Putting 2020 in perspective through a 2021 lens…
There is no doubt that 2020 will go down as one of the toughest years for unforeseen economic disruptions on record, however disciplined commercial real estate lenders, and particularly life companies, were prepared to react, stabilize and get back to business. LifeCo investments in commercial real estate debt have become a preferred allocation for what is often a best of class option as a funding source. If the systemic failures of the last great disruption in 2008 did anything, it gave institutional originators like Gantry confidence in the tools at hand to deal with the unanticipated, non-systemic disruptions of the covid 19 pandemic.
Like the banking industry, life companies spent Q2 2020 essentially working on forbearance matters and were able to work with borrowers to come up with short-term solutions in record time. Institutions had to put money out, consequently more dollars went into the safe asset classes like multi-family and industrial at the expense of office, retail and hospitality. For quality or qualifying assets with strong fundamentals combined with an accommodative US Treasury, interest rates were pushed down further for the favored classes, which was a very positive outcome if you were a borrower.
The second half of 2020 offered some promise for what we will see in 2021. Financing for office buildings and retail was significantly impacted due to the pandemic-related performance disruptions from home officing, social distancing and shelter in place orders. There were still significant opportunities for net lease and single tenant credit assets in both these classes, with bright spots for retail being in necessity driven, credit-tenant oriented properties and for the office sector in credit-tenant net lease and medical office properties.
So, what’s to come for LifeCo lenders in 2021?
A number of our clients locked in multi-generationally low interest rates in late 2020 and early 2021. Even with the recent jump in treasury rates, rates are still very low. We are recommending to our clients that a comprehensive review of existing debt and asset goals should determine if maturing loans (or even near maturing loans) can be replaced by low-cost debt currently being offered by the LifeCo lenders. This includes:
Multifamily – This asset class remains favored in 2021, with significant allocations pursuing long-term placements for quality assets at what remain historically low interest rates and extremely favorable terms. Competition for loans on stabilized assets with strong fundamentals is high, providing ample options to meet a variety of ownership and exit goals alike.
Industrial – Arguably the asset class that was the biggest winner in the new normal of the post Covid economy. Allocation interest in this asset class is high, and for assets supported by strong market locations, fundamentals and operative performance, opportunities are significant and lender interest high.
Self Storage – A hybrid asset class that blends operative imperatives of industrial, multifamily and retail has become an institutional darling. Strong performance in both downcycle and upcycle markets has proven out the fundamentals for underwriting these assets with a range of life company lenders.
Office – Credit-tenant net lease and medical office properties will continue to be favored by LifeCo lenders where fundamentals warrant. Quality and well-leased office continues to attract interest when stabilized by occupancy and location, including expanding interest in key suburban markets seeing a boost in the new normal of the post Covid workplace migration.
Retail – Allocations are available for credit-tenant, net lease properties and properties meeting the “necessity” classification including grocery, drug, and essentials anchored centers.
Are there any issues/black clouds on the horizon?
About 25% of Gantry’s $17 billion loan servicing portfolio is retail. Both bank and life company regulatory bodies have provided borrowers in this asset class with assistance through the pandemic. But what is going to happen when that forbearance period ends?
At minimum the issues impacting retail are going to continue. If those assets are recycled to another asset class, say housing, that is going to be a multi-year process. Though not purely life company related, if newly completed/bank financed projects are undergoing slow lease up, those assets will remain on the balance sheet of banks for longer periods. It’s not only depriving banks an opportunity to recycle their capital for new construction, but also provides fewer takeout opportunities for long term lenders.
Mark Ritchie has over 30 years of experience in commercial real estate finance. Based in Los Angeles, he is a principal of Gantry, which is the largest independent mortgage banking firm in the US. Gantry ranks fourth in the nation for life company debt origination, as reported in the recently released Mortgage Bankers Association 2020 Origination Rankings.
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