Bridge Loans: A ‘Soft Landing’ Primed for Growth, says Walker & Dunlop

Bridge loans today—Widespread growth amid a deluge of new supply

The bridge loan market is in a current state of robust growth, large-scale opportunity, and expansion that shows no signs of slowing down. Stable employment and wage growth continue to drive rental rate increases across the multifamily spectrum, furthering the construction boom in core markets and creating an influx of new supply.

While this supply surge presents an abundance of financing opportunities, it also presents challenges for bridge lenders to effectively navigate the evolving landscape to ensure they are not over-lending. This is particularly important now, as multifamily fundamentals will likely shift in response to the lack of measurable increases in overall wage growth and the affordability of multifamily market properties will come into question.

The value of bridge loan financing—future potential vs. current valuation

As bridge loans become increasingly popular under the robust economic climate, their growth is bolstered by a number of larger macroeconomic trends that are driving its position as a value-driven financing option. Areas that have seen continued growth in the multifamily space, such as student and senior housing, are optimal candidates for bridge financing, along with others in the healthcare space. Typically, borrowers select bridge loans for their non-recourse character and ability to leverage on a total cost basis rather than on the current valuation of the property as long as it is supported by projected stabilized valuation. For example, a lender can advance renovation proceeds allowing a borrower to complete their business plan prior to securing long-term permanent financing

For non-bank bridge loan lenders, it is a particularly advantageous time to be in business because of the more stringent regulatory climate pushing banks out of the space. However, caution is recommended due to the new supply flooding some of the major metropolitan markets and the looming affordability factor that continues to run throughout the multifamily space.

Changes in the regulatory environment signal slowdown in construction

Amid the boom in construction projects across the multifamily space, the infusion of new supply and consistently rising rental rates, banks are scaling back funding for new construction endeavors across the board. As bridge loan lenders are typically leveraged by banks in order to hit targeted internal returns, any transaction labeled as “construction” is deemed unattractive, as banks have become staunchly opposed to increasing their exposure in this space.

As a result, it is harder for new borrowers to qualify for construction financing, and many financial institutions are hesitant to lend new funds until prior loans are paid in full, creating large amounts of pre-stabilized loans for newly constructed properties. This presents a significant opportunity for bridge loan lenders, who become the benefactors of many Class A real estate projects without a “home” due to banks’ lack of interest in re-structuring those deals.

The future of bridge loans—a “soft landing” driven by the headwinds of supply

Across the recent ups and downs, challenges and immense opportunities, and widespread growth in numerous top markets nationwide, the bridge loan market still has yet to reach its peak. Going forward, its growth will continue to be sustained by the current low interest rates that are underpinning larger expansion in the economy as a whole. In addition, with the consistent amounts of new supply coming online, bridge loans will be an advantageous financing option fueling continued expansion across the multifamily space.

While the lease-up velocity is expected to falter somewhat down the road, and the affordability factor remains in question with its impact on future rental rates, concessions are also “stickier” and not as easy to burn off. This is having a direct impact on the number of deals that go into permanent financing and presents new opportunities for bridge loan lenders.

These factors, coupled with the astronomical increases in costs for new construction projects, particularly on the labor side, have led to a slowdown on the financing side of the market, creating the favorable “soft landing” that bridge loan lenders and servicers are seeing. This will undoubtedly continue to drive the market players forward to meet the ever-rising supply, despite the marked decrease in shovels in the ground.

Sandor Biderman is a senior vice president at Walker & Dunlop, and brings more than 18 years of industry experience. Sandor also operates as propriety capital chief production officer and heads originations for the firm’s bridge lending programs. Biderman holds a B.B.A. in international finance & marketing from the University of Miami.