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Uncertainty Ahead for Life Insurance Mortgage Portfolios

Trepp Inc.’s just-released Q1 2022 LifeComps Commercial Mortgage Loan Index reported a negative total return of 5.77%, year over year, on LifeComps portfolio real estate asset classes. Multifamily properties took the hardest hit, with a -5.33% total return during the first quarter. Meanwhile, retail property loans decreased by 3.08%, while hotel property loans decreased by 3.22%.

The LifeComps Commercial Loan Index is a published benchmark for the private commercial mortgage market and is based on mortgage loan cash flow and performance data collected quarterly from participating life insurance companies.

The reasons for the decrease are becoming familiar to most investors. Supply chain disruptions and inflation combined with Federal Reserve increases in the Federal Funds Rates have exacerbated returns on portfolio holdings.

While uncertainty is impacting all asset classes, office properties top the list. As employees continue working from home, occupiers are re-evaluating their space needs. This, in turn, could threaten loans on offices that have near-term lease rollovers. Nearly two-thirds of loans sold in the LifeComps portfolio consist of office property loans.

Trepp reported that multifamily and industrial properties continue to be strong investment vehicles among life insurance investors. Supply chain and consumer demand have increased the attraction of industrial space, even as funding and new loans on industrial property have been cut by half to $1.8 billion since Q43 2021.

Despite assert depreciation, interest payments continue surpassing interest that is due. Trepp analysts forecast that interest income will drive total returns, depending on tenant income. Though funding and originations have slowed, “the income derived from total occupancy will drive investors to assets with the most stable occupancy,” the report said.

Trepp also anticipates a slight decrease in real estate investments, with a long-run hold on industrial property loans dependent on consumer demand and the global supply chain. An increase in prices and interest rates could lead to a slowdown in consumer spending, potentially reducing down industrial investments.

Finally, “continued volatility in global markets could impact investor-driven returns, as certain parts of the global economy remain closed and drive further uncertainty as we progress into 2022,” Trepp analysts said.

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