Heightened conservatism in today’s financing environment is causing borrowers to explore new platforms for loans, even if it means paying higher interest rates. A healthy rental pipeline, stabilizing cap rates, and a potential interest rate hike makes the climate hard to navigate for some borrowers.

Paul McCormick, Vice President of the Capital Services division at Ariel Property Advisors, lends his expertise on the changing nature of the lending business. McCormick strays from the 2014/2015 lending mindset and dives deep into the 2016 reality in the below interview:

What do you foresee for the current 2016 lending market?

Paul McCormick: We are still seeing a big appetite from borrowers and lenders to transact. However, deal flow is lighter since there is a more concerted interest to lend at the right price with favorable conditions on the part of traditional lenders. The risk of being overleveraged is a concern for banks so we are getting to a point where a “new normal” might be established where sellers and buyers have to transact at a price point that is in line with a lender’s comfort zone to offer a capital infusion.

How is the lending environment different today from 2014?

PM: Banks are generally being more risk averse now than they have over the course of the last several years. Since 2012, rents have gone up consistently, cap rate compression has been consistent and aggressive, and there was an underlying expectation that interest rates would stay low. Today, we are seeing rents stabilize behind the crowded pipeline of units coming on-line, cap rate compression has leveled off or decelerated and interest rates are expected to rise again in the near future. With new challenges, it’s only natural that banks are shying away from risk, which is increasingly affecting the development market and leading the way for investors to look for other means as a way to gain capital.

Tell us about the new avenues of financing explored by investors and how they are taking advantage of this opportunity.

PM: Private lenders are willing and able to get more creative with a mix of bridge, mezzanine and preferred equity financing to get higher up on the capital stack and enable borrowers to gain access to capital quickly. The interest rates are higher, but borrowers are willing to pay a premium in order to avoid the more conservative bank processes. These options are usually cheaper than raising equity.

Where are these new sources of capital coming from?

PM: Financing today is available from both individual and institutional lenders, some of whom are already active in New York City real estate, which is something we didn’t see in the last cycle. These entities have access to sources of capital that allow them to open up their own lending platforms. By working with lenders that are less known to the public, mortgage brokers are proving even more invaluable to clients in the current financial environment.

How does the time frame on the loan process differ by going to a private lender as opposed to traditional financing?

PM: Traditional lenders generally close loans anywhere from 45 to 60 days after a signed application, assuming clients are sending in due diligence materials up front and third party reports are ordered early. Private lenders have a streamlined underwriting process, relying on their own expertise in the New York City real estate market. Some lenders are comfortable lending without needing an appraisal, which in conjunction with limited deal flow, gives them the ability to close a loan in 10 to 14 days. They can decide if the terms the borrower is looking for is a worthwhile financing opportunity and forgo a longer traditional loan process.

How does the changing face of capital services translate to the state of New York City’s economic climate?

PM: The possibility of two interest rate increases before the end of 2016, one in June and one before the end of the year, can have positive implications. The rate increases can assist in reaching the “new normal” where market players are comfortable to transact without the looming distraction of the Feds interest rate activity. In the most recent cycle, we have seen how the regulations have led to a healthier and more robust market. This is a stark difference from what the market previously experienced during the housing crash. In today’s cycle, we are situated better and although conservative, the market is moving within healthy parameters. We do anticipate with the upcoming loan maturities an active debt market in New York City.