Survey: insurance co.s shift investment plans - major life insurance companies decrease real estate lending to minimize insolvencies

Real Estate Weekly, July 1, 1992

Facing projected losses of $9 billion over the next three years, major life insurance companies are scaling back their real estate lending to minimize insolvencies while smaller players are putting their stock in select commercial niches, according to experts participating in the recent program here, "Insurance Companies & Real Estate: Is the Marriage Working?"

The one-day forum, sponsored by the American Society of Real Estate Counselors, addressed the insurance industry's future role as a continued source of financing for commercial real estate investments and development.

"Today's insurers are the leader in market pricing, structuring and underwriting," said panelist John Levy, senior vice president of NationsBanc Mortgage Corporation. "Yet, these companies aren't the same heavy hitters whose individual annual real estate investments were $3 to $4 billion in the late 1980's. Instead, today's lenders are small-to-moderate size companies investing $100 to $500 million each in select real estate niches."

While major lenders and investors in all sectors of the commercial real estate market in the mid-1980's, insurers in the 1990's are now faced with an over-built market, record high vacancy rates and declining rents. According to the American Council of Life Insurance, office building mortgages account for as much as 44 percent or life companies' total commercial property portfolios.

"The office sector problems will be with us for awhile," said speaker David Johnson, managing director of CIGNA Real Estate Investors. "It's going to take several more years to work through the problems as office leases continue to rollover. Yet, there are buyers out there. We've had success with vacant buildings, where the buyers are the users of the space. Vacant buildings are easier to sell than partially full ones."

According to Levy, there is a positive side of the office market. "The one bright niche in the office sectors is medical buildings," said Levy. "They're red hot right now - but we like then attached to major hospitals, not 'doc in the boxes."

Another hot area on life companies' lists is multi-family units. "Apartments clearly are the institutional investment vehicle of choice, except those with popcorn ceilings, or other asbestos products that are friable," said Levy. "It's a big issue that affects the marketability of the building and our interest in financing the project."