Life insurance companies upped the ante last year, processing multifamily deals hand over fist. And this year, most have increased their appetite and are charging through the first quarter at full speed, giving the government-sponsored enterprises (GSEs) a run for their money.
The largest life companies, such as Northwestern Mutual, Prudential and MetLife, have increased their allocations to commercial real estate this year, and continue to build on last year’s success. But to get the volume they hope for this year, many of these traditionally risk-averse lenders may have to get a little more creative—there are only so many core, trophy properties on the market.
Northwestern Mutual had one of its biggest years on record last year, originating perm and construction-to-perm multifamily loans totaling around $1.8 billion. All told, the company originated $4.5 billion in commercial real estate debt last year—and hopes to do $5 billion this year.
“We just raised our allocation to mortgages, so we need to get up to that level to get the portfolio size high enough,” says Dave Clark, a vice president who runs the commercial real estate lending arm of Milwaukee-based Northwestern Mutual. “Just under 16 percent of the portfolio is in mortgages—at one point it was as high as 22 percent. And there’s a lot of room between 16 and 22.”
Like Northwestern, Prudential is eyeing a bigger year, hoping to build on the $1 billion in balance-sheet loans it originated in 2011. In the past, about 20 percent of its loan portfolio was multifamily debt, but the credit-crisis shrunk that figure down to about 15 percent.
“We’d like to get it back to that 20-percent level over the next few years,” says Paige Hood, who runs the general account side of Newark, N.J.-based Prudential Mortgage Capital. “So we hope to do more in 2012.”
Pricing and Process
Most life companies today have the ability to be competitive with, and sometimes price inside of, the GSEs. This is particularly true for lower-leverage deals—and the most desirable assets.
“Our niche is to do larger, high-quality loans, and we are willing to take basically lower rates to get the high quality,” says Clark. “Because of that, we tend to be more competitive with the GSEs than the average company who maybe has a higher risk and yield profile.”
But it’s not just attractive pricing—life companies also offer the ability to lock a rate at application, weeks ahead of the GSEs. And life companies can underwrite deals in a more flexible manner—pre-stabilized assets aren’t turned away, as they are by the GSEs. Whereas the GSEs hold fast to the “90-for-90” rule—that a property must be 90 percent occupied for at least 90 days to get a loan—these balance-sheet lenders aren’t bound to trailing numbers.
“I think our niche in the market is taking a little bit of construction risk or leasing risk or repositioning risk as a way to compete with the agencies,” says Hood. “We can offer the ability to fund while the property’s in lease up, we also have some prepayment flexibility that we can build into our deals in certain situations.”
Searchlight
It might not be an easy task for these companies to keep growing their portfolios, though. Life companies typically cherry-pick only the best deals in the biggest markets, but there are only so many of those to go around.
“Since the company is growing faster than the real estate market, we start running into concentration issues if we keep going into the larger cities,” says Clark. “We are definitely underweight when you get outside of an MSA and into the country. In theory we’d like to do more of that.”
But the company has a limited number of staff, and the efficiency of placing large amounts of capital into one deal is attractive. Last year, the company’s average loan was between $50 and $60 million, and if it started doing more $20 million loans, it would have to originate three times as many.
To help grow its portfolio, Northwestern is thinking about getting active in Canada again. “And there are other places—we’ve been active in manufactured housing, lending on the land, and we could look at being more active in senior housing, or students,” says Clark. “But I think it would be more practical in the short run to try to penetrate some of the smaller markets and be willing to do some smaller deals.”
