SAN DIEGO—Tightening spreads and yields on new investments, as well as e-commerce's effects on traditional retail are some of the challenges life-company lenders are facing today, PGIM Real Estate Finance's chief investment officer Paige Hood tells GlobeSt.com. We spoke with Hood in advance of MBA's CREF/Multifamily Housing Convention & Expo 2018 conference in February about the challenges these lenders are facing and how they are being impacted by alternative lending sources.
GlobeSt.com: What do you see as the chief hurdles life-company lenders are facing today?
Hood: While there are some concerns in the market, fundamentals remain strong as we begin 2018. The underlying economy is positive, with steady job growth. Commercial real estate supply and demand is relatively in balance in most markets and for most property types, and there is ample liquidity from both an equity and debt perspective for CRE. However, the issues that are of greatest concern to lenders are:
- Tightening spreads/yields on new investments. With ample lender appetite from life companies, banks, the GSEs and CMBS, spreads have been contracting, even as treasury yields rise. With acquisition activity declining and likely fewer maturities, particularly in CMBS, loan demand could be lower in 2018, further pressuring loan spreads. To date, CRE mortgages remain attractive relative to public fixed income alternatives; however, if spreads continue to tighten, you may see some life-company lenders reduce allocations to the asset class.
- E-commerce's effects on traditional retail. Pressure on retail properties from on-line retailing has caused many life company lenders to become much more selective in that space, particularly as it relates to malls. Most life-company retail-loan portfolios are weighted toward the more defensive grocery-anchored centers and fortress malls, but many have raised the sales and occupancy levels required to underwrite a new loan.
GlobeSt.com: As they become more prominent, how are alternative lending sources impacting life companies in multifamily lending?
Hood: Debt funds are one alternative lending source where we have seen a rise in popularity over the last year. They have become increasingly active providing bridge and reposition financings for multifamily. As the amount of capital in that space has grown, pricing has become more competitive with banks and life companies, while often providing higher proceeds. While bridge and repositioning loans are not the traditional space for life companies, many are allocating more capital for those investments, typically on the lower end of that spectrum. This has led to more lending options for multifamily borrowers.
GlobeSt.com: What are life companies doing to compete with these additional sources?
Hood: In some cases, life companies are the take-out source for bridge and repositioning loans. As properties stabilize, most borrowers look for a lower cost of capital, either an agency or life-company loan. There is an increased sense of urgency to lock in long term rates since both short-term and long-term rates have risen lately.
GlobeSt.com: What else should our readers know about life companies in the multifamily market?
Hood: Each life company has its own strategy, but in general, life companies are a great source of long-term capital for moderate leverage, secured by higher-quality properties in major markets. I believe most life companies would like to increase multifamily exposure in 2018 if they can find attractive loan opportunities.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
