Life and Annuity Issuers Prepare to Feast on Commercial Real Estate

Few banks, REITs or CMBS managers are in a mood to invest much, and the regional banks that have focused on commercial real estate have been hit especially hard, Murray said.

“I would expect to see more bank failures,” Murray said.

Gary Bhojwani, the CEO of CNO Financial, warned against assuming that the office market is at the bottom and will recover quickly.

CNO itself recently cut down to about 30,000 square feet of office space in Chicago, from 140,000 square feet before the pandemic, and it replaced about seven buildings at its Carmel, Indiana, headquarters with 250,000 square feet of space.

“There are tons of companies doing that,” Bhojwani said. “I think this is the small knife. The big knife hasn’t shown itself yet.”

Because so many players are cutting back on lending, for any would-be borrowers wanting financing, “insurance companies are the only game in town,” he added. “It’s a great time to be a solution provider.”

The economy: Meanwhile, for life and annuity issuers, overall conditions are great. North America has avoided the recession that most people were expecting, and “the United States is hitting the ball out of the park,” said Paul Gruenwald, S&P’s global chief economist. “We going through an investment boom.”

Carmi Margalit, S&P’s life insurance sector lead, told attendees that the higher rates have helped life insurers write the most profitable business in a decade, capital levels are high, and, at most life insurers, commercial real estate portfolios are relatively small and performing well.

In theory, a spike in interest rates could cause customers to pull cash out of life insurance policies and annuities, but the industry has just gone through a dramatic rate spike that led to no troubling wave of disintermediation, Margalit said.

The gameboard: Sachin Shah, the CEO of Brookfield Re, the company that just bought American Equity, said life insurers have a natural advantage in this kind of market because they need long-duration liabilities and can avoid selling properties during downturns.

“You have to have a really long view,” Shah said.

Roger Crandall, the chairman of MassMutual, agreed that the life insurance industry is well-situated to get through the commercial real estate crash.

But “there’s plenty of pain to come, particularly in office,” Crandall said.

A view of Manhattan, from Midtown looking west toward the Hudson River. Credit: ALM