Life companies are jockeying to keep their seat at the table as capital continues to pour into commercial real estate.
Thanks to maintaining the most conservative standards in the lead up to the boom, life insurance companies had fewer bad loans to work out after 2008 and used that strong capital position to increase their share of the commercial real estate lending market. Life insurance companies originate more loans today than they did at the peak of the boom—the only lender segment that can make that claim.
But with commercial banks and conduit lenders getting more aggressive, life insurance companies are being pressed. Origination volume for commercial/multifamily loans rose 24 percent in 2012, according to the Mortgage Bankers Association’s (MBA) Originations Index. Commercial banks saw the biggest increase in activity last year with a 51 percent increase in originations, followed by 45 percent by conduits and 43 percent in volumes by Fannie Mae and Freddie Mac.
Life company origination volume remained unchanged in 2012 compared to 2011. Those are the two highest years on record for life companies, but it shows they are being hard pressed to gain additional market share given the evolving capital markets conditions. That leaves life companies trying to strike a delicate balance between finding opportunities to boost yields and managing risk as the market becomes increasingly frothy.
In addition, CMBS issuance is expected to increase by 46 percent in 2013 from the $48 billion in 2012 issuances. And volume could more than double by 2015 to $100 billion, according to a recent commercial real estate forecast issued by the Urban Land Institute and Ernst & Young.
But experts say there will continue to be balance in the market, even with the increased competition.
“Even though conduits have become more aggressive, I don’t see them stepping on the life companies’ toes all that much,” says Brian Stoffers, president of debt and equity financeat CBRE Capital Markets in Houston. Life companies may not always compete with the lowest rate, but they do offer distinct advantages such as the flexibility of dealing with a portfolio lender, adds Stoffers.
Chasing new opportunities
Although known for their conservative lending practices, life companies are certainly not immune to the competitive pressures in the market including the quest to obtain higher yields.“Everyone is reaching for yield, which puts pressure on pricing,” says Donald Dibble, a senior vice president at Lincoln Financial Group in Greensboro, N.C. “You have to be willing to take a lower spread or a lower nominal rate in order to get the quality transaction you’re looking for today.”
Some life companies are looking to gain higher yields by going higher up in the capital stack. Lincoln Financial Group, for example, is pursuing mezzanine loans. “That being said, we are taking a very prudent and disciplined approach,” says Dibble. “We’re not looking to go out and chase every transaction. We are looking to stay with developers with a real track record or people that have their own equity in these transactions.”
Life companies also may have a bigger opportunity to pursue apartment loans in the coming months. In March, the Federal Housing Finance Agency (FHFA) issued a mandate that the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac reduce their lending by at least 10 percent this year. Under the new directive, Fannie and Freddie’s combined multifamily lending would be reduced to $56.9 billion from $63.3 billion in 2012.
Life companies have been seeking to increase their diversification in multifamily, but they are not going to “go over their skis” to make those loans, notes Stoffers. “They are going to maintain very credible underwriting,” he adds.
Allstate is one life company that had success in making apartment loans in early 2011. “Yields were higher, the GSEs pulled back from that market, and the life companies were able to garner more market share in apartments,” says Mike Moran, managing director, head of real estate investments at Allstate in Northbrook, Ill. During 2011, for example, approximately 50 percent of Allstate’s new originations were done in apartments versus historical activity of 15 to 20 percent.
Yet that involvement shifted in the latter part of 2011 and 2012 as GSEs regained market share. Allstate did almost no apartment lending last year. “Should GSEs pull back again, or should Treasury yields increase, that would be a wonderful opportunity to again access rationally priced lending opportunities,” says Moran. However, it is difficult for life companies to compete directly with the lower-priced mortgages that the GSEs offer.
Conservative streak remains
Life companies have a well-deserved reputation for conservative lending practices, and their appetite for risk has not changed notably even as the broader lending market is becoming increasingly competitive.
Life companies such as Allstate expect to hold firm in their tolerance for risk. “Our reaction to the capital coming in and yields going down and pricing becoming irrational is to not participate in that market,” says Moran. If pricing and risk don’t make sense, Allstate would rather be underweight in mortgages as an allocation and shift to areas where risk is priced more appropriately or that have good liquidity. “Generally, the life insurance industry is holding to its risk posture, recognizing that in the end, we are stewards of life companies’ capital and look to ensure repayment first and foremost,” he adds. - source: national real estate investor
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