As a first-in-line alternative to banks, life insurance companies have for years been a steady source of capital for office building owners—until now.
That’s right, insurance companies have joined banks and issuers of commercial mortgage backed securities in slamming the lending window shut on office owners who are facing—take your pick, an avalanche, tsunami, Great Wall—of maturing debt coming due in the next three months.
With office valuations plunging in major urban markets, office owners who can’t secure refinancing may have to choose between a fire sale and giving the keys back to the original lender.
Many insurance carriers have slowed or stopped making office loans, spooked by rising vacancy rates, falling rents and the persistence of remote work that is keeping average occupancy levels below 50%, the Wall Street Journal reported this week.
Office occupancy fell 2.2% to 46.3%, according to Kastle’s latest 10-city average.
A February survey by Goldman Sachs Asset management found that 15% of insurers with commercial real-estate lending businesses said they planned to decrease that activity this year, three times as many who responded that way in the same survey last year, WSJ reported.
The report said the Principal Financial Group, an Iowa-based insurance company, told investors in early March that the firm is “putting a pause on deploying new capital into commercial mortgage lending.
The CEO of the Iowa company’s Principal Asset Management unit said the firm will refrain from investing capital in CRE until building owners reprice valuations.
Earlier this week, the chief investment officer of the $306B California State Teachers Retirement Fund disclosed it expects to write down office valuations in its $52B CRE portfolio by 20%.
“Our office real estate is probably down about 20% in value, just based on the rise of interest rates,” CIO Christopher Ailman told FT. “Our real estate consultants spoke to the board last month and said that they felt that real estate was going to have a negative year or two.”
Distressed office buildings have become the focal point of concern in the CRE sector. Several forecasts are projecting peak-to-trough plunges in office valuations of up to 40%—cliff dives that could drop to as much as 70% in cities like San Francisco and New York.
Because real estate assets are highly leveraged—and therefore illiquid—they generally are slow to reprice. The fire sale of assets from failed regional banks SVB and Signature is expected to speed up revaluations, GlobeSt. reported.
Ailman warns that parts of the commercial property market could “seize up” while prices adjust. “The buyers don’t want to step in until [prices] come down,” he told FT. “So, it’s an illiquid market and it’s going to be locked for a while.”