Allianz Real Estate’s debt business in the US has originated $1 billion of new loans year-to-date, but the strength of this pace could be challenged by today’s rising interest rate environment.
“From an origination standpoint, we are in excess of where we were last year. There are a variety of reasons for that and we’re not entirely sure that activity will maintain itself,” Michael Cale, co-head of debt investments at Allianz Real Estate, told Real Estate Capital USA. “The cost of debt capital is becoming a major topic of conversation. Corporate bond spreads have widened, Treasuries have gone up and the all-in interest rate clients have been paying has also risen. It is a fact of life that with inflation where it is, we are starting to see an uptick in cap rates across all property types and I think that will continue throughout this year.”
Because interest rates have been historically low for more than a decade, the impact of higher rates can have an outsize effect. Additionally, turbulence in the debt markets has created some choppiness on the acquisition side.
“We have been in a low-rate environment for such a long period of time that a 25-basis point move in cap rates from 3.5 percent to 3.75 percent is very impactful on value. Margins are so tight that just a little bit of movement in cap rates can have an effect,” Cale said. “The market is different than it was four months ago and we’re sure it will see similar changes over the next 60 days.”
Allianz is a long-term investor in both debt and equity, with different buckets of capital for different needs. “The majority of what we are putting out is on the fixed-rate side,” Cale said. “We do have some floating-rate capital as well that we’re deploying as there has been increased demand from borrowers who want more flexibility. But we are well-positioned to move forward.”
Part of the firm’s ability to increase its originations stems from its ability to think long-term and offering a wide range of loan sizes which fit with the needs of a broad range of borrowers. The firm’s most recent activity has been driven in part by high-net-worth family clients which were looking to lock in long-term fixed-rate financing as interest rates march upward. In the past, these borrowers might have opted for floating-rate debt.
“One of the things we are doing right now is trying to get in front of our clients and show that we are a multi-faceted lender with different products to offer. Given our history, client base and ability to do repeat business, we seem to be having some success in that arena,” Cale said.
The firm has re-entered the retail market along with some of its high-net-worth clients and has focused on well-located properties, Cale said. Allianz has also expanded its portfolio in student housing and self-storage, with concentrations in multifamily, logistics and medical office properties. Although the firm last year bolstered its multifamily and industrial portfolios, it has started to step that back a bit, Cale added.
“We have done some self-storage, we have done some senior housing and we are certainly looking at the single-family rental market, where we have a position on the equity side,” Cale said. “But the senior family housing market is not a prevalent yet on the debt size yet, in terms of the ability to underwrite larger loans.”
The company has always been active in the four main good groups, which have historically made up the bulk of its business, Cale said. “As we are all well-aware, retail and office have slowed down over the past couple of years because of what has happened with the situation around the covid-19 pandemic. So, like others, we have ramped up our multifamily and industrial lending,” he explained.
Allianz is keeping a close eye on inflation, with Cale citing the potential impact on rental rates and material costs.
“When there is inflation in the market, you can also assume there is going to be real rental growth,” Cale said. “We have certainly been seeing that in the multifamily space. But inflation is something we look at very seriously because we do some construction-to-permanent lending. From a building standpoint, you’re looking at a 12-month project, and you’re seeing headwinds on building materials, appliances and other things of that nature that could affect the way you’re looking at an asset.”
The company typically does about 50 to 60 deals a year, with exposure restrictions on some markets where Allianz believes it is overweighted. “When you’re building a portfolio, you have to look at it holistically,” Cale said. “That portfolio will probably be heavy in coastal states, but we certainly do deals in the Midwest and the Sunbelt and will continue to do that.”
The insurance company lending world is different than it was in the past, with more third-party capital allocated to general accounts on both the fixed- and floating-rate sides. “We are a balance sheet lender, we are a discretionary lender and we have a surety of closing and we believe these factors help us to win business. That long-term reputation is what we hang our hats on,” Cale said.
Allianz’s focus, however, is on forming relationships.
“We want to chase people, not deals. We get deals in from every broker and banker in the country. It is very important for us to be strategic about who we do business with, which means we chase relationships with sponsors, mortgage bankers, brokers, high-net-worth families and other parties and there have been situations where we have won deals because we had four or five relationships with the parties,” Cale said.
And the inflation seen today could create dislocation as well as opportunity. “This dislocation is good for a lender like Allianz, which has a great sponsor base and network. The more dislocation in the market, the more we believe that the strength of our balance sheet and our ability to close loans is important to sponsors,” Cale said.