InvestmentsMortgageReal Estate

In the pipeline: Tapping the small veins

Lenders are mobilizing to serve a growing class of investors that banks turn away

Investors are showing a strong preference for multifamily properties due to economic and demographic trends. The multifamily buying and selling market is red hot, and the competition for properties on the market is intense.

Historically, this has been a game dominated by large and medium players, multifamily companies and investment firms, but now, individuals want a piece of the investment action.

The problem is, most banks have neither the appetite nor the ability to meet this demand. Many of them have caps on the amount of commercial real estate debt they can take on, meaning that, generally, only the cream of the investor crop gets attention from the banks.

What this means is that reluctant banks are creating a large pool of underserved demand.

Chris Farrar, Velocity Mortgage Capital CEO and founder, is at the helm of one of the handful of companies tapping into this underserved pool of investors.

“My personal view is that this is a result of the credit contraction post-financial meltdown,” Farrar told HousingWire.

“I think there’s regulatory pressure on banks to limit their CRE exposure period, and so when there is that pressure, naturally, they’re going to lend to the top 10%; they’re going to lend to the cream of the crop,” he added.

“We’re starting to see more and more demand for our small-commercial product [loans],” Farrar said.

Leslie Smith, managing director of Commercial Direct, another of one of the companies out to meet this demand, said her company has gone from zero production in this space to closing deals in the last two quarters.

“People are curious [about investing]. We have this product; we put it out into the market; and we’ve seen ramp up. Whether it’s because we’re getting better at targeting and marketing to these people or there are more of them, you know we’re still kind of trying to figure out what that balance is, but we’ve gone from zero production to actively closing loans within the last two quarters,” Smith told HousingWire.

Smith says that the typical investor profile for her customers is someone who has successfully managed a handful of single-family properties and wants to make the transition into small-time commercial multifamily management.

For Farrar, the typical investor profile is a self-employed, small business owner who wants to break into the SFR or small multifamily space with a loan of less than $1 million.

In terms of where this demand came from, Farrar thinks it is connected to the strengthening economy and the recent tax cuts making people feel like they have a little more cash to leverage.

“There’s been a repairing of balance sheets just over the last 10 years, post-crisis, and that’s obviously taken some time and some sweat and hard work, but there’s no question we’re seeing a positive reaction to the tax cuts, from a business perspective,” Farrar said.

To be clear, this type of investor is not entirely new. Local banks have been serving this demand class for a long time. What is different this time around is that national companies are emerging to take on the pent-up demand that the local banks can’t take and the big banks won’t take.

“I think a lot of people think that this is a new asset class. We don’t really think that it is; we think it’s been around for a very long time. Our competitors tend to be the community and local banks and local, private money lenders,” Farrar said.

“I think it’s a slice of the market that’s always been around, but it’s historically been underserved,” he added.

Smith feels this investor class is underserved as well and feels that her company is operating in an untapped vein.

“In the commercial space [not SFR], we haven’t seen direct competition out in the market, and we’ve definitely searched for that,” Smith said.

“We always compete with regional banks. They know their communities really well…but a lot of times we get really good borrowers that come to us because their regional bank really doesn’t have the appetite for additional risk,” she added.

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