Wall Street Banks Cut Out of Prized Commercial MortgagesSarah Mulholland
MetLife Inc. and Prudential Financial Inc. are cutting Wall Street’s middlemen out of the resurgent market for loans backed by some of the nation’s most-prized commercial properties.
Banks from Deutsche Bank AG to JPMorgan Chase & Co. -- which originate loans and then sell them off as securities -- risk losing out as rising borrowing costs prompt them to charge more to make money. Insurers are offering cheaper real-estate loans because they don’t need to quickly sell the debt at a profit, pushing Wall Street firms to lower their standards just to get deals done.
As a result, sales of commercial-mortgage backed bonds are falling short of predictions for the best year since 2007: Issuance slumped to $14.6 billion from $20 billion in the same period last year, according to data compiled by Bloomberg. Bank of America Corp. cut its forecast last week for deals tied to single loans, typically backed by the higher-quality properties that insurers target, as sales plunged 66 percent from last year’s record $9.1 billion.
“The insurance companies are really plowing a lot of cash into making these loans” and “can cherry pick the best assets that are out there,” Lea Overby, a debt analyst at Nomura Holdings Inc. said in a telephone interview from her New York office.
Life insurers probably extended a record $60 billion in commercial mortgages last year, Jamie Woodwell, vice president for commercial real estate research at the Mortgage Bankers Association, estimated.
Insurers are offering 10-year loans with interest rates as low as about 4 percent, compared with 4.9 percent on new debt that will be packaged into bonds, according to Alan Todd, a debt analyst at Bank of America. Insurers are increasing those investments because they performed well for them during the credit crisis and its aftermath, Woodwell said.
Delinquency rates on the commercial mortgages held by insurers have been lower than on the debt contained in bonds. Only 0.05 percent of commercial mortgages held by life insurers had payments more than 60 days late at the end of last year, and the rate never topped 1 percent during the credit crisis, Mortgage Bankers Association data show.
By contrast, the delinquency rate for real-estate debt contained in bonds was 5.43 percent last month, down from 9 percent in July 2011, according to Fitch Ratings.
“Core real estate has proven to be a good, solid long-term investment,” Robert Merck, head of the MetLife Real Estate Investors unit, said in a March 5 interview. “There’s a lot of capital around the globe looking for yield.”
MetLife, the largest U.S. life insurer, has increasingly turned to real estate to bolster profits and support long-term obligations as the Federal Reserve holds interest rates close to zero for more than five years. Last year, MetLife boosted lending for commercial properties 19 percent to a record $11.5 billion, funding loans including $450 million to Shops at Columbus Circle in the Time Warner Center in Manhattan and $500 million against its own New York headquarters at 1095 Avenue of the America.
Banks are being squeezed by the extra competition at the same time that funding costs rise as the Fed is trims its stimulus measures, Bank of America’s Todd said. Landlords’ average rate has climbed to 4.9 percent from 4.27 percent a year ago, Bank of America data show.
“It’s getting tougher and tougher for originators to compete,” he said. Bank of America last week cut its estimate for sales of bonds backed by only one borrower to $20 billion from $25 billion.
Prudential’s Mortgage Capital Co. provided $15.8 billion in funding last year and has another $14 billion to invest in 2014, the Newark, New Jersey-based company said in a Feb. 3 statement. Its deals last year included helping finance a $850 million loan for Tysons Corner Center, the 1.9 million square-foot mall in Tysons Corner, Virginia.
John Chartier, a spokesman for Prudential, declined to comment on the firm’s real estate lending.
Last year, issuance linked to a single borrower reached a record as falling bond yields allowed banks to cut the interest rates they charged and to win a bigger share of the commercial real-estate lending market. Yields on the benchmark 10-year Treasury note have since climbed to 2.74 percent from 1.6 percent in May.
At the beginning of the year, analysts predicted sales of commercial-mortgage backed securities would rise to $100 billion from $80 billion in 2013, according to forecasts from banks including Bank of America and Deutsche Bank. The market for securities linked to everything from strip malls to skyscrapers has sprung to life after coming to a standstill for 16 months when credit markets froze in 2008, benefiting top underwriters Deutsche Bank, JPMorgan Chase and Wells Fargo & Co.
Offerings tied to as many as 100 properties are still climbing. Banks have underwritten $11.5 billion of debt that packages multiple loans, compared with $10.9 billion last year, Bloomberg data show. Those deals often have lower quality collateral because investors are less discriminating about lending against marginal properties when they are bundled with other debt, said Nomura’s Overby.
Deutsche Bank and Cantor Fitzgerald LP this week are marketing $1.1 billion of bonds linked to 56 loans on 84 properties. The buildings are spread across 28 U.S. states, with New York and California accounting for about 41 percent of the transaction, according to a report for investors from Kroll Bond Rating Agency Inc.
Banks are compensating for higher funding costs on those deals by lowering their underwriting standards, Barclays Plc analysts led by Keerthi Raghavan said in a report this month.
Lenders started forgoing a ranking from Moody’s Investors Service on the riskier portions of new deals last year when the bond-rater started to demand more protection for investors to deem them investment grade. Standards are slipping further, Moody’s analysts led by Tad Philipp in New York said in a January 23 report.
Increased demand from insurers for high-quality assets is coming at a time when fewer properties need financing because they’ve already taken advantage of cheap funding costs and pushed out maturities, Nomura’s Overby said. About $46.5 billion of commercial-mortgage backed bonds come will come due this year, down from about $55 billion in 2013, Bank of America data show.
“Because interest rates have been so low for so long, a lot of those assets already have financing,” Overby said.