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The Emergence of the Private Real Estate Investor
The ever changing landscape of commercial real estate investment is being driven less and less by institutional investors in Middle America. Private investors, whether they are entrepreneurs, family offices, regional developers or lone wolves, are becoming more and more sophisticated in their analysis and risk appetite than ever before.
The lead story of the latest run up in real estate values is a story of the two coasts and the 24/7 cities where the international and institutional players are gobbling up trophy assets at record prices. The middle of the country and suburbia is not participating in this same stratospheric marketplace. However, solid real estate fundamentals have created a thriving market for many small investors. Finding capital sources for these investors is the lynchpin of their acquisition strategy.
Historically, traditional banks filled the lender’s role in financing these low balance loans with strong covenants and hefty guaranties. The conduit lenders who by some accounts were giving money away at the height of the market in the mid 2000’s were not interested in lending under $10 million. This void made in difficult for smaller investors to charge into the market with any sort of aggressiveness. The uncertainty of having a solid capital source in hand was unacceptable to many sellers.
In response to this evolving class of investors, more and more non-commercial bank lenders have entered the market to serve this active investment class. Due in part to the improving economy and market fundamentals, a new crop of financing sources has emerged. Many of these lenders are now focused on doing covenant light loans between $1 and $10 million thus allowing many of these smaller real estate investors to grow their portfolios.
These non-bank lenders have broadened the lending pool for these investors. They include regional life companies, CMBS conduits (non-recourse) and private lenders. This has allowed easier access to capital for borrowers fueling the continued growth and valuations in the lower end of the real estate market. Much of this growth has come at the expense of traditional banks that are unable or unwilling to adapt to the unique risk needs of many of these smaller investors.
Finding the right professional to lead this capital search can reap tremendous benefits. Let us hope that these savvy investors continue to find the right capital sources and that this important piece of the real estate market stays relevant.