Insurance investors have been major players in Commercial Real Estate (CRE) lending for decades, with the commercial mortgage industry fitting nicely as an asset against the liabilities that life insurance companies have. Characteristics such as fixed-rate interest and ten-plus-year terms benefit both sides.
However, the pandemic, the threat of inflation and emerging global pressures are creating unusual market conditions for insurers, who are required to generate returns that not only allow them to cover claims but also provide a return for stakeholders.
CRE has always been a nice fit for them. In fact, about 11% of the insurance industry’s investments are in commercial mortgages, but the profile of those mortgages has shifted over the past few years in terms of property types and complexity—along with the availability of talent and staff who manage and service portfolios. In this blog, we briefly discuss how we got where we are in terms of CRE investing and what insurers can do to keep winning.
A quick summary of how we got here
The first half of 2022 was the strongest on record for commercial lending, with life companies well above the $105 billion pace set last year. In the second half of 2022, pricing differentials started with public markets flowing into other markets. On the supply capital side, there has been a reaction to rising interest rates more so than on the demand for capital, so there is some slowdown in the market as buyers and sellers reevaluate their properties’ worth. The uncertainty has also led to a slowdown in sales transactions, with public markets feeling it the most.
In the wake of the COVID-19 pandemic shifting more offices to work-from-home or hybrid models, downtown urban office space is significantly less of a focus for many firms, with certain exceptions for very strong growth markets. On the other hand, industrial investments like warehouse space and logistics centers are more attractive, while hotels and multi-family seem to be back after surviving a significant stress test.
What must insurers do differently to keep winning with CRE?
We have talked to some insurers who report moving away from smaller loans in favor of larger more complex loans. And, while the due diligence process doesn’t change, the amount of review does. There may be more collateral, so there are more appraisals, engineer reports, surveys, etc.
With what equates to more complex borrowing structures, smaller—possibly less experienced—teams to manage it all, and stakeholder expectations that are just as rigorous as ever, technology can go a long way toward protecting your yield. To stay competitive, satisfy customers and meet profitability goals, look for technology that enables you to make optimal use of resources, achieve near-perfect accuracy, and aggregate data from multiple sources while maintaining the ability to scale and pivot as business conditions change.
SS&C offers a variety of solutions that can help, from our modern full-service loan management platform to automation and digital workers that can address high volume, repetitive, manual tasks allowing you to reinvest the time savings into more value-added activities.
If you would like to learn more about how SS&C can support your commercial lending needs for 2023 and beyond, contact us or download our "Comprehensive Loan Management Delivered in a Single Solution" brochure.
Written by Daniel Pallone
Vice President, Mortgage REIT & Loan Solutions