Since the Great Recession in 2008, it’s no secret that traditional commercial banks, insurance companies, and other lenders have become much more conservative and cautious with underwriting financing for commercial real estate. Due in part to new regulations and capital requirements, traditional banks are taking a step back from lending.
As traditional banks continue to pull back from commercial real estate lending, savvy players in the CRE space are taking advantage of emerging opportunities to fill the voids. This has, in effect, created a perfect storm -- the combination of tightened rules and regulations, ever increasing demand from lenders, and interest from new entrants to the commercial lending space, have all allowed alternative lenders to become real, active, and significant players in commercial real estate finance.
Here are 3 types of alternative lenders that you need to know about right now…
1. Crowdfunding Platforms
While crowdfunding platforms are nothing new when it comes to gaining funding for both creative projects and products focused on consumer use, they are still considered up and coming when it comes to funding for commercial real estate. Today’s CRE professionals have begun turning to similar types of platforms as an alternative source of financing, gaining traction and showing no signs of slowing down.
Borrowers who are seeking CRE funding now have access to a larger base of investors, and also enjoy more relaxed rules and regulations. Keep in mind, though, that despite the ease of use, successfully garnering funding for a CRE project will always depend on the scope and breadth of the platform’s user base.
2. Non-direct Marketplace Lenders
This type of lending utilizes technology in order to connect lenders directly to borrowers, completely bypassing the traditional banks. Additional benefits include reduced barriers to transaction, significant savings for borrows, and a promising ROI for lenders. Long popular for student and automotive loans, financial companies have begun taking steps into the CRE space on these platforms, creating a new marketplace for commercial loans.
Unlike traditional banks, these marketplace lenders do not take in deposits or lend to businesses or consumers themselves. As a result, they assume no direct risk; rather, they generate their income from commissions and other fees received from borrows, lenders, and investors.
3. Direct Lenders
Unlike non-direct marketplace lenders, direct lenders have access to their own capital, which they can then lend to borrowers without a number of intermediaries (private equity firms, brokers, banks, etc). Direct lenders are able to offer loan terms that are similar to those of traditional banks and financial institutions - but without the strict rules and regulations that accompany them. As a result, working with a direct lender typically offers faster and more efficient financing results.
With many traditional banks still reeling from regulatory impact, smart alternative lenders are in a prime position to pick up their slack when it comes to commercial real estate loans. These alternative sources of funding are able to finance CRE development like the big banks, but without all of the regulations, liabilities, and risks. As borrower demand continues to arise, competition will continue to breed among lenders. And, as the alternative lending space continues to grow, these types of lenders will become less seen as the “alternative” solution.