Commercial Magazine

Maintain Stability in Turbulent Times

Rising interest rates and tightening credit may give private lenders an advantage

By Mark Falzone

As everyone knows, inflation is having a cooling effect on the global economy, and commercial real estate lending is certainly being impacted as well. For loan originators, developers and other stakeholders involved in project funding efforts, rising interest rates can have a dampening effect on a deal, impacting project development, closing dates and more.

But higher rates can’t stand in the way if the time is right to make a deal. Commercial mortgage brokers and their clients need choices that allow them to confidently move forward with a project. In many situations, private lenders are a viable option.

Trouble brewing

The past two years have presented some unique challenges — and some drastic market changes — to traditional lenders. When rates were near record lows early in the COVID-19 pandemic, taking risks simply wasn’t worth it for many banks. Although demand continued as borrowers sought to cash in on the low rates, this influx of new clients did not necessarily mean a big payoff for some traditional lenders.
The situation flipped in second-quarter 2022. Demand remains strong today even as the Federal Reserve raises interest rates to combat inflation. But higher rates translate to more opportunities for private lenders because banks want even less risk, and they may not consider loans that have become riskier simply due to market changes.
At the same time, borrowers are eyeing the market with caution. Those who want to start or save their commercial real estate project may be waiting for rates to trend downward or at least stabilize before jumping in.

Private lenders can help borrowers circumvent many of the issues that traditional lenders may pose, especially when time is of the essence.

The commercial mortgage industry has yet to see the end of shifting rates, which adds an additional layer of complication for deals. Brokers and borrowers need to remember that they’re not always locked into the rates they were given at closing. If rates continue to rise, borrowers may be stuck paying more. And in some cases, if market conditions continue to worsen, funding could be withdrawn altogether.
Naturally, this puts further strain on a project budget and risks narrowing the profit margins even further. With rates on the higher end — and with the potential for them to rise even higher — this gives borrowers another reason to wait it out.

More restrictions

Aside from rising interest rates, commercial mortgage brokers need to explain to borrowers that the difficulty in obtaining a loan from a traditional lender is expected to increase. Banks are likely to tighten their overall credit standards as the market retracts. This impacts who gets a loan.
As banks tighten their credit policies, fewer borrowers become eligible for these loans in the first place. That’s because traditional lenders are likely to reassess and revise their criteria to only approve a select few borrowers.
It also affects which deals banks are willing to fund. Traditional lenders may underwrite fewer loans in each category or cut certain loan types for specific industries altogether. This leaves borrowers in these buckets with fewer or no options, even if their application meets the bank’s stringent lending criteria.
Finally, there are the many typical hurdles that borrowers face when applying with a traditional lender. It often takes at least three months for an application to be approved — and a lot can happen in a few months in this shifting climate. Couple that with the increased competition that comes from tightened credit and the uncertainty of rising interest rates, and commercial mortgage borrowers may choose to sit out altogether.
Faced with these shifting circumstances, borrowers are left with a few choices. They can take the risk — apply for a loan, wait and hope to get approved — or they can wait for the chaos of the current market to calm down and try again later. In either instance, time is not on the borrower’s side, and this can have significant ramifications on a pending project. For timely funding, borrowers should consider working with a private lender.

Private option

Private lenders can help borrowers circumvent many of the issues that traditional lenders may pose, especially when time is of the essence. Known for quick closings within days or weeks along with flexible application criteria, they face fewer regulatory restrictions than conventional lenders. They aren’t tied to the same lengthy application processes and strict parameters, nor are they limited by deal types. Private lending institutions are known for focusing less on the borrower’s history and more on the collateral, or the asset being developed. They are known for analyzing projects and identifying those with the greatest chances of success. This may help borrowers who have faced financial difficulties in the past.
In times of uncertainty, private lenders also can offer more stability. Inflation impacts everything in the economy, including interest rates for loans. As a result, traditional banks could decide to alter final loan terms or pull out of funding altogether.
Private lenders, however, have more latitude and discretion in these situations. They understand the importance of seeing a project through to the end since its completion ensures that the loan will be paid back. Borrowers can know with confidence that the funding they signed up for will be available, no matter what may come.
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Changing interest rates, tightening credit standards and an uncertain economic outlook — there are any number of reasons why a borrower may be hesitant to obtain a loan for a pending commercial real estate project. But with a private lender, many of these concerns are addressed.
With shorter closing times, set interest rates and funding resources rarely dependent on borrowing from banks, private lenders are set up to be more stable and resilient. When time is of the essence and the success of a project is in the balance, a private lender may be the right solution for your next commercial real estate deal. ●


  • Mark Falzone

    Mark Falzone is a senior loan officer at Kennedy Funding, a nationwide direct private lender based in Englewood Cliffs, New Jersey. Falzone is a 16-year industry veteran and is part of a team whose principals have closed in excess of $3 billion in hard money loans to borrowers across the globe. He specializes in bridge loans for land, multifamily, retail, office and hospitality properties.

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