Insurance company lenders pour billions into commercial property

Aug 12, 2011

The following article was published in the Dallas Morning News on August 11, 2011:

Insurance company lenders pour billions into commercial property

By Steve Brown

When developer Wood Partners decided to sell its Alta Design District apartments recently, that seemed like a smart move.

Appetite for first-class investment properties is way ahead of supply. So Wood Partners wouldn’t have a problem rounding up a buyer for the property northwest of downtown Dallas.

But instead of selling the new rental project, the apartment builder chose to refinance it with a $30.4 million mortgage from Massachusetts Mutual Life Insurance Co.

“The interest rates are attractive, and we were at the point in the market where we felt there was a lot of upside in the investment,” said Todd McCulloch, Wood Partners’ development director. “There was really no reason for us to sell.

“And the insurance company lenders have gotten real aggressive and their processes have gotten easier.”

During the last year, insurance company lenders — long considered the gold standard in commercial property debt — have made hundreds of millions of dollars in mortgages on high-profile Dallas-area buildings.

The big debt deals include loans on two of North Texas’ choicest real estate assets: Uptown’s Crescent complex and the Trammell Crow Center skyscraper in downtown Dallas.

And insurance company lenders have also financed everything from industrial parks to new first-class apartments near Turtle Creek.

Longtime mortgage advisers say on the heels of the credit crunch, when funding was cut off for many real estate projects, the recent high-profile financings by the insurance companies are encouraging.

“It’s good to see,” said Jody Thornton, executive managing director in the Dallas office of Holliday Fenoglio Fowler LP. “They have been a great source of liquidity to the real estate market in the last 18 months.

“For the most part, they do mortgages on the better assets at a better interest rate.”

Good time to borrow

Certainly you can’t do any better in terms of quality than the Crescent, which Metropolitan Life Insurance Co. just made a $205 million loan on.

Or Trammell Crow Center, where Northwestern Mutual Life Insurance Co. provided $93 million.

Northwestern Mutual also recently made a $69.3 million mortgage on the huge Gables Villa Rosa apartments on Cedar Springs Road in Uptown.

With mortgage rates at near-record lows, it makes sense for commercial property owners to be locking down financing, said Charles Mohrle, a partner in the Dallas mortgage firm of Mohrle-Morris & Associates.

He said the recent big debt transactions are “an indication that some pretty sophisticated owners believe that this is a good time to borrow money and lock in their cost of capital for a long period of time at an interest rate that may look very favorable in the not-too-distant future.”

But don’t expect to fix any problem properties with new insurance company loans, Mohrle said. Those lenders typically aren’t interested.

“They are not going to do scratch-and-dent stuff and hairy stuff,” said Trey Morsbach, senior managing director in Holliday Fenoglio Fowler’s Dallas office. “They are doing today what they have always done — going with first-class sponsors of first-class real estate in top major metropolitan markets.”

Not a record year

Most of the life insurance loans made in the last year have been priced at 150 to 200 basis points above U.S. government Treasuries and were for 65 percent to 70 percent of the properties’ values, Morsbach said.

Last year, life insurance companies provided more than $30 billion in debt to U.S. commercial real estate, he said.

“In the go-go days, they got as high as $42 billion or $44 billion,” Morsbach said. “There were a lot of people thinking they would eclipse their best year ever this year.”

But the current financial market turmoil has put those estimates in doubt.

Plus, there are widespread concerns that the interest rates lenders charge for commercial real estate deals will go up.

“Interest rates are very low, but there are concerns rates could rise considerably due to the U.S. credit ratings downgrade and inflation fears,” said Scott Lynn, director and principal of Dallas-based Metropolitan Capital Advisors Ltd.

Lynn also said he wouldn’t be surprised to see life insurance company mortgage volumes decline later this year.

“There has been a lot of life company money in the market, but life companies notoriously place a huge volume of their allocations during the first three quarters of year,” Lynn said. “It may be true that there could be a shortage of allocable funds in the fourth quarter, especially since securitized lenders are temporarily sitting on the sidelines due to the upheaval in the bond market and a general inability to securitize their loans.”

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