Life insurance companies are the silver lining of the capital markets. Commercial mortgages held by life insurance companies posted a 1.22% positive return in the fourth quarter of 2020, according to new research from Trepp. While the return was a decrease from the third quarter, which had a positive return rate of 1.71%, it still signals healthy activity considering the economic dislocation caused by the pandemic.
It also is a sign that returns have stabilized for the second consecutive quarter. The returns were driven by both income, which contributed 1.01%, and appreciation, which contributed 0.21%. In addition to the record-low interest rate environment, lenders are cautiously optimistic about the market in 2021, according to the Trepp report.
While CMBS is suffering from elevated delinquency rates, life companies have seen a decrease in delinquency rates, which are already significantly lower than the CMBS market. From the third quarter to the fourth quarter, life company mortgage delinquency rates fell from 0.06% to 0.04%. Deferrals and forbearance has also decrease from the third quarter to the fourth quarter. In quarter four, interest capitalized fell to $24 million from $33 million in the third quarter.
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By comparison, CMBS delinquency rate was at 4.45% in December. While it was down from the industry high of 5.88% in June, the market is still significantly higher than life insurance companies. Retail and hotels are driving the market's recovery. retail CMBS delinquency rate stood at 12.78% and hotels had a 19.87% delinquency rate in December, according to a report from DBRS Morningstar.
By some estimates, these delinquency rates don't represent the severity of the market. DBRS Morningstar believe that many distressed retail and hotel properties are still benefitting from forbearance and are at risk of slipping into delinquency at any time.
The difference between the two sectors may be due to property exposure. Life companies typically have more multifamily loans. Those property types remain strong, with a total return of 8.06% over the last 12 months. Industrial came in second with 7.54%, followed by office at 6.45%.
Life companies have 8,000 active loans, with an aggregate principal balance of $151 billion. The weighted average duration is 5.28, according to the research from Trepp.
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Kelsi Maree Borland
