What are commercial mREITs: 

At their core, commercial mREITs operate simple businesses. They write short-term, floating-rate loans collateralized by pre-stabilized (transitional) commercial real estate assets. They then turn around and lever up the returns on these loans using financing from bank warehouse facilities and CLOs.  

The business model is a win-win-win for the mREITs, their borrowers, and the banks that finance their loans. The mREITs capitalize on the attractive spread between returns on transitional CRE loans (roughly 300-400 bps over SOFR) and their costs of financing (roughly 175-250 bps over SOFR). Borrowers that own transitional assets performing below their economic potential benefit from access to short-term prepayable loans until their assets stabilize and are ready for long-term fixed financing. Lastly, the banks that finance mREIT loans benefit from lower regulatory capital requirements on warehouse facilities, which allows them to earn higher cash-on-cash returns by lending to mREITs vs. making CRE loans directly.  

A brief History of Commercial mREITs: 

The Commercial mREIT business model found its footing post-GFC when banks and CMBS markets pulled away from writing CRE loans backed by construction and transitional projects. Banks also faced higher regulatory capital requirements against such loans, which were deemed riskier vs. loans backed by stabilized CRE. Commercial mREITs stepped in to capitalize on the void left by banks and CMBS lenders. Over the last 15 years, mREITs have grown from ~0.3% to ~1.6% of all CRE loans outstanding. 

*mREITs holdings are adjusted to exclude consolidated CMBS securities as a result of VIE treatment. 

Outlook: 

Today, the lending backdrop is attractive for transitional and bridge lenders, including commercial mREITs. CRE asset values have bottomed out and are improving as measured by Green Street’s Commercial Property Price Index (CPPI), reducing the risk inherent in these loans. On the other hand, while lending spreads have declined vs. the highs in ’22 and ‘23, they remain elevated vs. long-term averages. Lastly, the cost of financing with bank warehouse facilities and CLOs has declined. Together, these factors suggest that commercial mREITs will continue to increase their share of the CRE lending market over the near to intermediate term.