Awash with insurance cash

Carriers, bankrolled by reliable premiums, find 'perfect storm' to invest in NYC real estate

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Among last year’s major deals involving insurance companies were refinancings are (from left) 345 Park Avenue and 125 West 55th Street

With their recession-proof premiums still rolling in, traditionally conservative insurance companies are ramping up their investments in New York City commercial real estate.

“REITs and insurance companies have the perfect storm to acquire properties,” said Jahn Brodwin, senior managing director at Manhattan consulting firm FTI Schonbraun McCann Group.

“Both are looking for the same criteria. They want low-leveraged transactions with conservative underwriting and longer terms — 10-year deals as opposed to the three, five years that banks want. They are looking for stable, core properties.”

Insurance companies especially increased their market share of commercial real estate lending in the U.S., to 17 percent last year from 13 percent in 2009, according to the research firm Real Capital Analytics. They are the third-most active lending group after major banks and government agencies such as Fannie Mae, Freddie Mac and the Federal Housing Authority, Real Capital said in a report.

“Insurers have access to very low-cost and extensive capital resources,” the report noted. “They also have far lower default and delinquency rates on existing loans.”

The big players have a heavy share of the market. Through November 2010, Metropolitan Life, which is based in Manhattan, and Prudential, which is based in Newark, N.J., accounted for about half of the gross commercial real estate lending volume for all insurance companies nationally for the year. MetLife alone racked up $1.9 billion in loans.

And it’s not just lending. “I’m seeing a lot of insurance companies active in both debt and equity for commercial real estate,” said Russ Schildkraut, a principal at the Manhattan-based Ackman-Ziff Real Estate Group. “They’re comfortable with the cost basis and sponsorship. They understand it’s difficult to underwrite today.”

Among last year’s major New York deals involving insurance companies reported by Real Capital Analytics:

•Prudential refinanced a portion of the debt at the $400 million 345 Park Avenue, an office building owned by the Rudin Organization.

•MetLife refinanced a portion of the debt at the $345 million 125 West 55th Street, an office building owned by Boston Properties.

•MetLife refinanced a portion of the debt at the $200 million Ocean Residences at One West Street, a rental owned by the Moinian Group.

•Prudential financed the sale of the $193 million Manhattan Tower, an office building at 600 Lexington Avenue, to SL Green.

Dan Fasulo, managing director of Real Capital, noted that insurance companies are more focused on recapitalizations these days than new acquisition financing.

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“They can come in at a lower loan-to-value rate in a recapitalization deal,” he said. “It’s more attractive and safer. In addition, many recent acquisitions have come built in with attractive debt that [building owners] can assume from the previous owner, crimping opportunities in that niche.”

Another reason these insurance carriers are pouncing on recapitalizations now is simply that there are so many of them, because overpriced deals from 2006 and 2007 are still being restructured.

Between 2002 and 2007, insurers were largely shut out of new deals as commercial mortgage-backed securities issuers stepped in to finance deals. For the two years after that, insurers opted for the safety of corporate bonds rather than real estate, said Keith Braddish, executive vice president of CB Richard Ellis. But now that corporate bond yields have dropped, real estate is beginning to look more attractive, he said.

In addition to MetLife and Prudential, a number of other insurers have been aggressive about New York City real estate investments over the past year. They include the Teachers Insurance and Annuity Association, Northwestern Mutual, Hartford Insurance, New York Life, Unum, Sun Life and Transamerica, Brodwin said. Foreign insurance companies — particularly those from Israel, Germany, France and Japan — have also jumped into the fray.

Experts say the most active insurance investors are life insurance carriers. “They have all this [premium] money coming in, and are looking for a conservative 5 to 6 percent annual return,” Brodwin said. “In exchange for that return, they need: one, a guarantee to clip coupons — or as close as they can get — and two, something that gives long-term inflation protection. They can’t put themselves at risk of losing their principal.”

That leads them to core markets like Manhattan.

“They want a top tenant roster,” Brodwin said. “Office would be the top choice, retail behind that, and residential behind that.”

With many Manhattan office leases running for 10 to 15 years, income is locked in for a long stretch of time. “As long as good-quality tenants are in place, it creates stability and assures cash flow,” Brodwin said. “That’s very important to insurance companies in a way that it wouldn’t be for entrepreneurial investors.”

Retail properties have shorter leases than offices, and tenants often have less-stellar credit, leaving them more prone to market swings, he noted.

Residential, meanwhile, “gives the best inflation protection, because rents reset each year,” noted Brodwin, “but it doesn’t give protection in a down market.”

CBRE’s Braddish predicted that insurers will continue to increase their exposure to New York’s commercial market this year.

“Life insurance companies like the total economy and demographics of New York City,” he said.

But Fasulo cautioned that the window for insurers to invest in New York won’t last much longer.

“CMBS lenders are starting to wake up from their slumber party,” he said. “There will be significant competition for insurance companies over the next couple years. Who knows, we could get to the point where CMBS comes back to being the dominant lending group before people expect it.”

Fasulo noted that insurance companies invested in properties with an average loan-to-value rate of 62 percent last year. But already those rates are creeping up to 70 or 75 percent, he said. “And that’s where insurance companies start to pull back again.” Fasulo said.