Smaller regional banks are struggling to compete with their national peers, creating opportunities for real estate managers to provide deal financing.
By Davide Mamone | January 22, 2025
Real estate managers may be getting an early Valentine this year – an opportunity to grab market share as regional banks retreat from warehouse property loans, say industry watchers.
A wide range of factors, including the economy's recent round of higher interest rates and high inflation, have helped discourage both small and large regional banks from offering direct mortgage loans to warehouse asset borrowers in the past few years.
That's even as global money center banks have kept a presence in the warehouse lending space, but largely as providers of credit to other loan originators.
Larger banks prefer to lend their money to portfolios of mortgages rather than individual owners, moving away from a "competitor position and into a more symbiotic position," and creating opportunities for managers to partner with them, said Dean Dulchinos, head of real estate credit at Orix USA.
"[But] it's harder for [regional banks]," he said. "There are some structural changes taking place in the marketplace that will give us a real competitive advantage for years to come."
Generally, large banks such as Wells Fargo, J.P. Morgan Chase, Bank of America and Citibank have "a very healthy appetite" for warehouse lending through credit line mechanisms, according to Richard Byrne, president of Benefit Street Partners, a Franklin Templeton affiliate.
"We have been aggressively courted by our bank groups to use their lines more frequently," he told FundFire.
The warehouse lending pullback is only one of many markets where regional banks have been less active, following the 2023 collapse of Silicon Valley Bank – and similar pressures at Signature Bank, First Republic Bank and others – that weakened the market's ability to provide fresh capital to borrowers.
For instance, last May, New York Community Bank agreed to sell roughly $5 billion in mortgage warehouse loans to J.P. Morgan to boost its liquidity levels. The regional lender also cut 700 jobs at its Flagstar subsidiary in October after reporting its fourth consecutive quarterly loss of $280 million.
There have been "few bank failures" recently, considering the difficulties regional lenders have been facing, said Paul Rahimian, CEO at Parkview Financial, a direct private lender specializing in ground-up commercial and residential real estate financing.
"[But] there are predictions that this year could actually be the year where you see the most bank failures, just because everybody has been trying to wait for the rates to come lower," he added.
Such a development could further boost real estate managers offering warehouse lending, Dulchinos said.
"We're sort of entering a golden age of private credit for commercial real estate debt," he said.
Fund managers still might end up facing other types of competitors in the market, such as insurance companies or larger institutional investors, according to Jeff Levi, principal at Casey Quirk, a Deloitte business.
"The retreat of regional banks will absolutely create opportunities for new originators to lean in as sources of financing," he said. "It is not clear that this space will be filled by asset managers versus other sources of capital."
Winter is Coming
Globally, banks hold roughly half of existing real estate loans. About 70% of those bank loans were finalized by small regional lenders, according to Benefit Street's Byrne.
"That poses a big question about the health of the overall lending world," he said.
These lenders are struggling at a time when many loans are set to mature by the end of the year. In the U.S., nearly $500 billion in loans will mature this year, and about 14% of these, especially those originating in 2022 in the office and apartment sectors, are potentially underwater due to falling asset values, according to a recent MSCI real estate report.
Nearly 21% of maturing office loans from institutional investors – including banks, insurance companies, retirement plans and hedge funds – are associated with properties estimated to be worth less than the debt secured against them, MSCI estimates show.
Banks and other lenders are likely to "mark down" office properties to "more realistic levels" over time, said Byrne.
Banks may still struggle to originate new loans this year because they must manage their reserve requirements as well as regulatory concerns, said Parkview's Rahimian.
"The opportunity is there because private lenders will be looking as rescue capital to help clients and real estate owners get out of the situation [that] they're in," he said.
The wall of maturities could be as high as $2 trillion for commercial real estate this year, according to some estimates. But some say this figure is too conservative because it does not account for $1 trillion in loans extended in 2024.
"[These loans] are still in the maturity wall," said Byrne. "Wouldn't you agree that all we're doing is pushing maturities and making the wall bigger and bigger and bigger and bigger?"
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