Can Private Money Fuel the Recovery Once Again?

As the Pandemic Retrenches, Private Money Steps Up

By Odell Murry
MAI Financial Services, Inc.


In comparing the 2020 COVID-19 Pandemic to the Great Recession of 2007, there are some major differences, but some similarities. During the Great Recession of 2007 institutional lenders were quick to batten down the hatches, the money stopped flowing, and the resulting hasty retreat of institutional lenders allowed private lenders to get involved to keep the gears of the real estate sector of the economy from locking up completely. As traditional lenders backed away, private lenders seized the moment and stepped in to fill the void.

Today’s economic indicators and the mood may feel reminiscent of the lead-up to the Great Recession of 2007. Like with that economic disaster, the stock market has remained stubbornly strong throughout the COVID-19 pandemic, despite concerns of a record number of people out of work. The lock-down has hampered much of regular economic activity, but at the same time, it has led to record levels of personal savings. At the start of 2021, there are some 10 million Americans behind on their rent and mortgages, and it appears that government programs are the only thing preventing a massive crisis in the housing market, but that crisis showed signs of bubbling up to the surface as indicated by falling rental prices in pricey coastal metros during late fall and early winter. Since then rent prices have already begun to climb again, but it is still too soon to tell if that rally will be sustainable without continued government intervention.

It can be said that the federal government certainly has intervened more quickly in this case than in the Great Recession. The Federal Reserve swiftly dropped the Federal funds rate to near-zero, resumed programs to purchase massive amounts of securities, backstopped money market mutual funds, and vastly expanded the scope of its repurchase agreement operations. Congress approved a $1.8 trillion package on March 27, 2020, which included $500 billion in direct payments to Americans, $208 billion in loans to major industries, and $300 billion in Small Business Administration loans. Nine months later, a $2.3 trillion spending package, which included a second round of stimulus, was signed into law.

The question is, what happens if the markets perceive that government funding dries up, or that the funding provided simply isn’t enough to stave off calamity? Institutional lenders do not manage upheaval the way that private lenders can. As a result, the opportunity for private lenders may be here again. It may then be up to private lenders to once again “Save the Day,” as the private lending industry did so admirably in 2007 and 2008.


Collapse of Employment

The unemployment figures have been dire, as whole sectors of the service economy were paused or diminished because of COVID-19 lock-down policies. In April 2020, the U.S. unemployment rate peaked at 14.7%, and it has only scaled down to 6.4% in January 2021. As we all know, those numbers likely are worse among people of color and women, who economists say are bearing the brunt of this economic disaster.

Even a short-term interruption in employment can have disastrous consequences on credit scores for some potential home-buyers, as bills become past due. If federal recovery programs fail to keep pace with economic need, the credit picture for many home-buyers, at least with institutional lenders, may grow even murkier.


Reshaping of the Real Estate Sector

We are likely to see a dramatic reshaping of the real estate outlook, and it may have real ramifications for institutional and private lenders. Office, retail, vacation, and hospitality real estate all saw a significant dip in value in 2020, and the bottom for that dip isn’t predicted to come for some time, according to a recent Bloomberg News Report. Also, people are rethinking where they are living and working, both because of the pandemic and because companies have been forced to realize that technology allows a dispersed workforce to work effectively and, in some cases, more efficiently than they would in an office. This means that investments in urban and office real estate, once sure bets, are now on shakier ground.

All this may spook institutional investors from putting money down on large-scale projects. However, there may be a need for more small-scale lending for housing in the suburbs and rural America, as people flee to places with more space and are no longer tied geographically to their jobs.


Filling the Void

Private lenders have proven they can step in when institutional lenders waver. While the Great Recession was devastating for the real estate market, it was private money – gathered from private individuals, pension funds, IRA’s, and other private investors – which proved a source of key capital during the recovery. For example, In 2012, privately funded multifamily property loans in the United States went up 22% over 2011, and privately funded loans for retail property increased by 17%.

Private lenders are able to navigate more turbulent terrain because their definitions of risk and success are fundamentally different from traditional mortgage lending. Private loans are typically based on the amount of equity in a property, rather than on the borrower’s individual credit score, for example. And private investors are more concerned with seeing a solid plan for a good rate of return on investment than with credit scores, and that may lead them to find good investments when institutional investors turn their back on certain borrowers in the real estate market.
These are indeed turbulent times, and it is impossible to predict fully what the close of 2021 will look like in the economy or the U.S. real estate market. What we can say with some confidence is that history has shown that private investors may be the lubricant that keeps the gears of the real estate sector from locking up in times of crisis, and they likely will be called on to play a large role in this latest recovery effort.


Odell Murry is founder and president of MAI Financial Services Inc., a private-mortgage company and institutional commercial mortgage broker. He is also a board member and past president of the California Mortgage Association. Murry originates institutional and private-mortgage loans on apartments, industrial, retail and most other income-producing commercial real estate. He also serves as chairman of the National Advisory Board of the University of Massachusetts W.E.B. Du Bois Center. You can contact Odell Murry at or (866) MAI-FUND.