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FINANCE: A piece of the rock

Life insurance companies are a great source of capital for the shopping center industry. And they frequently take ownership stakes in shopping centers and other real estate projects. But overall, how important is the role of life insurance firms in retail real estate?

The Commercial Mortgage Alert, a newsletter published by Lend Lease Real Estate Investments (LLREI), recently named the “Top Mortgage Originators Among Insurance Companies.” The top 30 national life insurance companies originated more than $22.4 billion in commercial and multifamily loans in 2000. Surprisingly, the newsletter predicts this figure will climb to $36.8 billion by the end of 2001.

“Life insurance companies have always been key players in financing shopping centers,” notes Jeanette Rice, head of LLREI's debt research group and senior managing director of research at Dallas-based Holliday Fenoglio Fowler.

“The recent downturn in the economy has not hurt life insurance investments although retail in general, has had credit problems and resulted in a slight drop in investment in that area,” Rice says. “We see the retail sector increasing in popularity as an outlet for life insurance companies to invest in.”

According to Commercial Mortgage Alert, Teachers Insurance Co. was the top mortgage originator among the insurance companies with the largest mortgage portfolios. In 2000, Teachers reportedly originated $3.3 billion, down from the almost $4.5 billion originated in 1999. Despite originating 26% less in 2000 than in 1999, Teachers Insurance Co. holds more than $24 billion in mortgages, only a 1.9% change.

“Most insurance companies view retail as a higher risk than other types of investments,” Rice acknowledges. “Retail has had credit problems and since capital is pretty conservative, it has shied away. But that appears to be changing rapidly.”

In her more than 20 years of experience in real estate market research, Rice has seen life insurance companies move from mortgage origination only into more direct investment, frequently in the increasingly popular REITs. “Life insurance companies want — and need — diversification by property type,” Rice explains. “Frequently that means they must invest in the retail sector. Our research shows life insurers prefer anchored shopping centers and grocery-anchored shopping centers most of all. In this, they mirror other investors and lenders in the field.”

On the other side of the coin, unlike many other investors, life insurers are almost always conservative. “Their investments tend to have low loan-to-value ratios and the majority involve indirect investments,” Rice says.

The life insurers that finance and invest in the retail sector have noticed the slowdown. LLREI noted the impact on retailers and what it refers to as the “retail space market.”

Currently, retail sales are anemic after nine years of truly robust conditions. However, while 2001 is expected to be a year of concern over poor retail sales and declining consumer confidence, LLREI expects, as a whole, the market to hold up reasonably well.

Although some life insurers do buy and hold real estate, more typically they prefer financing — usually providing financing to the investor or owner rather than the center itself.

The involvement of life insurance companies in shopping center financing falls under the general heading of “retail” in many studies and, in particular, in one survey undertaken by the American Council of Life Insurers (ACLI). The 426 life insurance companies that belong to the ACLI are surveyed on a regular basis. The results are published in a quarterly report of loan commitments among insurers sold by the ACLI.

“There was a drop in allocation in the retail category during several quarters,” notes Jack Nowowski, manager of investment research for ACLI. “However, there was a rebound in the last quarter. In 2000, we saw a 16.2% allocation. The allocation of loan commitment figures for retail dropped to 12% and 12.5% before rebounding to 15.1% in the second quarter of 2001.”

The assets of ACLI's 426 life insurance company members account for 80% of legal reserve life company total assets. In the first quarter of 2001, for example, retail represented 22% or $6 billion, following office properties that represented 37% of insurers' portfolios.

All indications are that shopping center owner/developers will continue to benefit from this involvement on the part of life insurance companies in the months ahead.

Mark Battersby is a Philadelphia-based writer.

Banks become brokers

Banks are quietly lobbying to be allowed to better serve their customers. If their efforts are successful, the way shopping centers are financed may change forever.

Banks, a primary source of short-term financing such as construction loans and bridge financing, have won the support of the Fed and the U.S. Treasury Department to be allowed to enter real estate brokerage and property management. Not surprisingly, because this proposed regulation (or deregulation) could affect all aspects of the real estate industry, most industry groups strongly oppose the move.

“Cash-rich banks could use profits from taxpayer insured operations to subsidize real estate functions, freeing more resources to consolidate market power,” Richard Medenhall, president of the National Association of Realtors, recently testified before the House Subcommittee on Financial Institutions and Consumer Credit. “We hope that the Treasury Department and Federal Reserve will agree with us and deny the petitions to define real estate brokerage and property management as financial activities. This is not only necessary but essential if we are to ensure that the real estate market, one of the largest sectors of the economy, remains fair and competitive.”
— Mark Battersby

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