Life company lenders are heading into the second half of the year with ample allocations and some are looking to improve their yields though creative funding. They have a reputation as a conservative capital source that tend to prefer “middle of the fairway” type deals like fixed-rate permanent loans on quality assets with modest leverage. This has become a crowded space, so life companies are being creative by stepping out of that narrow box and adding more options. In the last few months we have started to see more lenders allocating funds for bridge loans, mezzanine financing, construction/permanent financing and JV equity.
The reason for this shift can be attributed to a few market forces. The prolonged market cycle is one force that is prompting firms to step into new product types or products where they have not been active for quite some time. The motivation can be to boost yields, balance portfolios or simply place capital in a highly competitive lending environment. At the beginning of the year, many life companies said that they expected allocations to be the same or even higher than 2016. However, investment sales during the first half of the year are more subdued and competition from other lending sources has increased, meaning that life companies are having to work harder to drum up new business.
NorthMarq Capital recently helped to secure financing for the acquisition of a large suburban office building in Minneapolis. The building was being marketed as a value-add acquisition opportunity. So, the funding needed to be consistent with the owner’s plan to buy the asset and make capital improvements, as well as have funds available for the tenants improvements and leasing commissions. The buyer opted for a bridge loan provided by a life company lender that beat the bank and debt fund competitors on proceeds and structure. Financing featured an acquisition loan with future funding to be made for capital and tenant improvements. The loan also included a fixed and floating rate component for flexibility.
As life companies expand their allocations to other types of financing, they are able to compete more effectively with banks, who are increasingly becoming a one-stop-shop for borrowers. Life companies are using these products as a way to get in the game earlier and retain that business when the transition or construction of the property is completed.
At the end of the day, life companies have the capital and the underwriting expertise to successfully execute on a variety of short and long-term financing products. All of that is good news for liquidity in the commercial real estate market and good news for borrowers who will have more options—and more competition to keep pressure on lending rates and terms—as the current market cycle continues to mature.