Life companies get creative with loan offerings

5 min read

Life insurance companies have long been lenders in commercial (including multifamily) real estate (“CRE”), but their loan appetite has been historically limited to a handful of products, most notably permanent debt on stabilized properties and construction to permanent loans. Given the interest rate turmoil and banking dislocation that began in the summer of 2022, however, insurance companies began to expand their loan product offerings.

Here’s a look at the key events that have shaped lending markets in 2023, their impact, and how life insurance companies have stepped in to creatively fill a need in the marketplace.

What happened in markets to limit loans?

In the late summer/early fall of 2022 and extending into early 2023, debt markets began a rapid change driven by multiple forces: inflation, rising interest rates and the bank regulatory environment.

In March of 2022, in a bid to curb inflationary pressures and slow the economy, the United States Federal Reserve Bank began a nearly unprecedented cycle of raising interest rates, starting at 0 percent and continuing to more than 5 percent in May of 2023, a 17-year high. These hikes made CRE debt significantly more expensive.

As a result of these aggressive interest rate increases, some banks experienced significant (unrealized) losses in the book value of their reserve holdings. While these losses were only on paper, they served to spook investors and, more importantly, depositors, a significant source of bank capital. As a result, First Republic Bank, Silicon Valley Bank, and Signature Bank were taken into FDIC custody and registered as the 2nd, 3rd, and 4th-largest bank failures in US history, respectively. These failures happened in a span of just a few weeks. As a result of these failures and enhanced regulatory scrutiny, banks across the country (64.5 percent, according to the Federal Reserve) moved quickly to significantly tighten their lending standards in an effort to preserve and protect their capital despite demand for financing from real estate developers and investors.

In this unusual environment, insurance companies sensed an opportunity and got creative to capitalize on it.

(Source: Federal Reserve of St Louis)

How insurance companies are taking advantage of the financing gap

In its simplest form, the business model of life insurance companies is to collect policy premiums (assets) today and pay out claims (liabilities) as they arise. Although complex, the goal is to match these assets and liabilities. As a result, insurance companies often need to “park” their capital in safe, stable investments and one of those investments of choice has been high-quality, lower-risk CRE primarily in the form of longer-term, fixed-rate senior debt, including “construction to permanent” loans.

In recent months, however, life insurance companies began to creatively expand their product offerings to capitalize on the opportunity in the market created by banks tightening their credit standards, as well as the dislocation in the debt capital markets, which are often used by alternative lenders (for example “debt funds”) to finance their lending activities. In addition to banks being the primary source of lending to ground-up development projects, both banks and alternative lenders have been a major source of floating-rate bridge loans to CRE sponsors, especially as borrower demand increased in the face of declining interest rates prior to 2022.

In conversations we have had with insurance company lenders, although they are not loosening credit standards, they view the current market environment as an opportunity to establish new relationships with sponsors on high quality assets. For instance, some are moving into the construction loan space, traditionally a stronghold for retail banks, to offer products with favorable terms for the most in-demand assets such as multifamily and industrial projects. Loan terms include maturities matched to construction completion and stabilization (i.e., dropping the “permanent” piece of the construction to perm loan), floating rates, and flexible pre-pay, terms that have traditionally been sought and offered on ground-up development projects.

Another product we see being offered is fixed-rate, shorter-term (e.g., 5 years) debt with flexible pre-pay (e.g., after 30 months). These are increasingly being sought by borrowers to refinance floating-rate bridge debt on transactions where, for example, a transitional property has not yet achieved stabilization within an original underwritten time frame, or the owner has had to push out an anticipated sale date.

While insurance companies have traditionally sought duration in the permanent debt space, the opportunity to establish new relationships and deploy capital is attractive to many, especially those insurance company lenders with access to multiple buckets of capital. For borrowers, the fixed rate gives certainty on financing costs, and the flexible pre-pay allows them to take advantage of the market if and when rates decline.

As a result of these product offerings, life insurance companies are seeing a surge in demand for their loan products. One Walker & Dunlop producer states that nine months ago, they had not completed a single variable rate construction loan with a life insurance company. At the time of writing, they are quoting multiple deals per day, with volume doubling in just the last six months.

For the time being, the trend is clear. Life insurance companies are getting creative in their product offerings and can be a critical source of financing for CRE nationwide.

How Walker & Dunlop can help

While expansion of life insurance company loan products, especially construction lending, is good news, it can be difficult for borrowers to directly access this capital. That is where Walker & Dunlop can be of great help. The breadth and depth of the Walker & Dunlop platform ensures that we have the resources and relationships to provide ready access to all capital sources, including life insurance companies.

We have an extensive network of relationships with dozens of life insurance companies. We act as a trusted advisor to help our clients navigate the complex matrix of borrowing criteria and approval requirements for life companies. For example, the following table highlights key differences between banks and life insurance lenders in today’s debt markets for a construction loan:

If you are seeking access to debt or equity financing for your next project, get in touch with our team of experienced advisors today.