Bridging the Residential Housing Gap

A variety of indicators have suggested an appreciable uptick in housing market activity of late as mortgage rates eased into the low 6% range.¹ In our view, this reaction to a relatively minor rate move—a return to early-2023 levels but still quite elevated compared to most of the post-global financial crisis era—underscores the pent-up demand for housing in the US. Combined with the retreat of traditional banks from construction lending, the result is what we view to be a supportive backdrop for nonbank providers of capital to the real estate industry, particularly in residential transitional loans and land banking.

Residential transitional loans. Given that the median age of owner-occupied homes is 41 years, we see significant opportunity to extend short-duration, value-add renovation loans—sometimes called “fix-and-flip” loans—to real estate developers that buy homes with the intent of quickly renovating and reselling them.² We believe experienced developers with an intimate knowledge of the markets in which they operate have an advantaged position and are likely to quickly turn around their renovated properties, resulting in strong cash flows for lenders and optionality to redeploy capital.

Land banking. The process of preparing raw land for construction can take up to two years, and many large, publicly listed homebuilders have moved toward “land-light” business models in response. Land-banking arrangements facilitate this shift, providing homebuilders with off-balance-sheet financing for the acquisition of entitled and permitted land, which enables them to maintain a robust development pipeline without compromising liquidity or financial flexibility.

With their potentially attractive yields and robust monthly cash flows, residential transitional loans and land banking represent compelling opportunities for capital providers, in our view. High barriers to entry, meanwhile, highlight the importance of sourcing, underwriting and structuring experience.