Insurance companies have never been ones to spell out their allocations for commercial real estate. Usually real estate developers and investment managers are left to make their best guesses at the start of the year as to what insurance companies will be doing, both in terms of lending and in what they will be investing. By now it’s pretty clear that life insurance are not just lending defensively to real estate this year — that is, lending just to keep their existing portfolios solvent — but are actively expanding their business.
The latest proof point: Bernard Winograd, Prudential Financial’s executive vice president for U.S. businesses. According to comments he made in a conference call, the insurance company is happy to be a lender to real estate again. “We feel good about the upside opportunity for valuations relative to the downside risk.”
It’s not just Prudential. As Bloomberg reports, MetLife said last month that prices have bottomed out while valuations are starting to rise. “Smart capital is starting to queue up,” Principal Chief Executive Officer Larry Zimpleman said in an April 27 interview. “There are a lot of new funds being formed by investors who are looking to invest and buy either loan portfolios or buildings.”
Perhaps of even greater interest are the comments made by Primerica CFO Alison Rand in another interview with Bloomberg.
The insurer is planning to invest at least some of its portfolio in CMBS, she says.
Supply of new CMBS, that is, has been sparse for obvious reasons, one of which is lack of demand. Whether Rand was discussing new or existing CMBS is unclear, but either way it signals growing intereste by the buy side for these securities.
Freddie Mac has posted an eye-popping $8 billion first-quarter loss — an amount higher than the $7.8 billion that Freddie lost in Q4 2009.
The GSE will be seeking more funding from the government. In the short run it will likely get it. The Obama Administration has all but said the sky’s the limit for keeping Fannie and Freddie solvent. There is a case to be made for that – certainly multifamily companies like that position.
However the numbers also bolster a case being made by some Republicans that it is time to cut the cord for Fannie and Freddie. Unfortunately, they may be the right — the government’s support of the two GSEs in the long run is not sustainable. It is also hindering private market solutions, such as a multifamily CMBS.
Given the strong constituency that wants to keep the status quo with the GSEs – at least, again for multifamily – the situation is not likely to change any time soon. Including the GSE’s bleeding red ink.
It has become a cliche to say the economy is showing signs of life — but, then, there it is. The economy IS showing signs of life — as well as the commercial real estate industry, which all but had its final rites time last year.
To be sure, there are several challenges including the yet-to-be-resolved question of where billions of dollars of commercial property debt will find refinancing, the record high CMBS default rates and several legislative initiatives that are worrying the industry.
But never mind those for the moment. Instead consider what has happened in just the last several days:
- Citigroup is bringing a $222M RMBS to market — a private-label RMBS — according to the Financial Times. The bonds are expected to be AAA-rated, backed by 255 residential loans originated by CitiMortgage.
- REITs — at least the publicly traded ones and even many unlisted REITs — are going gangbusters. Last year they raised a record amount of equity, primarily used to shore up balance sheets. This year they are on track to match that or more. Better yet, at least some of this war chest is expected to be used to make acquisitions. This week alone saw five REIT IPOs or stock offerings including Kilroy Realty, Chatham Lodging Trust and Macerich Co. which raised an eye-popping $1.23 billion.
- The reviving CMBS market is pushing out more transactions. Glimcher Realty Trust CEO Michael Gilmcher, for example, told USA Today that the company just acquired $100 million in loans will be sold into the CMBS market in order to refinance loans for shopping centers in Tennessee and Ohio.
- Europe’s structured finance market is getting back to its feet as well too. Property investment fund Vesteda launched a $471 million CMBS this week, the first in Europe for almost a year.
Another sign has emerged that the CMBS market is starting to come back. REIT Ramco-Gershenson Properties Trust just closed on a new $31.3 million CMBS loan with J.P. Morgan. It’s not the much-longed for multi-borrower conduit type deal, but still. Ramco-Gershenson secured a loan at 60% LTV for two retail properties at a ten-year term at a fixed rate of 6.5%.
The deal is also a nod to REITs, the publicly-traded ones, that is, which have become de facto kingmakers in the commercial real estate debt and equity markets. The biggest boost to CMBS, it must be noted, came from another REIT – Developers Diversified Realty – last year with its $400 million CMBS.
DDR then disappointed the market by declining to go back for a second pass. Instead, it has recently priced a $300 million stock offering. That move wasn’t so much a commentary on the still-nascent CMBS market, but rather an illustration that REITs basically have all sorts of capital raising avenues open to them these days.
Let me start off by saying that of course FDIC’s main mission is to get the best deal it can for taxpayers. The agency is trying to sell off a huge number of assets that it has seized from failed banks. Of course it is going to do what it can to get the best price.
But it would be nice if it gave some thought to the US commercial real estate market and the impact its actions could have there. Two recent news items suggest that CRE is not at the forefront of FDIC’s thinking as it goes about dispersing the assets now under its control.
The most blatant example is news reported by Bloomberg that FDIC is holding a $1 billion auction in which it is selling off loans – including a loan to the build a W Hotel in Atlanta – that may trigger write downs among other banks as well. Half of the loans were originated by Silverton Bank, according to Bloomberg – but several other banks joined Silverton in providing the $80 million W construction loan. These banks will have to take write-downs as the Silverton loan goes to auction, and possibly push many to the edge of insolvency. It’s not just this auction: reportedly of the $50 billion or so in loans seized by FDIC, 63% involve other lenders.
The other news item – again, reported by Bloomberg- also points to future woes for CRE, thanks to FDIC actions. Reportedly FDIC is seeking pension fund money to invest in failed banks. It’s a smart move for FDIC, which sees this is a good way to lower fees, according to Bloomberg. But the CRE industry should wonder if these funds will re-allocate money slotted for acquisitions or other investment into FDIC deals.