Real estate direct lending remains a critical component of the evolving economic landscape, offering short-term capital for commercial real estate projects such as multifamily buildings, shopping centers, and construction loans across various asset classes. These funds have gained importance as acquirers and developers seek flexible financing solutions to navigate challenges posed by fluctuating interest rates and tighter credit conditions.
Justin Land, President & CEO of Merchants, a KKR-owned private lender for residential real estate investors who has directly loaned more than $5 billion in capital, discussed his views about the latest trends in direct lending, where he sees current opportunities in residential real estate lending, and where the overall market is headed, among other topics.
CM: What are the predominant trends now occurring in direct lending?
JL: A key trend is the collection, compilation and use of more analytics and data for underwriting, decision making, and reporting purposes. The resulting information and market dynamics have led to increased investment and more efficient capital being available to certain segments of the industry, including the RTL and DSCR space. As a result, the opportunity for more entrepreneurs to turn real estate investment into a full-time business continues to grow.
CM: In the current economic environment, what are some of the main issues for underwriting a loan?
JL: Lenders must be able to satisfy a real estate investor’s need to act quickly to take advantage of new opportunities, while at the same time meeting the strong criteria of capital markets. Many private lenders today offer more competitive services to investors than traditional banks due to their ability to operate with speed and efficiency.
CM: What are the primary factors that Merchants examines while assessing a prospective transaction?
JL: A key focus for Merchants is the location of the proposed project, and the market activity in that area. We also evaluate the viability and economics of the transaction, as well as the investment experience of the borrower.
CM: Where do you see opportunities in residential real estate lending (regions, sectors) as we move through the year?
JL: Merchants continues to see opportunities in regions with strong economic activity, job growth and underlying fundamentals, including Colorado and other Mountain region markets. There are opportunities across the country for value-add type projects where investors can re-position, build, or stabilize a property for better future use.
CM: Is it time or too soon to exhale regarding lending and borrowing?
JL: There is always potential for fluctuations and unforeseen events in the real estate markets. It is never really time to exhale. There are many phases of the market cycles, and we try to manage risk for long-term success.
CM: Where is the real estate market as a whole headed? In three years, where will we be?
JL: Each segment and market may be different, but we believe real estate will remain a strong asset class over the long term, due in part to the ongoing housing shortage for residential and scarcity of land available for new development. Key factors that could affect short term outcomes include interest rate environment and unforeseen events.
