'Creative, Not Stupid': Alternative Lending Companies Staff Up For Breakout Year

The financing crunch that has impacted commercial real estate, where traditional financing sources went from being flush with capital to frozen in the past few years, has produced many losers. But a clear winner has been the alternative financing sector, which is seeing increased demand amid the regional banking crisis, rising interest rates and market uncertainty. 

An estimated $1T in commercial real estate loans are coming due in the next 18 to 24 months, 10% to 20% of which will struggle to refinance, according to Michael Boxer, managing director of private real estate debt at CenterSquare. Special servicers and private lenders are staffing up in response to that coming demand, he said.

Alternative financiers and private lenders will see new opportunities for business, leading to growth and new hires. A solution to today’s CRE problem, loans coming due that simply aren’t worth what they were when they were written five or 10 years ago, requires extensive financial and underwriting experience. The job market is ready. Plenty of talent waylaid by decreasing deal volume is available for new jobs. 

“Our business is growing exponentially,” said Gary Bechtel, CEO of Red Oak Capital, a national commercial real estate firm and lender. “There's always winners and losers, right? And we're fortunate we're on the right side.”

Since he started at the firm in 2020, Red Oak has expanded from 11 to 26 employees, opened offices in Charlotte and Irvine, California, and started an institutional business that raised additional capital from institutions and high net worth individuals.

This growth allowed the company to expand its origination capabilities and business, in turn enabling it to meet the fresh wave of demand. In 2020, the firm was lending $30M to $40M per month. Last year, it saw between $700M and $900M per month, and Bechtel predicted roughly $10B in total business in 2024.

“We are very creative lenders,” he said. “Not stupid, but creative.”

Deal selection mitigates risk, he said, and since the firm is seeing even more interest and potential business, he believes it is not only making more deals but also less risky ones. He pointed to the decline in the securitization market, which has left even more potential business for lenders like Red Oak to absorb. There is growing demand for underwriting new hybrid loans that provide an equity position for the lender, called a “senior stretch.” 

Bechtel said there are fewer bridge lenders today, but that means those still operating will take a larger share of the existing business — and existing talent. Firms like Madison Realty Capital and Thorofare Capital have also been very busy.

The trick is making sure everything is underwritten correctly with enough value creation so that in a few years, there is enough to take the lender out of the equity position. 

This doesn’t necessarily mean that there will be a massive shift in talent if a lender is willing to adapt, said Anthony King, partner and lawyer at Saul Ewing LLP. A more traditional player in this space could pivot and use the same staff to find players who want to come into a deal long-term rather than focusing on figuring out loans. Underwriting and analyzing operating income are still involved, but the existing employees would need to wear different hats. 

Whoever is helping make these financing deals happen is expected to be busy this year. Bechtel said activity picked up in the fourth quarter. Through the first three quarters of 2023, transaction volume was down about 70% and debt translation volume was down 68%. A lot less money was moving through the system, and many fewer deals were getting done. But the realization that rates weren’t moving helped catalyze more activity.

Steven Caldwell, head of large loan originations at Barclays, told Commercial Observer that the Federal Reserve’s Dec. 13 announcement that rates wouldn’t go up is “moving the calendar forward” for more loan originations. 

“Lots of capital has been raised over the last six to nine months to take advantage of, in general terms, credit,” Boxer said. “Capital has repriced, and debt all of a sudden can generate very attractive yields.”

There are lots of potential employees out there for alternative financing firms, Bechtel said. The drop in deal volume has led many firms to let go of valued financial talent. That is one reason Red Oak targeted Charlotte for expansion: It is a financial center home to several large banking institutions and a great labor pool. 

“Fortunately for us and unfortunately for other companies, many firms have downsized, so there's a lot of great people on the street looking for jobs,” Bechtel said.

Bechtel said there will be increased hiring among alternative financing players and potentially a longer-term shift in the business. Since many larger CRE firms and players have let go of financial talent that may find its way to third-party and alternative financing providers, these groups may end up providing a larger portion of deal financing in the future versus in-house talent. The reticence of regional banks and traditional lenders, still wary of too much CRE exposure, may hasten such shifts in 2024.

Bechtel said he sees opportunities for growth in headcount and deal count organically, because of the downsizing and dislocation continuing for the foreseeable future, or opportunities for mergers and acquisitions. 

“In a lot of instances, we’re hearing from the guys who are raising and deploying capital that it's just much more efficient for them to focus on what we do really well, which is the raising and managing of money and to align ourselves with a Red Oak to have them deploy and manage the money for us,” Bechtel said.