When the pandemic hit the commercial mortgage finance industry in the spring last year,
Ladder Capital Corp.’s
chief executive spent so much time glued to his desk at his home office he developed a rash on the back of his legs.
“I didn’t move from the chair in three days,” recalls the CEO,
His New York-based real estate investment trust looked vulnerable to Wall Street because of the large size of its real-estate securities portfolio, Mr. Harris said. Concerns about Ladder’s liquidity persisted even after the firm paid $100 million in margin calls to its funders, he added.
Today, Ladder and other so-called nonbank lenders are on track to have one of their biggest years for loan volume, according to analysts and industry executives. Ladder in the second quarter made $803 million in loans, mostly to developers needing so-called bridge capital to finance new developments or renovations, compared with $260 million in the second quarter of 2019, according to JMP Securities.
“The amount of lending going on outside the banking system is unbelievable,” Mr. Harris said.
The Federal Reserve, which kept lending and helped convince many banks to go easy on struggling mortgage finance companies, was the main reason the industry survived those dark days, Mr. Harris said. “It could have been an absolute mess if the Fed hadn’t stepped in,” he said.
The reawakening of the nonbank lending industry has been good news for the broader real-estate community. It is helping real-estate developers regain traction as the economy reopens, particularly those who need short-term financing to repay construction loans or buy and upgrade older properties.
Nonbank lenders are “essential in keeping the stock of real estate properly maintained, desirable and revenue-producing,” said Steve DeLaney, an analyst at JMP Securities.
Ladder’s loans this year have included a total of $300 million to the new owner of Citigroup Center in Miami, investors who plan to upgrade office buildings in Manhattan’s Garment District and developers who completed apartment projects in the New York region during the pandemic.
Despite the rise of remote work, which has been curtailing demand for office space, Mr. Harris thinks the Manhattan office buildings are acceptable risks. While their occupancy is below historical averages, the amount of the loans is far less than what the buildings would cost to replace, he noted.
He also noted that New York apartment rents have rebounded after taking a nosedive early in the pandemic. Mr. Harris expects apartment demand to stay strong as colleges reopen and retirees move to the city.
The growth of nonbank lenders, like
Blackstone Mortgage Trust Inc.
Starwood Property Trust Inc.,
in commercial real estate started in the wake of the global financial crisis. They filled the gap left by many small regional banks that exited the business of making riskier bridge loans and redevelopment loans to developers.
In 2019, these nontraditional unregulated firms originated $66.1 billion in loans, or about 9.8% of the total, according to data firm Trepp LLC.
Many ran into trouble when the Covid-19 pandemic hit because they financed their lending with money borrowed from banks in short-term revolving repurchase agreements. They used these “repo” loans partly to load up commercial real-estate securities, which can be volatile in times of economic stress making the nonbank lenders vulnerable to margin calls.
Mr. Harris co-founded Ladder in 2008. Public scrutiny of his firm increased in recent years because he was a friend and lender to former President
In February, The Wall Street Journal reported that New York prosecutors were investigating loans that Ladder made to Mr. Trump backed by some of his buildings.
Mr. Harris declined to comment on the investigation.
When the pandemic hit,
TPG RE Finance Trust,
an affiliate of private-equity giant TPG, was one of the first commercial mortgage finance firms to start teetering partly because of the sharp drop in value in securities the firm owned. The firm eventually had to sell some $961 million in securities to meet margin calls and was recapitalized with $225 million from Starwood.
Concerns grew on Wall Street about Ladder, which had a far larger portfolio of $2 billion in real-estate securities. The firm’s financial condition wasn’t as precarious as TPG’s because the ratings of its securities were higher, Mr. Harris said.
But those three months were rough, he said. Ladder’s shares fell over 80%, and the company cut its dividend in the second quarter. Mr. Harris paid Ladder’s $100 margin call in full and spent weeks restructuring loans with real-estate owners that owed the firm money.
Ladder has reduced its reliance on riskier repo funding and other secured lending sources to less than 35% of total assets in the second quarter of this year from over 55% in the fourth quarter of 2019, according to a report earlier this month by
Moody’s Investors Service.
TPG RE Finance Trust, which is originating loans at the same rate it did before the pandemic, has also strengthened its balance sheet by relying less on repo financing than it did in the years leading up to the pandemic, according to people familiar with the matter.
Other nonbank lenders have increased or maintained their use of secured funding. “Significant reliance on secured funding continues to be a key credit challenge,” the Moody’s report said.
Write to Peter Grant at [email protected]
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