Life Companies Lead in Turbulent Times
In what remains a tumultuous market, insurance companies have remained a consistent, reliable and competitive capital source for commercial real estate finance. As banks have mostly continued to be sidelined from actively pursuing new originations and CMBS outcomes remain subject to market volatility, these time-tested insurance companies have shined as they continue to grow their output of stable, fixed- and floating-rate debt across the major CRE asset classes.
According to the Mortgage Bankers Association, insurance lenders have grown their annual share of new commercial mortgage originations in commercial real estate by a meaningful 5 percent in both 2023 and 2024 over their 2022 allocations, making them responsible for 16 percent of all new originations market wide annually since the upward spike in rates. Life insurance companies view commercial mortgages as a highly desirable alternative investment strategy with low delinquencies and wish to grow their mortgage portfolios as a higher percentage of their overall investable assets. As a dedicated life company correspondent, I expect that in 2025 they will sustain and continue to grow their position, infuse liquidity into the CRE markets and remain committed to expanding their allocations to CRE lending.
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Competitive landscape
Borrowers have gravitated towards insurance loan options as a prevalent capital source and have gotten comfortable with the programs they offer and how they differentiate from the rest of the market. They really have become the “go-to” lenders amidst all the market turmoil. They are often more conservative on LTV than CMBS, but offer a far more streamlined process and rate lock at application. Therefore, all deal terms and economics upfront are set up front, which is a big competitive advantage when dealing with swings in treasuries. In today’s marketplace, even though we have seen this shift somewhat, banks are ever more reliant on recourse, deposit requirements and performance covenants. Insurance companies, meanwhile, provide non-recourse loans with a focus on the subject property with strong sponsorship and mostly do not have any ongoing loan covenants. They are also straightforward on their credit decisions and underwriting criteria, focusing on quality and experience of the sponsor, historic performance on the asset, business plan, and local submarket fundamentals (to name a few).
The most compelling advantage for any investment or refinancing transaction in what remains a tense rate climate is that insurance companies are well known for rate locking at time of application. They set deal terms up front vs. going down to the closing with final debt cost a moving target, which can result in loan proceeds movement up until the day of closing as a result of movement in rates. This approach takes uncertainty out of the underwriting process, helps make investment decisions swifter and paves the road leading to certainty of close.
Further, insurance company loans today mostly feature some form of interest-only period, many offering full term IO. While underwriting is still based on amortizing DSCRs, many insurance companies have become creative in underwriting to interest-only debt coverage ratios in order to increase proceeds and meet current demand. At the end of the day, life company commercial mortgages are balance sheet execution, providing flexibility and the ability to make common sense underwriting and business decisions through the loan process and, after the fact, loan servicing for the life of the loan.
Consistency: permanent loans
Borrowers looking to finance or refinance a performing asset at today’s market value should be considering life company execution as a primary option. Life companies have historically been known as a definitive source for stable, conservatively leveraged, long-term debt on high quality and performing assets. Their five-year and longer programs continue to shine in tumultuous times. This historical norm has shifted over the years.
Life companies have largely been known for being conservative and lending in primary markets. However, in order to deploy more capital and/or get higher yields, insurance companies are becoming more and more comfortable financing assets in secondary markets and elsewhere, where fundamentals and performance meet necessary underwriting criteria, and pushing proceeds on core assets in strong markets they believe in. Their all-in rates will be set at 125bps to 225 bps above corresponding treasury yields (based on individual features of each asset, market, and risk). This has recently been a moving target as spreads are compared to corporate bonds as an alternative investment and require a premium as they are illiquid. The recent market turmoil sent corporate bonds soaring during the uncertainty and, thus are having an impact on lender spreads, seeing them increase as a result. Still, these programs continue to come in at attractive rates, beating competing sources for any borrower looking to remove uncertainty from the table, and their spreads still land commensurate or below competing sources.
Creativity: core plus + bridge
One area where insurance lenders have become creative beyond their traditional fixed-rate permanent loans is in their bridge and core-plus programs. Life companies lent money for over a decade after the GFC at historic lows and looked for ways to increase yield. They created value-add bridge loan programs for light- to heavy-lift business plans and transitional assets. These programs have competed with the debt funds and often are priced more competitively and offer balance sheet, life company execution with certainty of close. Insurance companies have even created core-plus (hybrid permanent/bridge) buckets of capital to meet current market demand. Core-Plus capital has the ability to underwrite future performance of an asset and/or push loan proceeds (think break-even debt coverage ratios to minimize cash-in refinances and aim to be cash neutral) while providing core type pricing and terms.
This comes with a spread premium of 15bps-50bps, depending on the overall deal, and offers short to long term fixed and floating rate options. We’ve seen a tremendous benefit to borrowers needing to refinance an asset at maturity with a low existing interest rate and would typically require cash-in based on today’s rates. Core Plus money is a great alternative to minimize cash-in while staying tightly priced and not having to go with more expensive debt fund capital.
The surprise: office
The reality of office in the current cycle is a case of haves and have nots. Commodity office product in the major CBDs continues to suffer from post-pandemic shifts in workstyle, and while vacancy is improving as back to office strategies unfold, most of these assets will continue to struggle until values undergo a major reset.
For performing assets in strong submarkets, insurance companies are stepping up to offer permanent loans for the right type of office properties. Select submarkets like Century City, parts of Culver City, or San Diego’s UTC in Southern California continue to support performing assets. These pockets can be found across the nation. Life companies’ focus on performing class A, multi-tenant buildings, where average weighted leasing term aligns favorably with loan duration and performance demonstrates high DSCR. One area this is occurring is acquisitions with a reset of basis and high cap rate in a strong market, resulting in very strong underwriting metrics with healthy debt coverage ratios and debt yields. The strong cash flow and fresh capital in the capital stack has helped insurance companies get comfortable with the right type of office.
The unexpected star: retail
Retail has continued to outperform expectations post-pandemic and has become a highly favored asset class for insurance companies. They focus on grocery-anchored retail centers and well-located, necessity-based neighborhood retail. Power centers are less in favor with insurance lenders because required leverage is often beyond their comfort zone and best served by a CMBS program, but they will still fund these assets where performance and tenants create stabilized conditions at the right leverage point. Core-plus and bridge loans are available from insurance lenders for retail assets in transition, especially with tenants in tow or a clear plan for enhanced performance is in place.
The mainstay: industrial
Although there has been a shift in industrial overall, insurance companies remain extremely comfortable financing industrial real estate in all its various forms: from large-footprint warehouses to multi-tenant business parks. They understand the business model, and while their preference is for modern, institutional-grade product, they are more than willing to underwrite performing assets in high barrier-to-entry markets where logistical efficiencies or demand are clear and demonstrable. Industrial is also a favored asset class for the core-plus buckets of capital from insurance companies when in-place rents are below market or a portion of vacancy exists in a market where demand supports leasing momentum.
Opportunity and availability
Many borrowers have lost their relationship lenders, as banks retreated to rightsize their existing loan portfolios, recapitalize and ultimately strengthen their balance sheets. Alternative debt sources have become critical in that context. Insurance companies are more accessible than ever, and stand out as prime consideration. Again, where CMBS is laborious, complicated and subject to rate volatility at closing, insurance debt is streamlined with a clear rate lock and terms set at application. Where banks are tentative in the return to new origination and focused on recourse, deposit requirements and performance covenants, insurance companies are non-recourse and focus on the asset as collateral. In my humble opinion, when the market fundamentals and the asset is a fit for life company execution, commercial mortgages from the life insurance companies should quickly rise to the top as the preferred capital source when considering all other options.
Andy Bratt is a principal with Gantry.
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