Fitch Ratings reports that the position of insurers in the United States as key participants in commercial real estate lending is expected to remain strong moving into 2012, particularly as the revival of the commercial mortgage-backed securities (CMBS) market and the outlook for bank participation in commercial mortgage lending remain uncertain. Fitch sees insurance companies' disciplined underwriting standards, reflected in low loan-to-value (LTV) ratios on recently-financed deals and very low commercial real estate loan delinquency rates on their balance sheets, as an important source of continuing support for a healthy commercial mortgage market. This is particularly true in a scenario where weaker demand for CMBS deals and a more limited role for GSEs in multifamily property finance limits sources of growth in commercial mortgage origination.
For Real Estate Ivestment Trusts (REITs), the continued participation of insurance companies in secured lending during the financial crisis ensured access to capital at a time when unsecured borrowing costs were above 10 percent for even the strongest credits and refinancing needs were substantial. Although REITs do not face large scheduled maturities in 2012, the continuing participation of insurers as lenders on top-tier properties provides critical support to the market.
During the first half of 2011, commercial real estate financing commitments by life insurers, such as MetLife and Prudential grew sharply. In the second quarter of 2011, commercial mortgage commitments by U.S. life insurers grew to $15.7 billion compared to $5.9 billion during the same period in 2010 according to the American Council of Life Insurance. Average LTVs on the deals were approximately 60 percent.
While recent insurance mortgage deals have averaged about $20 million, insurers are also likely to participate in larger transactions involving central business district office buildings and large regional malls. Fitch expects insurance companies to remain well positioned to provide mortgage financing on some larger deals, particularly in prime commercial markets such as New York; Washington, D.C.; Boston and San Francisco.
Insurers' cost of capital advantage, as well as reduced execution risk, should continue to favour a shift toward insurance-financed commercial real estate deals in a still-fragile market facing uncertainty over the 2012 economic outlook.