Why Savvy Alternative Lenders Are Outsourcing CRE Lending & Investing Functions

Alternative lenders are capitalizing on one of the best commercial real estate (CRE) investment opportunities in years. As banks confront high interest rates, falling asset values, regulatory pressure and a looming maturity wall, alternative lenders are ideally positioned to fill the lending gap.  

“Alternative lenders have the greatest flexibility to adapt to market conditions and make swift decisions about strategic investments as they arise, competing on sophistication and complexity,” said Anne Jablonski, Executive Managing Director, Head of Commercial Real Estate (CRE) for SitusAMC. “They’re highly skilled at managing tougher borrowers and structuring around less desirable property types -- including non-stabilized assets.” 

But competition is heating up: Asset managers amassed $275 billion for credit-focused strategies between 2019 and 2023, according to Real Estate Capital USA. The prospect of consolidation looms large, and firms need to focus on strategies and best practices to navigate complex challenges and perilous risks. To scale quickly and stay ahead, some savvy alternative lenders are turning to outsourcing. 

Scaling Origination  

At the same time, non-bank lenders are often highly entrepreneurial, with leaner staffs than banks. Team members wear multiple hats – originating and underwriting the loans and taking charge of asset management upon closing. Outsourcing to a third-party provider can augment internal resources, allowing smaller shops to play big and pursue additional opportunities. It also provides financial agility, as the overhead expense is kept off their balance sheets and can be scaled in line with work volume. 

Through outsourcing, lenders can delegate reviews and more quickly analyze borrower and property financials to ensure they meet underwriting criteria. “An experienced advisor is going to know where to look and will be able to quickly dig into the diligence to help confirm their investment hypothesis, size deals, get a clear understanding of the property's value, identify and mitigate risk and more,” said Jennifer Cleare, SitusAMC Senior Director, Strategic Advisory Solutions. 

Capturing Real-Time Insights 

Alternative lenders invest in a wider range of opportunities outside of traditional senior loans, whether it’s a note acquisition, subordinate debt, structured products, non-investment grade or investment-grade security acquisition, etc. Unlike banks, they’re willing to play in riskier parts of the capital stack and various debt instruments. As a result, non-banks often require deeper analysis in their origination and transaction due diligence to fully understand risks related to asset type, borrower quality, property complexity and position in the capital stack.   

A significant challenge is that all of the data used to predict an asset’s future performance comes from the past – whether it’s comparable sales or market vacancy surveys. Having a holistic view of the loan life cycle is critical because lenders need a bird’s-eye view during underwriting into potential stresses on the loan post-close. 

“Because of our end-to-end platform, our origination professionals have access to what’s happening in real time in servicing, asset management, forensic diligence and special servicing, across a broad spectrum of highly active clientele,” Cleare explained. “This is especially valuable for non-bank lenders looking at non-traditional investments. We can underwrite and assess performance of that asset using real-time knowledge of today’s market.” 

Delegating Servicing and Asset Management   

Primary servicing -- with its time-consuming administrative tasks -- can distract from lender's core mission — business development and growth. However, servicing and managing a portfolio is mission-critical for long-term investment success. Through outsourcing, non-bank lenders can free up internal teams to focus on investor relations, formulating new strategies, portfolio-wide risk management, deploying institutional capital and earning superior risk-adjusted returns. 

“Alternative lenders are incredibly creative – every day they slice, dice, syndicate and come up with new ways to finance opportunities in which they see potential and viability,” said Ji Won Sin, Senior Director, CRE Client Services. “The lenders who are looking to really take their business to the next level can outsource servicing to our teams. We onboard those loans, and execute their vision -- monitor the property, service it the way they ask and manage it through the entire lifecycle. This gives them the power to scale their businesses by removing arduous back-office work.” 

Uncovering Risks and Navigating Default 

As alternative lenders scale, they inevitably encounter more risk. An experienced outsourcing partner can help support assets if those risks escalate. For example, SitusAMC’s Financial Diligence & Forensic Analysis team can help identify and understand deeply buried risk factors that could negatively impact loan value. Misappropriation of cash releases, potential default and inconsistencies within financials or counterparties are just some of the risk factors that can negatively impact a CRE loan or portfolio.  

“Forensic diligence helps everyone understand what’s happening under the property’s financial ‘hood’, so lenders can better manage the risks of distressed assets, set the table for a potential workout conversation and minimize financial risk when the lender decides that taking back the property is the only option,” said Sandra Adam, CPA, SitusAMC Director, Financial Diligence and Forensic Analysis.”  

In the event of default, a seamless handoff from primary servicing to an in-house special servicing team with deep experience is a significant advantage. Clients don't have to engage two different vendors, and the primary servicer doesn’t have to go across the wall to a third party to provide the historical data and history of the asset. 

“When an alternative lender works with a firm that is maintaining an asset all the way through its lifecycle, they benefit from a single, unified platform,” explained Curt Spaugh, SitusAMC Senior Director, Special Servicing. “We've established processes and procedures to ensure our professionals are in sync, with the same level of information access, so nothing falls through the cracks. If a loan defaults, our special servicing team can get the full breadth of the history from origination on, ensuring data reliability and accuracy. But the real value-add is that we work closely with collateral managers, who are the ones coming up with ideas to resolve these distressed assets. The team is deeply skilled in aligning all parties in a default to find win-win solutions.” 

Implementing Best Practices in Valuation  

Success in alternative lending requires raising capital at scale, as a larger asset base provides the foundation to better manage costs. Alternative asset managers can gain a competitive advantage by leveraging best practices across asset management, accounting, compliance, valuations and reporting.  

“Best practices show the market that you're a solidly established organization with proper infrastructure in place, positioning you to weather any storm better than competitors, said Tom Dial, SitusAMC Senior Director, Commercial Real Estate Debt Valuation. “And it should help raise money too, since large investors demand solid controls.”   

Investors are carefully scrutinizing managers and are digging into legacy assets in previous funds to see how teams addressed distressed assets. Investors want to see regular and transparent reporting on asset values, whether equity or debt. Alternative lenders should look for a valuation partner with a deep knowledge base around commercial real estate, as well as the systems and experience of the team. 

“Getting marks done on a periodic basis, whether quarterly or monthly, provides clarity for investors, and shows that a lender has proper checks and balances to reduce the possibility of stale or off-market valuations,” Dial said. 

Alternative lenders are facing what some have called a “generational” opportunity to capitalize on the trends roiling the CRE market. But success will require a singular focus on serving borrowers and finding innovative strategies to execute complex deals. Delegating the back-end operations of the business can give alternative lenders the capacity to scale quickly and pivot nimbly.

Click here to download SitusAMC’s new white paper, “Alternative Lending: Opportunities and Challenges in a Shifting Landscape,” which examines the key issues alternative lenders should consider in today’s dynamic environment. SitusAMC’s seasoned experts provide a comprehensive suite of services designed to help alternative lenders originate, transact and manage commercial real estate debt with confidence and ease, and scale their portfolios more efficiently and effectively. For more information, visit our website.