With interest rates expected to remain high into 2024, the commercial real estate industry is anxiously awaiting a ray of hope that increased transaction volumes will clear the clouds and provide a silver lining.
In this environment, some financial institutions have scaled back or even shut off their funding sources over that time, while others have found more patient and stable sources of capital to maintain their levels of activity.
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The latter group includes private lenders who have raised significant amounts of capital from insurance companies looking to invest further in commercial real estate credit.
“We've been pretty successful at providing a suite of services to insurance companies,” Acore Capital CEO Warren de Haan said of the firm's focus on insurance companies. “Insurance companies continue to grow because, unlike banks, the insurance industry is not going to go into recession.”
“These insurers continue to generate liability, continue to grow and continue to create demand for the kind of match-term finance assets that we offer,” de Haan added. “And they received very good risk-based capital treatment at launch, which is why the scheme will continue to exist.”
De Haan said Acore has set up “a number” of separately managed accounts (SMAs) with insurers over the past decade and has stepped up efforts in recent years. The company's insurance roots date back to its founding in the spring of 2015, when it received $1.6 billion in capital from Delphi Financial Group, a wholly owned subsidiary of Tokio Marine Group, Japan's largest publicly listed insurer.
De Haan noted that some insurers, particularly smaller ones, are choosing to outsource their asset management functions to private equity firms with experience in CRE investments rather than keeping them in-house. However, he stressed that a strong commitment is required for private lenders to invest in running an SMA for an insurer, as a significant amount of infrastructure is required to support the suite of services required, including loan origination, accounting, asset management, daily reporting, and back- and middle-office functions.
Last year, Acore further strengthened its ties to insurance capital with the hiring of Andrew Terry, the former head of insurance at investment management firm Schroders, as its new managing director. Terry's job is focused on expanding Acore's relationships across the insurance industry.
“He works with all insurers who are looking for the yield that mortgages offer, whether it's whole loan or participation,” de Haan said. “This suite of services is something we're offering to more insurers in order to attract more managed capital so that Acore can provide low-cost, predictable capital to our lender and borrower community.”
Demand for insurance capital has also been on the rise over the past two years, with interest rates rising to their highest in 22 years and many banks pulling back on lending. Insurance companies themselves are raising large amounts of capital to seek investments in commercial real estate.
PGIM Real Estate, the insurance arm of Prudential (PRU) Financial's global asset business, launched an open-end bond fund six years ago that has grown to about $5 billion. Melissa Farrell, head of debt issuance at PGIM, said insurance investors are attracted to the real estate space given the interest rate environment.
“We are seeing life insurers coming into this space and we are interested in it because we think it's a good space to be in given the current market conditions,” Farrell said. “We see a lot of insurers looking to leverage their balance sheets and get higher returns in this market.”
Farrell noted that PGIM's debt funds focus on variable-rate loans on transitional assets in search of additional yield, while traditional life insurers tend to seek longer-term, fixed-rate CRE investments. PGIM has recently benefited from pension risk transfer, in which companies shift liabilities to large insurers such as Prudential, which then seeks to offset those liabilities through longer-term, fixed-rate assets. Farrell stressed that duration is hard to come by right now, and investors are seeking shorter-term loans given the expectation that the Federal Reserve will cut rates soon.
While some asset managers are looking to grow further in the insurance space, PGIM is uniquely positioned in that it has separate accounts where it manages third-party capital in core and core-plus lending strategies, as well as debt funds, and is backed by a large insurance company like Prudential.
“We're approaching it from a different angle and we think we're in a very good position in that regard because we already have a large balance sheet of $50 billion in our own general account and we have $110 billion in assets under management and administration overall,” Farrell said. “That includes our agency accounts and debt funds. We think our relationships with banks are very good because we're simply larger and can step in to fill voids, especially in the larger loan space.”
The rise in insurance capital from CRE debt funds is coming to light at a time when insurers themselves are better placed to put their capital to good use, said Kristen Fallon, a partner in the real estate practice at Nixon Peabody in Boston. Insurance companies and pension funds have had the most loanable capital over the past decade, Fallon said. But in previous periods of low interest rates, borrowers often bypassed insurance companies.
“They're honest people, and they want a fixed rate of return,” Fallon says. “They want to put it to work for several years, and in a high-rate market, that was very attractive. But when we had a low-rate environment, these sources of capital were largely overlooked, so we're going to see a resurgence of interest, especially as they mature.”
Fallon noted that insurance companies can be an attractive option for borrowers looking for permanent financing if they can't go the CMBS route and have something bundled together as part of the deal.
Fallon said there are downsides from a sponsorship standpoint: Using an insurance company for a CRE loan can result in hefty exit fees, and expectations that the Fed will cut interest rates this year could discourage further use of the strategy anyway.
“They're doing it right because they don't do very specific types of financing,” Fallon said. “They rarely go into equity financing or mezzanine debt or any preferred equity structures.”
Fallon said the life insurers he represents are actively working on CRE transactions, seeing a significant uptick in requests earlier this year after little activity over the past decade. Insurers in particular could play a key role in looming loan maturities and construction debt take-out financing, but he said many insurers lack the experience to pitch to debt brokers. However, Fallon said many life insurers have become more willing to get involved in the CRE lending business in recent years by acting as investors in joint ventures.
In the private equity space, some of the larger firms are seeking greater access to insurance capital after Acor got there ahead of the competition: Apollo bought insurer Athenee Holdings in 2021, while KKR bought a majority stake in insurer Global Atlantic Financial Group Inc. That trend continued last year, when Blackstone agreed to buy a 9.9% stake in American International Group Inc.'s life insurance and retirement business.
“Insurance companies have an incredibly stable capital base, which has allowed private equity firms to achieve more deal flow and make more profits,” said Acore's de Haan. “We were ahead of the curve in 2015 and were way ahead of almost everyone in the insurance industry in terms of separate book size and scale.”
Andrew Coen can be reached at acoen@commercialobserver.com.