Community banks have historically been the primary lenders in GMI Capital’s target markets. They know the borrowers, they understand the local asset base, and they have the relationships that allow them to make fast, informed decisions. For the last two years, many of those banks have been unable to play that role. Understanding why and what it means for disciplined private lenders is central to how GMI Capital thinks about the current market.

What happened to the community banks

The regional and community banking sector entered 2023 with significant exposure to commercial real estate loans written at lower interest rates during the 2019 to 2022 period. As rates rose, the mark-to-market value of those loan portfolios declined, and regulators began scrutinizing CRE concentrations far more aggressively than they had in the preceding years.

The result has been a meaningful pullback in new CRE lending from institutions that were previously the most active participants in markets like Las Vegas, Boise, Phoenix, Salt Lake City, and Houston. Borrowers who have worked with the same community bank for years are finding that bank unable to approve new loans, not because the borrowers are weaker, but because the bank’s internal constraints have changed.

The lending gap is not a function of borrower quality deteriorating. It is a function of lender capacity contracting at the institutional level.

What happened to the larger debt funds

The larger debt funds and public mortgage REITs that might otherwise fill the gap have their own problems. Many entered 2023 with significant exposure to Central Business District office assets, a product type that has experienced structural demand destruction as remote and hybrid work has permanently reduced office utilization rates in gateway cities.

Managing distressed office exposure requires capital, attention, and workout capacity. It does not leave room for deploying fresh capital into growing markets on favorable terms. The funds that are most active in the space are largely occupied with their existing books.

What this creates for disciplined private lenders

The gap between what borrowers need and what institutional lenders can currently provide is real, measurable, and growing. Borrowers who need $5M to $15M bridge loans in growth markets, the loan size that is too small for the large funds and currently unavailable from constrained community banks, have limited options.

Local hard money lenders can theoretically fill some of this gap, but they typically struggle to execute above $3M and price their capital at 12% and 2 points on deals that carry more risk than the conservative end of the market requires. The result is that quality borrowers in quality markets are paying too much for capital that does not match their needs.

GMI Capital operates in that gap deliberately. $3M to $15M. Conservative underwriting. Institutional discipline. Pricing that reflects the actual risk of the loan rather than the scarcity of available capital.

Why this moment is important

The confluence of constrained bank lending, overleveraged debt funds, and strong borrower demand in growth markets is not a permanent condition. Banks will work through their existing books. New debt funds will be raised. The gap will eventually close.

The firms that are positioned to deploy capital consistently and at scale during this period, with the relationships, the underwriting track record, and the operational capacity to close on time, will generate returns that reflect the scarcity of quality capital today. GMI Capital has been building toward this moment since 2016.

This post reflects the views of GMI Capital and does not constitute investment advice. Past performance is not indicative of future results.