LaSalle’s Sonnenberg tracks lender tilt toward senior mortgages

Institutional allocations are also favoring this segment of the credit markets.  

LaSalle Debt Investors is touting the benefits of being a senior mortgage lender, with CEO Glenn Sonnenberg highlighting the relative security of being in the most protected part of the capital stack.

The Chicago-based commercial real estate origination arm of LaSalle Investment Management believes senior mortgages provide a hedge against turbulent or declining markets and are a very desirable lending strategy at this point in the cycle. Additionally, a senior lender has more control over property-level approvals and cash expenditures, Sonnenberg said.

“As opposed to mezzanine, preferred equity, and other equity hybrid strategies, first mortgages are truly debt and, as such, offer the relatively low leverage and current cash flow one should seek in being a lender,” Sonnenberg told Real Estate Capital USA.

First mortgages that are modestly leveraged continue to generate net returns to investors that are hundreds of basis points higher than comparable credit risk in more traditional, public debt, Sonnenberg said.

“Even with some tightening of credit spreads, the value proposition is compelling,” he added.

Sonnenberg reckons the pipeline is full of borrowers seeking floating-rate bridge financing for value-added or ‘seasoning’ strategies.

“Borrowers in growth markets, particularly in the multifamily and logistics sectors, are responding to the influx in businesses and renters that seek high quality product,” Sonnenberg continued. “[This] can participate in rising rents in a supply-constrained environment.”

Relative stability

Bryan Donohoe, a partner and head of real estate debt at Ares Real Estate Group, said the firm is seeing greater demand for senior mortgages among debt investors. This is due in part to the stability, principal protection and return profile of these loans.

“During crises like the GFC, the Russian debt crisis and now [the covid-19 pandemic], when people are invested solely in mezzanine-like structures, the thickness of the [mezzanine] tranche is minimal. So, when values eventually do move, even if temporarily, the structures are such that you lose your seat at the table to negotiate and lose your ability to participate in a recovery,” Donohoe said. “[Whereas] first mortgages that have some moderate leverage are able to achieve returns that are attractive to some pools of investors but to do so at a more stable format than mezzanine or preferred equity structures.”

Consultant perspective

RCLCO believes borrower appetite for senior mortgages has been improving steadily as liquidity has returned to the market across real estate property types, compared with the low levels seen during 2020. The consultant is also seeing institutional appetite pick up for senior mortgage-focused investment strategies.

“[There’s now] a more active investment sale market driving higher mortgage origination volumes,” Andrew Janko, managing director, told REC USA.

“We expect real estate credit liquidity should continue to improve, both as investor risk appetites recover and as institutional investors continue to shift their investment allocations towards real estate generally, and real estate credit specifically,” Janko said.

The consultant has identified various potential benefits to investors in real estate credit, which it believes can provide an attractive yield benefit in a low interest-rate environment compared to other types of credit investments such as corporate credit.

“There is [also] the additional structural benefit of security in the underlying real estate,” Janko explained. “For real estate-focused investors, the ability to invest in mortgages in addition to equity creates a larger universe of potential investments, as a large part of a real estate investment’s capital stack is frequently composed of debt.”