How are Life Companies Reacting to the Current COVID-19 Pandemic?

How are Life Companies Reacting to the Current COVID-19 Pandemic (As of 4/30/20)?

Life insurance companies have long been considered a conservative source of capital in the commercial debt markets. They typically lend at lower leverage points on assets that are stabilized or offer minimal risk profiles, which in turn allows them to be one of the lowest costs of capital without requiring a personal guarantee. The commercial real estate industry has been severely impacted by the current pandemic, and just like every other lender in the debt markets, life insurance companies are re-assessing how to deal with the effects of the COVID-19 pandemic on a daily basis. Each life company is assessing risk differently, however, the three most prevalent themes we continue to hear from our life company lenders are (1) the struggle to find accurate pricing, (2) the re-allocation of resources to portfolio review/management, and (3) the need for more precaution when underwriting and closing loans. 

(1) Accurate Pricing: Soon after government shutdowns were put in place and stay at home orders were mandated, pricing discovery became very difficult for many lenders. When COVID-19 hit and corporate bond yields surged almost overnight, lenders initially struggled with how to price commercial mortgages accordingly. Many lenders hit “pause” altogether on quoting new business, waiting for the volatility to subside. We have since seen some stability in the debt markets and lenders have started to quote new business, albeit less frequently and more conservatively. As of April 30, 2020, 10-year mortgage rate quotes from insurance companies are in the 3.50%-4.25% range (50%-60% LTV).  

(2) Re-Allocation of Lender Resources: Since the pandemic hit, the commercial real estate sector has felt the reverberations from businesses being shut down and tenants struggling to pay their rents. Many landlords have dealt with rent relief requests from tenants, and as a result, lenders are handling many debt reliefs requests from landlords. Since life insurance companies are not governed at the federal level there are fewer uniform regulations guiding how they can balance helping landlords while limiting the impacts to their balance sheets.  As a result, each lender is dealing with their portfolios and borrowers’ debt relief requests on a case-by-case basis. This requires a lot of time and energy, pushing lenders to re-allocate internal human capital from debt origination to portfolio management. As more relief requests continue to be processed and portfolio analyses completed, lenders will be able to shift more focus back to the origination side. 

(3) More precaution when underwriting: Since the duration and ultimate effects of the pandemic are still unknown, life companies are also taking more precaution with underwriting and committing new deals. Lenders who are quoting new business are doing so under more cautious parameters, such as the following:

a.       More conservative underwriting metrics such as using higher cap rates, higher vacancy factors, and solving for lower LTV and LTC numbers

b.       Asking more due diligence questions up front prior to committee approval

c.       Checking in weekly with regards to rent collections and doing more analysis on a tenant-by-tenant basis.

d.       Incorporating some short-term structure components, such as debt service reserves, TI/LC escrows, or other types of holdbacks.

Life companies are still quoting loans, however, we’re finding fewer lenders willing to quote unique property types, loan requests with a large cash-out component, or properties with lease-up risk. We expect these precautions to gradually ease up as the economy begins recovering from the pandemic.

What Does this Mean for New Deal Activity?

There is still a significant amount of capital insurance companies have allocated for mortgages in 2020, and that capital needs to be deployed. Lenders are figuring out how to adapt and deploy that capital in an environment that looks significantly different than it did only two months ago.  Essex tracks market and lender activity on a daily basis and we will continue to update you as fundamentals keep changing. Please reach out to us for more specific information on current pricing and activity from life company lenders.