Life Cos.: We're in Late Innings

SAN DIEGO—With the top markets experiencing frothy pricing and values back to peak, life-company commercial real estate lenders are looking for ways to differentiate from other lenders, said speakers at CREF15 here earlier this week. The “Life Company Lending” panel discussed ways for this financing sector to remain competitive in the highly charged commercial real estate lending environment.

R. Paige Hood, managing director of Prudential Mortgage Capital Co., said lending in the mortgage business is an alternative to corporate bonds. Last year was the firm's second-biggest year ever, and he is hopeful for similar results this year.

Gary Otten, managing director and head of real estate debt strategies for MetLife Inc., said we're seeing “peak values in trophy-type assets in top markets. We see demand outpacing supply in all property types, and we see pockets of multifamily overbuilding, though not much.” He anticipates activity to move at a “pretty fair pace through 2015 and maybe into 2016. The market is starting to mature and look rosy.”

Hood noted “pretty rich pricing” in the markets. “It looks like interest rates will be low for longer than we thought. 2015 looks as good as any year regarding the underlying fundamentals.”

Dan Maples, managing director and head of real estate debt investments for the Guardian Life Insurance Co., said, “It feels like we're in the late innings. The top markets are frothy, and we're back to peak values. We're not changing our asset class; we're looking at markets and submarkets, selecting the good-looking ones.”

Moderator Robert Stout, president and CEO of Q10 Capital LLC, asked the panelists how they differentiate themselves with so much competition from CMBS and other lenders. Robert Bedwell, SVP, investments, for Protective Life Insurance Co., said, “We don't try to compete with those guys. We try to stay as consistent as we can and price accordingly. We added the senior-living asset class, and we're constantly looking at alternatives and how we can be competitive. It's a very relationship-driven business.”

Maples said his firm has focused more on value-add acquisitions, and “we have been very active in this either alone or with a joint-venture partner.”

Otten added that his firm competes with banks for floating-rate assets, and Hood commented that CMBS “is not our primary competitor for most high-level deals we do. The agencies and others have been very aggressive.”

Otten added that “mortgages are an asset class our portfolio likes for stability, but the yields are so low.” Maples agreed that this has been a favored asset class for his firm, while Bedwell said mortgages make up 11% of his firm's portfolio, “but our portfolio has been declining, so now we're looking for it to grow—it's a struggle.”

Regarding how to operate a life company profitably in a low-interest-rate environment, Hood said there are “challenges around managing the pipeline. We need to adapt and investment. It becomes a relative-value proposition. We will continue to be a big investor. We may have pressure to find more return by taking more risk, but we're not yet having that internal pressure.”

Otten said, “Obviously, yield is a concern” in a low-interest-rate environment, “but everything in the portfolio is driven by low cost of capital, so it can work to your advantage.”

Maples added that long-term low interest rates are a concern, but “the best way to explain that to the market is with floors on certain deals. The longer this goes on, the more of a problem it will be.”