When the COVID-19 pandemic first hit the United States in March 2020, it was anybody’s guess as to how the private lending market would be impacted. At first glance, one would presume that loan demand would have been negatively affected due to the expectation that borrowers would “hunker down” and not ask for or spend money as the nation and the world experienced a shutdown of this magnitude.
In the early stages of this effectual shutdown of most of the economy, this was the case. Borrowers were reluctant to take on debt, as the future was uncertain regarding how they expected to pay back loans. Even though most businesses saw a significant decrease in revenue as time went on, the lockdown and shelter in place had another effect; many people felt uncomfortable where they lived and were frustrated to be at home 24/7. This was difficult for people as they tried to balance work with home life, especially those with younger children who were unable to go to school.
Since many businesses were closed, people were able to save money, because they had no place to spend it. Working from home was quickly becoming the new norm. People started to ponder the future regarding the work/home life balance, and many chose to increase their living space. This, in combination with no commutes for most workers, caused a price increase of homes in the suburbs where one could buy a larger house than in metropolitan cities.
The frenzy that ensued for house purchases was a boon for private lending. Not only were banks a bit gun shy due to the pandemic, but buyers were facing competition and needed a competitive edge – quick closing offers. Because banks slowed down on lending and the ability to provide capital very quickly, many private lenders had their best deal flow, by volume, in decades.
The question for private lenders, is what happens after the economy eventually loosens up restrictions for most businesses, so they can get back to a somewhat normal cycle? Some believe that working from home will be the new norm for many workers. Companies with remote workers have proven that they can be productive over this past year. These same companies looking to cut costs will point to cost savings on their income statement by lowering a large part of their expenses – rent. Since employees do not need to come into the office and can use Zoom when working from home, rent expense can be significantly eliminated. For example, SF Gate reported that Salesforce cut back 325,000 square feet of space it was planning on occupying in San Francisco after adopting a permanent remote work policy. Companies such as Drobox, Twitter, and Facebook have also adopted similar policies. Rent in the surrounding areas has decreased as much as 20%, but prices for homes have not seen such a decrease, and homes with more square footage command a premium. There is the possibility that once a vaccine is widespread and restrictions have been lifted, many companies will start to require employees report back to the office. Some companies are already requiring that their staff go back to working in the office, as they believe productivity will increase compared to at-home workers. This may force a shift of people moving back to the city from the suburbs.
Interest rates are still relatively low, but they are starting to increase. Many home buyers believe they should find something soon before the rates for mortgages climb. The demand for capital is still strong and it does not appear that it will taper off anytime soon. Banks still have strict criteria regarding lending standards, and recent changes in the Dodd Frank rules did not diminish these standards. As interest rates have risen, less borrowers have been able to qualify for bank financing due to debt ratios imposed by conventional lenders. In addition, borrowers who requested deferments from their lender may not have had their credit scores lowered due to these requests, but a memo recorded in their credit report has effectively prohibited conventional financing for them.
Another reason many believe demands for housing will continue is due to a housing shortage. Too many restrictions by city or county officials hamper housing starts, and costs of both material and labor have dramatically increased. This puts an undue burden on builders, as their profit margin gets squeezed. The law of supply and demand and relatively stable low interest rates should keep housing prices strong. During the Great Recession, many homeowners lost their houses to foreclosure. Millennials remember how their parents lost their home, and this led to people renting instead of purchasing a home. This new generation is now starting families of their own and are buying homes instead of renting, which is expected to fuel higher housing prices.
Many housing sectors are still seeing multiple offers on houses that are sold in less than a week, though this has started to slow down. This phenomenon puts the would-be buyers in a predicament as to how they can put in an offer that will be accepted to a seller. This is where private capital is an important asset to potential buyers, as they can use private capital to make their offer much more attractive to the seller and close the transaction quickly without contingencies.
Mark Hanf, president of Pacific Private Money, has seen these buyers come to him in droves for capital and reports that his company had its best quarter in quarter 4 of 2020. One of the main advantages of private capital markets is that they do not have to rely on asking for new appraisals in every situation. Each case is different, and many times, a recent appraisal that the borrower provides to the lender or a broker price opinion might suffice. Banks need to follow FIREA guidelines where the appraisal process is much longer, and this lends itself to a lengthy process to which the borrower may not have the luxury of waiting.
How long will the demand for private capital last? If banks continue to drag out the lending process, demand for housing stays consistent, and borrowers’ desire to purchase before interest rates and housing prices increase beyond where they feel comfortable, there should be a steady flow of requests for the foreseeable future.
