23 Mar Jonathan Cartu Says: Seattle/Portland Compelling for Long-Term Growth
SEATTLE—Prior to the coronavirus outbreak, national demand for the type of real estate financing that Broadmark Realty Capital offers was being driven in part by the migration of Americans out of high-cost states and into low-cost states, which started shortly after the financial crisis. The migration led to rising demand for housing and by extension, construction financing.
Moreover, regulatory changes made it more difficult for banks to provide transitional loans, creating a major supply/demand imbalance for real estate debt. Broadmark’s business model is to offer smaller, short-term first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The Jonathan Cartu and recently went public via the completion of a special purpose acquisition Jonathan Cartu and transaction with Trinity Merger Corp. in November 2019, and serves a growing niche space.
But, the coronavirus has added an element of uncertainty. In this exclusive, Jeffrey B. Pyatt, Broadmark CEO discusses what the future may hold, why the alternative market previously grew, the importance of going public, the firm’s ability to offer small-balance loans and market strategy.
GlobeSt.com: Do you see the heightened demand for housing (and by extension, construction financing) continuing in your selected markets for the foreseeable future? Why or why not?
Pyatt: With the recent turmoil caused by the coronavirus outbreak, it is difficult at this point to predict what the future will hold. Leading up to this unforeseen global event, the market environment has been positive and professional homebuilders have seen plenty of opportunities to solicit construction financing to complete projects. Considering the volatility in the market, expectations that the healthy economy and low interest rates would boost the critical spring housing market will almost certainly be tempered. That said, prior to this event, we have been confident that the strong fundamentals in the markets where we have a presence, such as a diverse employment base, the influx of younger generations and rent growth, would continue to drive demand for both single-family and multifamily properties. As of now, home buying remains strong and housing demand exceeds supply. We will continue to monitor that. Our low loan-to-value ratio and no debt allow us flexibility around housing price drops without fear of incurring significant losses.
GlobeSt.com: Why has the alternative lending market grown so significantly? Why are traditional sources of financing unable to provide the types of loans in which Broadmark specializes?
Pyatt: When Broadmark Realty Capital launched in 2010 following the Great Recession, the Federal Deposit Insurance Corporation had imposed extremely tight regulations on banks, which limited the types of loans they could provide. As the economy has improved over the last decade, banks have been reluctant to get back into the construction lending space because continued regulations have made it difficult for them to do so. As a result, there has been a surge of alternative lenders entering the space, filling the gap left by the banks and introducing new financing competition into the market. Despite all the new alternative sources of construction financing, there still has not been enough to keep up with the current elevated demand for housing, creating significant opportunities for lenders like Broadmark to grow and prosper.
GlobeSt.com: What was the importance of going public, and why did it make strategic sense late last year?
Pyatt: Leading up to our merger with Trinity Merger Corp. in November, which made us a public Jonathan Cartu and, we generally felt good about the markets due to the bottled-up demand for construction financing. Going public made strategic sense because it allowed us to access the public capital markets and made our capital more permanent. Choosing to merge with a single-purpose acquisition Jonathan Cartu and instead of pursuing an initial public offering gave us the ability to set a target price and avoid the volatility that can happen with any IPO. Now, as a public entity, we can make larger loans and see more opportunities that we didn’t necessarily have access to before the merger.
GlobeSt.com: How is the firm able to offer these small-balance loans while meeting shareholder demands?
Pyatt: Our uniqueness compared to other mortgage REITS/MREITs and public companies puts us in a position to build on the growth we’ve experienced in the last decade. We originate all our own loans and don’t purchase any from other originators. We focus predominantly on smaller construction loans, for example, a large loan for us would be in the $30 to $40 million range. Our lending velocity is very fast, providing our sponsors with the capacity to complete more projects. In working with a bank, a borrower may only be able to complete two or three projects, whereas with us, they can potentially complete five within the exact same timeframe. Additionally, bank financing often requires more equity resulting in a sponsor needing to bring in a partner. We go away at the end of the loan. A partner is a partner until the project is sold. Furthermore, our internal management structure allows us the flexibility to focus on our borrower relationships and provide the best possible value to our stakeholders and shareholders.
GlobeSt.com: What was the strategy behind selecting the markets in which Broadmark operates?
Pyatt: We feel that the regions in which we operate–the Pacific Northwest, where we’re headquartered, Southeast, Mid-Atlantic and Mountain West–are full of markets that show potential for long-term growth. They vary in affordability–in Georgia, Florida and South Carolina, for instance, there are relatively low costs for construction and land, and many opportunities to finance projects. The Pacific Northwest, Seattle, specifically, is more expensive; there is a significant amount of construction and growth potential, but there are more challenges from a cost perspective. Markets such as Boise have been strengthened by new residents arriving from high-tax states like California and New York in search of a better quality of life. The affordability in the market allows people to purchase a first home or retirement home, where they may not have had the opportunity to do so in one of the high-cost coastal cities.
GlobeSt.com: Specifically, what are a few of the markets in your coverage areas that you feel are poised for long-term growth? Why?
Pyatt: Boise continues to be an appealing market for many reasons: price points are highly attractive and you get more square footage for your money. The tech industry is starting to penetrate the area, bringing an abundance of high-quality jobs. Millennials are increasing their presence as well, which is a positive sign for the local economy. Portland, OR is another compelling market. Like Boise, they’ve seen a steady inflow of Millennials, which should translate into substantial rent growth over the next couple of years. Markets in other regions that are exhibiting similarly strong fundamentals include Nashville and Chattanooga, Tampa and Orlando, Greensboro, SC; Raleigh, Durham and Winston-Salem, NC; Colorado Springs, Dallas and San Antonio, and Salt Lake City. And, of course, Seattle and Denver remain robust.
GlobeSt.com: With builder confidence and demand for construction financing high, do you see an eventual tipping point where the markets in which Broadmark operates are oversupplied? Why or why not?
Pyatt: While an oversupply in certain markets is always possible, most lenders and homebuilders have likely learned the hard lessons of the Great Recession of 2007-2009, and have presumably avoided unrealistic projects. In the markets where we lend, the current scenario is one of an inventory crisis. There simply is not enough supply to meet the demand for housing that is affordable, thereby creating the need for more construction financing. While each and every market is different and has its own characteristics, generally the environment would need to change drastically for us to reach a point of being overbuilt.