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Finding yield in the current market environment

Geir Watland, Managing Director, Private Capital Markets for the Broadmark Private REIT, discusses the current lending environmentwhat he sees in store for the housing market, and where he sees current opportunities for yield in Part I our first-ever Q&A feature. 

Broadly, how has COVID impacted the lending market for real estate? 

It’s really a two-part answer. Initially, from March through May, construction came to a grinding halt in some of the markets in which we lend. As local governments assessed where to limit activity, some builders were unable to obtain permits, which put a damper on activity. Bridge loans, which take a project from completion to sale or lease-up, dried up as well.  

In June and July, as restrictions were relaxed, the mood changed, and people realized that the pandemic would not result in Armageddon. From a housing perspective, things went back to normal relatively quickly. Some local governments considered construction an essential service, allowing limited construction to continue. Permits are now more accessible, and the takeout financing market seems to be doing well. In the markets in which we operate, developers are back to building, which means we can lend on new projects. From a high level, that encapsulates what we’ve seen in the construction markets and therefore for our lending business.  

Where do you see the housing market moving post-COVID?   

It’s an interesting question, and while there’s still much uncertainty, we’re starting to get some hints as to what might happen. Pre-COVID, there was already a housing shortage in the regions in which we lend. Rents in costly locales like San Francisco, Palo Alto and Manhattan are going down, while they’re going up in places like Oakland as folks migrate to cheaper, less-crowded suburban markets. I like to say that in this environment you can work from anywhere, but need to live somewhere. That somewhere is becoming more flexible. Major companies like Twitter and Google are instituting more relaxed remote-work policies and flex hours for employees. As younger generations move from downtown areas into bigger apartments or houses, there is this long period of time where they’re hunkered down due to COVID, which is providing flexibility. With more people working from home, which could be the norm in the corporate world going forward, there is less pressure on the roads and public transportation, opening up opportunities for construction in the rural areas of peripheral markets, where they don’t have the stress of a commute. We have the ability to adapt and go where the development is happening as our borrowers are builders of single-family homes and multifamily buildings. We’re not locking ourselves into three-year construction projects for office towers or hotels – that’s where you’ll see the risk, whereas residential projects are more insulated.  

Where are the opportunities for high(er) yield in today’s low interest-rate environment?  

Investors are looking for yield everywhere across the capital markets. Let’s start with where you’re not getting yield, and that’s in the bond markets, particularly treasuries. The “real yield” today on the 10-year Treasury Inflation-Protected Security (TIPS) is around negative 1%. In other words, you’re paying the government to babysit your money. Going back 20 years, most people likely never thought that was possible, but in some countries yields are negative even on nominal bonds. In high-quality corporate bonds, there isn’t a lot of juice either. Money markets are near zero, and the 30-year treasury bonds are yielding less than 1.5%. So there’s not much yield to be found in conventional bond markets, whether it’s corporate or government bonds.  

What does this mean for investors? To reach for yield, investors need to buy junk bonds, which provide liquidity but are not particularly attractive by historical standards. The real opportunities are in direct-lending private markets that are very niche, where there is little competition. These opportunities are backed by loans to companies or real estate projects. As a niche real estate lender with an established track record, we’re able to charge a premium based on the flexibility and certainty of execution we offer borrowers, especially during periods of market volatility. We’re lending at 15 to 16% annualized.