Life Companies End 2016 Strong, Positive on Class B Apartments and Industrial


Life insurance lenders had a great year—at least that’s what it seemed like if you sat in on “The Future of Life Companies in Commercial Real Estate Panel” at  Mortgage Bankers Association’s 2017 CREF/Multifamily Housing Convention & Expo at the Manchester Grand Hyatt in San Diego.

Mark Fisher, the vice president and managing director of Stancorp Mortgage Investors noted that the “numbers reflect that for everyone there was a lot of ask in the last couple of years, so that made an environment where people could grow their portfolios. His firm lent roughly $1.7 billion last year.

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Similarly, Emily Franke a regional director at PPM Finance, said her company “started the year with a lower target than we ended.” By the second half of 2016, the lender’s allocations began to fill up and finished the year with just under $2.3 billion in deals.

For MetLife, volume totaled $15 billion in new commercial real estate originations, up roughly 8 percent from the year prior, according to Gary Otten, the head of real estate debt strategies at the company. “That was the fourth record year in a row,” he said. “You start to talk about cycles and peaks and what that signals, but the makeup of that new lending wasn’t materially risky or different than three years ago.”

The panelists were relatively optimistic about 2017 as well, given greater borrower interest in structured debt, but there are a few pockets of concern.

“We’re going to have a great first quarter because nothing drives borrowers to sign applications like higher rates,” Fisher said. On the other hand, if interest rates move up too much, it could lead to borrowers prepaying existing mortgages. “I think we’ve all suffered tremendous prepayments in the last couple of years,” he noted.

“In general, the fundamentals are very good and very positive,” said Franke. “The question is whether or not it’s sustainable.”

Industrial has done well because of e-commerce, she said, while there could be some uncertainty in multifamily, retail and office. Multifamily has been overbuilt, and retail and office are subject to lifestyle changes and preferences of the consumer and office-user. Acquisition financing has slowed because of differing expectations between buyers and sellers, especially as interest rates increase, she said.

“Throw in political uncertainty and where the Trump administration is going to take us,” Franke said. “It causes a lot of pause and we can expect a little pause in the beginning of the year.”

On the positive (and discounting President Trump’s tweets), “tax cuts, infrastructure spending and regulatory reform are all likely to improve economic conditions,” Otten said. “Boosting U.S. economic growth really helps every property type that we invest in, and I think the stronger U.S. economic outlook will lead to strong real estate demand.”

He echoed some of the concerns Franke raised, especially when it comes to overbuilding in multifamily, an oversupply of hotels in markets like New York City and Miami, as well as office struggling in Houston and Dallas.

When it comes to multifamily, “a lot of lenders are starting to move to the class B or suburban markets maybe because the brand new, urban [property] with high amenities is at such a point right now that there could be a bit of softening,” Franke said.

Otten agreed: “How many people can afford to pay $4,000 [per month] for a two-bedroom apartment, depending on the market?” He said that over the long term, class B apartments perform better than Class As.

“In an economic downturn, renters can’t afford that anymore. Couple that with the fact that you can’t economically build a Class B apartment, so that supply is a little more controlled. It’s kind of an interesting place to be both on the equity and debt side,” he said.

When it comes to industrial properties, all of the panelists agreed that e-commerce has made the asset very attractive.

Fisher said that Stancorp tends to finance older industrial properties, because in that space the owners are very experienced and there have been healthy rent increases. The only properties Otten is skeptical of are the buildings built in the 1970s and 1980s. While a good location could make those properties attractive, those buildings may not be as functional as newer ones, he said.