“It is a bizarre time when investments are beating your underwriting, but you are still out of money because of your financing.” So said Moshe Lichtenstein, Chief Investment Officer, Converge US, when he spoke at a panel discussion at the Insurance Investor Live | North America event in December last year in New York, which is now featured in the Insurance Asset Management North America 2024 report.
In the discussion Lichtenstein talked about strategic decisions for portfolios amid a volatile macroeconomic backdrop, with fellow panellists from T. Rowe Price, Liberty Mutual Insurance, and Shelter Insurance, with Nelson A. Pereira, Investment Director, Insurance, Mercer, moderating the conversation.
During the discussion, Lichtenstein gave his thoughts on the CRE sector of the wider Real Estate asset class and the challenges and opportunities they were seeing in the US market.
Real estate was seen as a safe bet during the inflation event of the past few years, however, CRE was hit hard by falling office occupancy rates partly due to hybrid working conditions. The loss of tenants in some of the US’s most profitable real estate markets has created spasms of worry for many in the sector. According to the consultancy Commercial Edge, “the national [office] vacancy rate was 18% in January [2024]”, which was “up 130 basis points year-over-year”.
The most affected metro areas were Detroit, Houston, San Francisco, Seattle, Denver, and Austin, with vacancy rates north of 20%. Miami had the lowest rate, followed by Boston and Charlotte. All were under 13% vacancy.
However, other parts of real estate have done extremely well over the past several years and areas such as single-family houses show no sign of slowing down in their exponential price rises. It begs the question: in 2024, what is a good real estate investment strategy for insurers?
Moshe Lichtenstein: It is a bizarre time when investments are beating your underwriting, but you are still out of money because of your financing. Real estate is a levered investment. It is dangerous out there; for example, multifamily transaction volumes are down 90-95%, which means that 90-95% of the market does not think they are priced properly, and they are down 20-30% already.
"Certain markets are oversaturated while others are undersaturated,
so it is about doing your due diligence."
We will see where people believe interest rates are going. It takes a long time for real estate to play out; right now, it is mostly uncertain. Certain areas are obvious, though – the office market, for instance, as you have not only asset risk plus the refinance risk, which is a perfect disaster. So, it will be interesting to see where certain assets play out. Industrial is interesting because there is a macro trend for manufacturing to come back to the US, which we haven’t seen in decades, and this is creating a macro trend that will be hard to fulfil.
Certain markets are oversaturated while others are undersaturated, so it is about doing your due diligence. You need to be careful in real estate.
Moshe: Certain opportunities were created because cap rates were so low in certain sectors, so there was a push to be creative. These will probably go away. Certain things the internet can’t replace – such as hospitality, multifamily, or industrial. Retail got over-traded to the downside and is recovering a little bit. Certain things you just need real estate for, and those will do well.
Moshe: We do a lot of bridge financing, and, if you know the assets, you can do well. But you do need to be humble, as you can be wrong – such as about where interest rates go. So, you need to be able to price all that in and make sure that you are comfortable with those numbers.
"If you price properly, you can get attractive yields."
There is going to be a lot of distress in multifamily as there is a lot of floating rate debt that has been taken out over the past couple of years and how all this gets refinanced is to be determined. It will depend on how accommodating lenders are. If you price properly, you can get attractive yields.
Moshe: What is interesting in terms of capital charge and how it is treated is that for a lot of bridge lending, you can have interest reserves and technical structures that make it quite attractive from a capital perspective.
Even if it is not the most stable asset, you can get favourable treatment.
