Featured in Commercial Property Executive
A lower cost of capital is helping make them a highly competitive debt source.
As national banks work out problem loans and prepare for new capital reserve requirements, they are limiting new real estate loan exposure. As a result, alternative lenders are stepping up to fill this gap, often at a significantly higher price than bank loans. Life insurance companies, however, offer more competitive rates than private lenders, like debt funds and family offices, and, therefore, are capturing a larger share of the core floating-rate business.
“We are seeing the groups who have various buckets of capital throughout the risk spectrum, such as Athene, Met Life, Voya, and Eagle Realty, to be most successful in deploying debt capital for the current needs of the market,” said Al Moczul, senior vice president of Life Company & Joint Venture Equity at Berkadia.
Commercial mortgage loans have been part of the insurance company asset mix for the last 20 to 30 years. Their real estate allocation is “very ambitious” and growing each year, according to Ivan Kustic, vice president at MetroGroup Realty Finance.
According to the Mortgage Bankers Association, the dollar volume of commercial and multifamily loans made by life companies grew 60 percent between the first and second quarters of 2024. With the $12.8 billion in new loans, life companies’ share of the $4.7 trillion in outstanding CRE debt is now 16 percent or $753 billion.
Lending by depositories grew just 21 percent between Q1 and Q2. But banks are still by far the largest holder of outstanding CRE debt at 38 percent or $1.78 trillion, according to MBA.
“Most (life company) insurers are inline or slightly above last year’s volumes,” said, Mike Cale, senior vice president of Capital Markets at Berkadia. “There has been an increase of rate-locked transactions over the past 30 to 45 days as a result of the dip in the treasury market. If the reduction in treasury rates continue into 2025, we would expect (life company loan) volumes to increase next year.”
What life companies finance?
Most life companies have established lending criteria, policies, practices and preferences, and only lend on the major property types: retail, office, multifamily or industrial, Kustic said. As such, they have tended to avoid some property types, like hospitality and self-storage, as they view those as businesses that require a high level of expertise and management. But, with banks less active today, they are getting a look at a lot more opportunities.
“The majority of their allocations have gone toward and are still going toward multifamily and industrial,” he said, but noted a recent uptick in their appetite for hospitality.
And, while they continue to look for opportunities in growth markets, such as the Sun Belt states, they remain active in stable markets with reduced supply, such as the Midwest, Moczul noted.
According to Kustic, large life companies with portfolios of $100 billion or more typically lend only on assets in major metropolitan markets and have minimum loan amounts of $50 million. Meanwhile small and midsize life companies have a long history making $3 million to $10 million loans in secondary and tertiary markets. “Their ability to understand these markets and provide risk-based pricing helps in their overall portfolio performance,” he suggested.
Life companies tend to limit their exposure to large CBD office buildings or regional retail malls—the two asset classes
experiencing the most value deterioration.
Kustic’s firm represents two midsize life companies, with portfolios of $11 billion and $20 billion, and neither has had a foreclosure in the last five years and they’ve had little or no delinquencies.
Why borrowers prefer life insurance loans?
One key feature of most life insurance loans today is they are non-recourse, said Gantry Director Charlie Kokernak. “Many of our life companies can’t accept deposits or a recourse guarantor, even if they wanted to, but that credit enhancement is something that the banks can lean on at times,” he contended.
Banks may also require a depositary relationship with borrowers. “If a client has $10 million on deposit in the bank and is asking for a $5 million loan, of course the bank would be comfortable giving them that loan without a personal guarantee,” Kokernak added.
Large life insurance lenders Gantry works with are comfortable going up to $100 million, but there are a handful of companies that will go up to $300 million. At that point, however, the lender wants some type of additional relationship with the borrower.
“When comparing a non-recourse product from a life company and a bank, we are finding that the vast majority of the time, what they (life companies) are offering is competitive if not more competitive terms,” Kokernak continued.
The life insurance industry uses the 10-year treasury bill rate (4.37 percent on Nov. 1) as the index they match plus 2.0 percent to 2.5 percent. Banks typically charge Prime based on SOFR (4.9 percent on Nov. 3) plus 2.0 percent to 3.0 percent. Private lenders, like debt funds and family office charge 2.0 percent to 2.5 per 4.0 percent more than banks.
