Heightened scrutiny of U.S. commercial real estate lending is paving the way for lightly regulated investors to gain a bigger toehold in lucrative deals.
Private funds are seeking a record $32 billion for commercial-property debt as buyout firms, real estate investment trusts and hedge funds expand lending. These companies, which typically charge higher interest rates, can move quickly on large loans that may be seen as too speculative for banks.
With banking regulators warning of a potential real estate bubble, firms such as Blackstone Group LP and Starwood Property Trust Inc. stand to become an even larger force in the market. So-called shadow banks -- lenders that fall outside of the industry’s oversight -- are able to take on more risk amid calls for caution in an area that melted down during the 2008 financial crisis.
“These guys aren’t scared of an empty building,” said Steven Delaney, an analyst with JMP Securities LLC. “These are the loans banks don’t want. There is a tremendous opportunity and a need for commercial-property owners for more types of financing than the commercial banking industry as a whole is willing to provide.”
The record capital being sought by U.S. private funds for real estate debt investment as of July was up almost 40 percent from a year earlier, according to data researcher Preqin Ltd. Banks, by contrast, are pulling back as slowing global economic growth, uncertainty over interest-rates increases and pockets of overbuilding spark concern that commercial real estate prices are due for a fall after almost doubling in six years.
The Office of the Comptroller of the Currency has been warning banks since last year on rising risks in commercial-mortgage portfolios, while the Federal Reserve has repeatedly flagged the property market as a potential bubble.
A market collapse may be better absorbed by investors in private funds than by companies that were deemed too big to fail in the 2008 crisis, leading to a taxpayer bailout, said Scott Rechler, chief executive officer of RXR Realty. Rechler, whose firm owns about $15 billion of real estate throughout New York, New Jersey and Connecticut, began focusing on the lending business last year.
“We’re using private capital,” Rechler said. “We would lose our money and our investors’ money. It’s not systemic.”
Banks still play a role by lending to investment firms. Commercial loans of all types by regulated banks to nondepository financial companies rose by almost 23 percent, or $41.2 billion, in the fourth quarter from a year earlier, one of the fastest-growing categories, according to the OCC.