Making a Case for Senior Lending


Tim Stoner
Managing Director, Capital Markets

Alex Rapoport
Senior Director, Capital Markets

Will McIntosh
Global Head of Research

John Kirk
Senior Director, Research

Mark Fitzgerald
Senior Director, Research

December 2017

Why senior mortgage loans are attractive in today’s market

The Opportunity

The commercial real estate (CRE) debt market has approximately $4.0 trillion in loans outstanding (see Exhibit 1), equivalent to nearly one-fifth of U.S. GDP output, offering investors a vast array of products and strategies. This article will focus specifically on market conditions, portfolio attributes, and current opportunities associated with senior mortgages, or whole loans, highlighting why now is an ideal time for life insurance lenders to invest in this sector.

A first lien carries lower risk than other real estate debt sources given its senior position in the capital stack, and it has priority over all other liens or claims in the event of default. Indeed, the quality of the underlying real estate pledged as collateral plays a crucial role in determining the level of risk associated with a mortgage. Following the Global Financial Crisis (GFC), however, even relatively high-quality properties were difficult to finance given the credit crunch. Consequently, loan volume slowed in light of a softening economic outlook, tighter underwriting standards, and stringent regulatory requirements (primarily for banks and Commercial Mortgage Backed Securities, or CMBS). As bank lenders and CMBS retreated from the marketplace, an opportunity emerged for other capital sources, such as life insurance companies and private debt capital, to absorb market share and take advantage of attractive risk-adjusted returns. Notably, private debt has focused primarily on new construction projects, value-add properties, and opportunistic investments, while competing less in the stabilized whole loan space given their relative cost of capital disadvantage compared to other capital sources. Life insurance companies, however, continue to fill the gap in the senior lending segment today.