To illustrate, Kokernak cited a recent life company loan that came in at a high-5 percent on a fixed-rate, non-recourse basis for a self storage and industrial transaction he recently shopped for a client. The banks his client had banking relationships with came in at low- to mid-6 percent and were not only looking for a depository relationship but were looking for some semblance of recourse, whether that was partial recourse that burnt off or full recourse from the start. “So, in that regard, the life company provided better pricing,” he added.
The bottom line
Banks and higher-cost alternative lenders may provide a little less leverage than life companies, but leverage is not always the top concern for lenders.
“What’s really been limiting loan proceeds over the last 18 to 24 months is the cash flow in place at the asset, as cap rates in many instances are below the coupon or borrowing rate, Kokernak said: “As a result, most lenders across the board, including life companies, are maxing out between 55 to 65 percent of the asset’s value or cost of the project.” But, he added, most life companies can go as high as 75 percent.
The pull-back by banks is a three-fold problem, according to Shlomi Ronen, founder & managing principal at Dekel Capital. New capital reserve requirements also caused bank stocks to plummet, stifling their ability to raise capital. Additionally, he said, that banks lend capital based on their balance sheet and they are experiencing a low level of loan payoffs, the amount of capital available to recycle back into the lending market is limited.
Life companies’ cost of capital is dramatically lower than banks because they fund loans from their general account, which is the premiums paid by policyholders, explained Kustic. He also noted that most of them contract with other capital sources, such as pension funds and municipalities, to invest their money in commercial mortgages and manage their portfolios. A number of insurance companies have also formed debt funds, allowing them to offer borrowers a wider variety of loan types.
“Oftentimes we will talk to a life insurance company about a perspective loan, and they would say our general account would be interested in providing the loan with these terms, and our managed account would be interested with slightly different terms,” Kustic said.
Life insurance company lenders are also more patient, providing terms from seven to 20 years. “These durations match up well with insurance and annuity products that the life insurance company offer clients,” Kustic added.
Lately, with interest rates higher, borrowers have been asking for shorter terms of three and five years to get through these higher rate times in anticipation of lower rates in the future,” he added, noting that while some of the life companies are accommodating these requests, ironically, the inverted yield curve for shorter-term loans are priced higher than 10-year loan.
Responding to changing needs
While life companies have traditionally offered longer-term, fixed-rate, permanent financing, Moczul said, over the last five years they also have offered transitional loans and construction financing for three- to five-year terms with flexible prepayment options. “Insurance companies have had to pivot to deploy these types of strategies to meet the market demand,” Cale noted.
He also said that due to consolidation within the industry, private equity firms who’ve acquired insurance companies are entering this space. “The net positive of this effect has given insurance companies alternative products to offer, such as shorter-term bridge loans, preferred equity and constructions loans,” Cale said.
Banks are facing a “wall” of CRE loan maturities–according to MBA, nearly $2 trillion of CRE’s outstanding debt will mature over the next three years—at a time when asset valuations have dropped up to 50 percent for office and 30 percent for multifamily. But the problem is having little impact on life company loans because the majority of their loans are on a longer maturity schedule (10 to 20 years vs. five to seven years for bank loans), Kokernak pointed out.
The development industry has experienced the biggest gap in financing availability since banks exited this segment of the market, noted Gregory Michaud, managing director & head of Real Estate Finance at Voya Investment Management, noting banks have long been the biggest source of construction capital. As a result, Voya, formerly a life company that now manages capital investment for institutional investment funds, ramped up its construction financing program over the last 24 to 30 months. “We have had a construction loan program for over two decades and come in and out of the market when we believe there is good relative value,” he said.
Construction loans originated recently have provided “the best relative value,” Michaud said, but spreads have compressed since more private lenders have entered this space to fill the void left banks pulling out.
Voya, which invests in core, core plus and opportunistic strategies, established the Commercial Mortgage Loan Fund along with 27 separate managed accounts, which are sources for funding commercial loans totaling approximately $14.5 billion of AAU (Agency Advice Units). Michaud noted that his company expects to finish this year with $2.5 billion in loan volume, with an average deal size of $30 million. However, the largest deal this year was $90 million.