit their targeted returns.

Bisnow: How is Slate’s approach different from your private debt peers?

Shanahan: What sets Slate apart is that we invest on both the debt and equity side of commercial real estate. When we approach a credit solution for our borrowers, we're really trying to put ourselves in their shoes and understand the business plan from both the lender and ownership side, because every deal is different. For example, a borrower could be focused on its initial capitalization at close because of the structure with its limited partner, or LP, equity. Or a borrower could be seeking bridge capital to get to a better credit environment and is focused on prepayment flexibility.

We pride ourselves on asking questions at the outset and working with our borrowers throughout the entire process to understand what's important to them and finding the right solutions. This allows us to, one, put terms out that are competitive and meet our borrowers’ needs, and two, navigate a smooth closing process so that when we’re across the finish line, they’ve received a capital solution that achieves their objectives and positions them to meet their targeted returns with no surprises. 

Vindici: We aren’t just an origination shop, we underwrite real estate first and utilize our equity expertise to understand our borrowers’ key issues so that we can leverage price and structure accordingly. This enables us to slot in anywhere in the capital stack and work with our borrowers to find the most efficient solution.

Bisnow: What does that look like in practice?

Shanahan: We did a mezzanine loan last year for a large, mixed-use redevelopment project. Very early on, we spoke with the borrower and learned initial capitalization and the corresponding equity check at close were very important given their agreement with LPs. By knowing this from the start, we were able to craft a customized solution and say, “Here's where we think the initial rate needs to be, but we can adjust current pay up and down and resize interest reserves to meet the initial capital need day one and throughout the life of the loan.” Further, this structure also allowed our borrower to achieve their desired return hurdles.

To put it simply, we demonstrated early in the process our flexibility with our borrower and found a solution that fit their capital needs while establishing the trust to move forward. At the end of the day, that is our ultimate goal — to establish trust and continue our relationship with our borrowers. There are always ups and downs in any negotiation, but as long as you’re open and communicative, there will be no surprises and borrowers will trust you with their business again and again. 

Bisnow: What kind of deals are you looking at? Where do you see areas of outsized opportunity in the market in the future?

Shanahan: Given the current credit environment and prolonged challenges for some property types, there’s a greater focus on a few primary asset classes and some alternative asset classes that currently project a measure of safety. These include multifamily, industrial — in areas where it’s not currently overbuilt — single-family build-to-rent, hotels, life sciences facilities and self-storage. As a private lender, we feel that these assets currently offer an outsized risk-adjusted return compared to historical averages.

With that said, we look at all asset classes. We are not hard “no’s” on office, we're not hard “no’s” on retail — those deals just have a higher threshold. In those instances, we understand that the cost of capital gets passed on to our borrowers. We try to be sensitive and empathetic and say, “We know this is a challenging time. We know that this is possibly more expensive capital than you initially underwrote. How can we help you bridge this short period of time to either sell in a better cap rate environment or refinance and hold long-term in a better, more efficient fixed-rate environment?”

Ultimately, our goal is to have more than half of our business be repeat business. This is why we are so borrower-focused; they are the engine that allows us to continue running. Being able to be that partner for them and find the creative solutions that enable them to do more is the key to our continued success. 

This article was produced in collaboration between Studio B and Slate Asset Management. Bisnow news staff was not involved in the production of this content.

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