Some parts of the real estate lending landscape are getting competitive.
"This is a world that is awash in capital," said Ethan Penner, Calabasas, Calif.-based of founder and managing partner of real estate manager Mosaic Real Estate Investors. "It creates a competitive frenzy to deploy capital. It's the No. 1 risk in today's world."
These loans are being made on weak credits with few covenants to protect lenders, he said. The second biggest concern is geopolitical risk.
"But if you make good investments that withstand and have staying power, you can ride out the bumps in the road from geopolitical risk," Mr. Penner said. "Not everyone has that."
One key is to avoid heavy competition, he said. That is hard to do because most managers have "narrowly defined investment strategies that they share with too many people," he added.
If a manager is lending in a competitive area, the balance of power leans toward the borrower. "They will squeeze you on returns and squeeze you on covenants," Mr. Penner said. "It's a double whammy of poor returns and poor credit risk."
In a world where there is a lot of competition to lend, low yield does not equate to low risk. In those situations, low yield equals high risk, he said.
"In real estate, if you have a half-empty building and hope to reposition or renovate it, there is so much capital to lend to you that you can command low rates and very few covenants," Mr. Penner said.
Kevin Kim, partner in Newport Beach, Calif.-based law firm and media company Geraci LLP, said private credit in real estate is getting saturated with capital to lend.
"We are seeing significant institutional dollars coming in and all buying the same product," Mr. Kim said — loans to rehabilitate properties and then sell them.
"There are more and more lenders with a ton of capital behind them," he said. "They have a lot of capabilities to charge less to the borrower. It's a very saturated market; yields are compressing.
And leverage is rising. Lenders are now willing to provide 75% loan-to-value, with some real estate credit managers lending on 85%, he said. Increased leverage is becoming commonplace as borrowers want to make an investment with less of their own money, Mr. Kim said.
If lenders start broadening the lens and go into all the different types of loans out there for real estate, there's a much broader market and there isn't as much competition, Mr. Kim said.