Debt funds, relatively new as a major player in commercial real estate debt, now claim a greater share of the U.S. commercial mortgage market than life insurance companies, Real Capital Analytics said.
The funds have proliferated in recent years as their sponsors, many of which also run private equity platforms, have shifted resources into debt investing. Their rise coincides with mostly stagnant growth in commercial mortgage-backed securities lending volume, and a trend toward caution in real estate lending by banks, which have faced greater regulatory scrutiny.
Citing data from the first half of 2019, Real Capital Analytics said debt funds surpassed insurance companies in real estate lending market share — a noteworthy development because insurers were "the only game in town" for many commercial property investors in the years immediately following the global financial crisis.
Insurers still claimed a slightly greater share of lending to investors with "core" real estate strategies — those focused on stabilized, income-generating properties — with a 10% share of the market, compared to 9% for debt funds. Still, debt funds' gains in value-add real estate and construction, segments that carry greater risks, pushed them ahead of insurers in the overall commercial mortgage market.
While non-bank lenders' rise relative to traditional capital sources has been "disconcerting" to some market participants, Real Capital Analytics Senior Vice President Jim Costello said in a note that they do not share the same risks as the CMBS lenders that dominated the commercial lending market in the years immediately leading up to the crisis. Significantly, Costello said, debt funds maintain "skin in the game" by retaining at least some of the debt they originate, whereas CMBS lenders in the era before risk retention were able to off-load their risk entirely.
