No one in the multifamily sector needs a lecture on the difficulty of financing projects and deals these days. But, when there are challenges in the market, attention to detail and alternative financing can result in a better chance of finding solutions. Considering life insurance companies as viable investors is one example. Insurers often can provide needed liquidity as they search for yield, especially in the multifamily world.
Multifamily fell to the same forces that have affected every other commercial real estate (CRE) class. After a buildup of easy money over more than a decade, the zero-interest rate policy in response to the pandemic collapse set asset investment on fire. Prices soared, opportunities were widespread and big leverage was in.
“Starting in 2019/2020, you saw a lot of floating-rate bridge money,” says Susan Mello, executive vice president and group head of capital markets at Walker & Dunlop. But as loans came up for refinancing, quick and large Federal Reserve hikes of the benchmark federal funds rate kicked up loan costs everywhere and made penciling a deal difficult, if not impossible. “The rapid rise of interest rates put values in question across the board. That’s exacerbated by how much liquidity there was in the market and the pullback in liquidity today.”
However, there was a bigger impact from interest rate hikes. They undercut the values of investments many small and medium banks had made in long-term bonds, whether Treasuries or mortgage-backed securities. In some high-profile cases — Silicon Valley Bank, Signature Bank, First Republic Bank — depositors quickly bailed out as their faith in the banks’ assets failed. The FDIC closed the institutions and a wave of fear spread through the industry.
Many banks have since reduced their new lending, including to CRE, as they manage their existing loan books and build up capital ratios in anticipation of increased regulatory requirements. Depository banks are exercising more caution by being more selective and implementing stricter underwriting standards. The result has been a decrease in liquidity from certain go-to sources.
The government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac are still making loans, but not enough and not at a fast enough pace. “As non-GSE lending in the multifamily space pulled back, we expected Fannie and Freddie to increase their lending in line with their mandate to provide liquidity to the housing market,” Mello says. “They’re still well below their regulatory caps and at this point, we don’t think they’re going to hit them by year-end.”
CMBS presents a different problem. “The CMBS market is functioning but it’s very expensive,” says Mello. “CMBS is quite low this year in terms of historic volume, although we are recently seeing a pick-up in issuances.”
Life Insurance Companies as a Source of Liquidity
This is where life insurance companies come into the picture. They’ve long been a source of liquidity to CRE, especially multifamily assets. “Insurers collect premiums in exchange for providing insurance at some time in the future,” says Mello. “Driven by basic asset and liability management, they need to invest premiums to meet the obligation to pay insurance claims. Providing senior mortgages to multifamily properties has been seen as a relatively lower risk CRE investment opportunity given the fundamentals of demand and operations in the sector.”
However, there has been an important change in the business models of life insurers over the years that can prove highly beneficial at a time like this.
“The business of life insurance companies is much more diverse than it used to be, as is the overall lender landscape,” Mello explains. “Many insurers are investing capital that comes not just from premiums but from managing money on behalf of third parties. Third-party capital often has different investment goals, requiring the insurers to invest more broadly based on overall risk-reward metrics.
This doesn’t mean life insurance companies will fill the liquidity gap in multifamily financing, “but they are being more creative,” says Mello. For example, under the older approach to investing, life insurance companies primarily liked fixed-rate, longer-term debt, looking to match loan maturities to the time frames in which they would need cash to pay future expected obligations. Today, with more flexible capital, the real estate debt teams can draw on their experience to underwrite different scenarios, such as bridge or construction loans, which can often be provided at a lower cost of capital than some alternative lenders that have become more prevalent over the past several years.
Life insurance companies “can be very loyal to their borrowers and sponsors,” says Mello. They want long-term relationships, and they see the disruption in the current lending environment as an opportunity to establish new relationships with great sponsors. And while traditionally they could be bureaucratic and slow to react, “the folks who are deploying capital are more in tune to the market. You have less of the bureaucracy that you might have associated with an insurance company years ago.”
Life insurance companies will not solve all the liquidity problems for multifamily. But they are worth considering as part of a broader borrowing strategy.
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