Life insurance companies and their affiliates like to finance and sometimes invest in multifamily projects. To find out about the appeal, challenges, and limitations of the various arrangements, Multifamily Executive caught up with Sean O’Connell of Securian Asset Management, who is affiliated with Minnesota Life and Securian Life. Securian Financial serves as a lender to multifamily owners and does not own any properties, but O’Connell responded to some questions about how the equity investment side works as well.
MFE: Why do life insurance companies invest in multifamily properties?
O’Connell: The multifamily sector is one of four primary sectors that insurance companies target for their commercial mortgage investments. Others being office, industrial, and retail. Historically, the multifamily sector has had minimal defaults. The life insurance industry has long duration liabilities, hence long-term, fixed-rate loans are a good match for these liabilities. Some insurance companies invest in the space as equity investments, both for existing properties or new development.
MFE: How do life insurance companies typically identify candidates for investment?
O’Connell: On the lending side, most companies partner in markets with commercial real estate loan brokers. Usually a life company will enter into a preferred relationship with a brokerage company and give exclusive or semi-exclusive rights to the broker to represent the insurance company in that market. These are long-standing relationships that may last 20 years or more. These brokers call on owners of real estate, including multifamily, seeking those in need of new loans or refinancing existing loans.
MFE: Are Opportunity Zones still playing much of a role in how properties/projects are selected?
O’Connell: In my experience, no. We have spent some time analyzing the pros and cons and have come to the conclusion, whether as lender or owner, the Opportunity Zone designation is not the determinate factor in making the investment.
MFE: Do you expect life insurance companies will be investing more or less this year in multifamily properties, and why?
O’Connell: To the extent the market is favorable from a pricing and leverage perspective, I would see more demand rather than less. Stable cash flows and the lack of affordable single-family housing in many communities support ongoing demand for apartments along with adding diversity to your overall commercial mortgage portfolio.
MFE: When life insurance companies are considering what to invest in, what is the biggest competitor to multifamily projects?
O’Connell: Without a doubt, the federal government is the biggest competitor, primarily through Fannie Mae and Freddie Mac.
MFE: Are life insurance companies typically more interested in existing communities or new construction projects?
O’Connell: Interesting question. We have a bias for existing, well-managed communities, both urban and suburban. Our view is the new product being delivered has to cater to the higher-end tenant, primarily because of development costs. Our thesis is the available tenant market is not as deep for the new product, and, when the next recession hits, demand will drop. We believe there is a much larger pool of existing and potential renters for older properties.
MFE: Are value-add properties attractive to life insurance companies?
O’Connell: Most life companies do not have the infrastructure to participate as a bridge/construction lender for these types of investments. Insurance companies generally will make a long-term loan once the value-add has been completed and size the loan on the increased cash flow of the property.
MFE: What’s the biggest challenge for life insurance companies in investing in multifamily projects?
O’Connell: There are two. Fannie and Freddie have a lower cost of funding, so they have a leg up on loan pricing. For us, [it's key to find] those owners who are really good operators, know their market and competition, and recycle capital back into their communities.
