Insurance company lenders scale relationships, build new ones

While commercial real estate lending activity is down, the opposite is true for insurance company lenders, which are finding places to expand their platforms despite a slow market.

Insurance company lenders, traditionally a stalwart of the US commercial real estate lending market, have not been immune to economic and geopolitical factors that have put a damper on transaction volume throughout 2023. But amid the dislocation and distress, these lenders are finding their origination levels to be about the same or even a bit higher than in 2022 as they scale existing borrower relationship and forge new ones.

Peter Gordon, chief investment officer of the US commercial real estate debt team at Nashville-based AllianceBernstein, says his team has been actively – and cautiously – deploying capital with relationship borrowers. The firm is able to help fill the void in the market caused by bank lenders that have been scaling back their activity.


Life insurance companies’ share of
lending originations in Q3


Share of originations in Q2

According to Dallas-based brokerage CBRE’s third-quarter lending momentum index, commercial real estate lending activity in the US is down by about 47 percent on a year-on-year basis. While banks remained the most active lender, making up about 38.4 percent of all new originations during the quarter, life insurance companies made up 33.5 percent of originations, up from 26.8 percent during the second quarter.

“From a dollar value standpoint, [originations] will be down year-over-year. But as a percentage of the total market, they will be a bigger piece,” Gordon says. “In the current environment, fewer deals are getting paid off than in a normal year, so life insurance companies have less capital to deploy, but they’re still active.”

Relationship management

Insurance company lenders say they are shifting their focus to originating more construction loans and structured financing in today’s market. This is necessary, given the paralyzing impact the Federal Reserve’s moves to fight inflation have had on the commercial real estate transaction market.

The US central bank has raised rates by more than 500 basis points over the past 18 months to a target rate of 5.25-5.5 percent, and this has been felt in the number of sales completed this year, market participants say. According to Q3 2023 research from New York-based data provider MSCI, transaction volumes were down 53 percent year-on-year from the same period in 2022. There were about $89 billion of new deals completed during the third quarter, and about $276 billion of US deals done year-to-date, MSCI found.

Melissa Farrell, head of US debt originations at Newark, New Jersey-based insurance company manager PGIM Real Estate, believes the steep rise in rates and the increase of the 10-year US Treasury to the roughly 5 percent range caught the market by surprise. But PGIM saw this as an opportunity to step in, particularly in the structured lending space.

Farrell notes senior lenders still active in the market have decreased the amount of leverage they will provide, particularly on construction loans. The leverage available for construction loans has dropped to below 55 percent while many developers are seeking total leverage of 65-80 percent. “We have seen a dramatic increase in preferred equity and mezzanine loan requests,” she adds.

Similarly, Peter Cerrato, a managing director for US real estate at Charlotte-based manager Barings, says the firm is seeing opportunities in construction lending.

“Insurance companies have historically been attracted to longer-term, fixed-rate, core mortgages [because] of their credit profile and asset liability management benefits. Some insurance companies are pivoting to construction lending, where they can achieve a significant premium as far as spread,” Cerrato says.

Cerrato says spreads on construction loans have widened and lenders are able to obtain the same return at a lower loan-to-cost and better credit profile. Supply is also expected to slow down, so a dearth of new products should provide strong future demand for projects.

Additionally, the long construction period for new assets means these properties will be coming online at a time when there is less competition due to the overall decline in construction lending.

“During the GFC, there was this void of newer properties for a period of time. Developers that delivered projects early on the back end of that cycle were very successful with their timing,” Cerrato notes.

Sector stressors

Insurance company lenders who spoke with Real Estate Capital USA expressed concerns about sector-specific volatility that is causing them to proceed with caution. There are also concerns over valuations as well as the impact of higher insurance costs.

By sector, insurance companies have the largest concentration in multifamily loans, which make up about 30 percent of their portfolios. Office loans make up about 20 percent, while industrial loans account for about 16 percent, according to data from New York-based rating agency Fitch Ratings.

David Marek, director and primary rating analyst at Fitch Ratings, says while multifamily is typically a strong asset class, the agency is observing some stressors as a result of the current high-interest rate environment.

“[The multifamily sector has] been strong due to the lack of homes. There is a small amount of those loans that are floating with no [interest rate] cap, so we are seeing some cracks in [that] small amount,” Marek says.

Another moving piece is the surging insurance costs, which have complicated lenders’ calculations during the underwriting. The challenge for lenders is balancing the growth in both top line revenues and expenses, Gordon says.

“In the past year, in some markets, we’ve seen rent growth decelerate and expense growth accelerate, [which makes] forecasting future cashflows difficult when it comes to sizing the appropriate amount of leverage,” he adds.


In a higher-rate environment with lower transparency around valuations, all commercial real estate lenders will need to be more prudent. “Life insurance companies gravitate towards the safety-seeking end of the commercial mortgage loan risk spectrum rather than the yield-seeking end due to the duration of their liabilities,” Gordon notes.

Although insurance companies are not generally participants in distressed loans, the market has started to see some discounted note selling.

Gordon believes more distressed selling needs to occur before there is sufficient price discovery for asset values to stabilize.

“Ironically, although everyone’s least favorite asset class, the office sector is likely to be the sector that sees most transaction activity in 2024,” Gordon says.

“Office values have reset more dramatically than any other sector due to uncertain or weak fundamentals and buildings are starting to look cheap against most historical valuation metrics. Despite the return-to-work/work-from-home story still being in flux, at some point investors will start to buy based on the value per square foot alone.”

Still, commercial real estate loans will always be part of an insurance company’s portfolio because of their relative stability.

“For insurance companies, [commercial real estate] should remain an attractive asset class for their portfolios from a diversification and risk-adjusted return standpoint,” Barings’ Cerrato says.