Commercial Real Estate Debt: Time for Insurers to Take a Closer Look?

March 03, 2025

4 min read

Peter J. Gordon| Head and Chief Investment Officer—US Commercial Real Estate Debt

Marshall L. Glick| Senior Analyst—Securitized Asset Management

Eric Goldstein, CFA| Research Analyst—Commercial Real Estate Credit Research

Gary Zhu, CFA| Deputy Chief Investment Officer—Insurance

Deanna Leighton, CFA| Lead Portfolio Manager—Insurance Portfolio Management

A holistic approach may help insurance investors navigate an expansive opportunity set.

Few market sectors have struggled more than commercial real estate since the pandemic changed how people work and live. A year ago, commercial real estate debt spreads were significantly higher than those of corporate bonds, so insurance investors received compensation for taking real estate risk.

Those spread premiums are lower today. Risk assessments, meanwhile, haven’t changed much. US inflation is still running hotter than expected and rates may stay higher for longer than the market assumed just a few months ago.

But while the interest-rate curve is higher than it was two years ago, it’s also more anchored. This has helped stabilize valuations and has created an environment that is more conducive to investing in real estate.

A Holistic Approach for an Expansive Market

The US commercial real estate market’s equity value was $22.5 trillion at the end of 2023, according to the Federal Reserve, with outstanding debt of $5.9 trillion. As we see it, capitalizing on the potential in such a vast market requires a holistic approach that incorporates opportunities across regions, asset types, collateral types (loans versus physical assets), and public and private markets.

We see opportunities across market segments, including commercial mortgage loans, conduit commercial mortgage-backed securities (CMBS), single asset single borrower (SASB) CMBS and commercial real estate collateralized loan obligations.

In our view, a holistic approach is better than a siloed process that segregates investments into categories—securitized loans in one bucket, whole loans in another and so forth. We think the siloed approach poses more risk of missing opportunities, duplicating exposures or both.

In Real Estate, Debt Seems More Attractive Today

Based on our view of today’s market landscape, we think it makes sense to prioritize debt over equity. Lenders’ seniority in the capital structure provides an important cushion. Equity investors face a higher risk of absorbing losses or, in extreme cases, losing all value—a risk that may grow if Treasury yields remain elevated or keep rising.

For lenders, a higher-for-longer rate environment means loans will likely remain outstanding for longer, which should increase returns. And when rates start to decline, property values and repayment activity are likely to increase.

This helps to explain why lenders have been willing to extend loans to borrowers instead of forcing sales. We expect this to continue. And while asset values have declined, we don’t think many of them have fallen far enough to make acquiring properties sufficiently cheap to justify significant equity investments.

Shorter Loans—a Good Fit for Annuities

Life insurers typically allocate a sizable 20%–30% to commercial real estate, according to SNL Financial, while allocations for property and casualty insurers are a more modest 3%–6%. On the product side, annuity sales have surged in recent years with rising interest rates, outpacing those of traditional life policies and boosting competition among insurers for short- and intermediate-duration assets.

This shift may make shorter-duration commercial mortgage debt a good fit for insurers’ annuity liabilities, which tend to have shorter contract durations than traditional life and long-term-care products. As many as three-quarters of conduit CMBS deals in 2024 sported five-year maturities; trends have been similar with securitizations backed by SASB loans and privately originated whole loans. Similarly, in the whole loan market, insurers have moved toward floating-rate indexed and shorter-duration loans to match the liabilities they’re selling.

Navigating the Credit Cycle: Where We Are

In most cases, sectors such as multifamily, industrial, hotels and retail are in relative equilibrium—a stable stage of the credit cycle. Office, perhaps the hardest-hit sector since the pandemic, is broadly in recovery. But the recovery’s length will vary based on property quality, location and employers’ return-to-office mandates.

And as the following display shows, loan origination volume is at or near pre-pandemic levels for every sector aside from multifamily and office. Compared to 2023, origination last year increased in every major sector except retail.

Origination Volume Improving in Most Commercial Real Estate Debt Types

Bar chart shows origination volume mostly up vs 2023 and at or near pre-pandemic levels.

Note: Loan Origination volumes are adjusted for future expected revisions using Newmark’s Proprietary models
As of January 25, 2025
Source: Newmark Research and RCA

Focus on Underwriting Quality, Not Property Type

Strong insurance investor demand for yield along with real estate’s value versus non-real estate corporate securities suggest opportunities. But limited growth in net operating income across properties means that the type of building—office, hotel or multifamily—isn’t as important as the quality of underwriting.

Put another way, we think the focus should be on credit features and covenants, not necessarily whether the loan is financing an industrial or multifamily property.

In conduit CMBS and SASB deals, we think it makes sense to look at higher-quality tranches—primarily AAA and AA—despite tighter spreads. In many cases, revenue growth has been offset by rising expenses, keeping net operating margins in check and growth in the low single digits. So, with the credit curve relatively flat, investors aren’t getting much more yield from moving down in quality. We do see opportunities to invest in situations with more perceived risk, moving higher in the capital structure to boost return potential with a significant downside cushion.

On the private side of commercial real estate debt, potential tends to cluster at both ends of the credit spectrum. At one end are income-generating “core” or “core-plus” properties with steady cash flow. At the other end are more opportunistic plays. As with publicly traded debt, we think a flat credit curve means that staying higher in the capital structure may reduce risk.

Quality and geography still matter for investors. Consider offices: the sector is recovering more rapidly in top-tier cities, including New York. And the outperformers are typically newer, energy-efficient buildings with modern amenities and proximity to retail and transit. Their closest analog may be the modern “fortress” malls that survived the shift to e-commerce that started in the early 2000s.

Again, though, leasing terms are typically shorter today, underscoring the opportunity in shorter-duration investments.

The Big Picture: Watch the Risks, but Don’t Pass Up Opportunity

There are risks in 2025. Credit spreads are tighter, and a significant drop in property cash flow would push values down. But we believe that staying up in credit quality, avoiding the riskiest business plans, and blending public and private credit may help insurance investors calibrate commercial mortgage exposure to today’s risks and opportunities.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Peter J. Gordon

Peter J. Gordon is Head and Chief Investment Officer of the US Commercial Real Estate Debt (US-CRED) team. US-CRED oversees nearly $12 billion in committed capital from insurance companies, pension funds and banks, across four vintage closed-end funds and various other institutional mandates. Previously, he was managing director of Commercial Real Estate Debt. Prior to joining the firm in 2016, Gordon served as managing director and head of commercial real estate (CRE) whole loan originations at Angelo, Gordon & Co., a global alternative investment-management firm, where he led the CRE whole loan team, responsible for sourcing, pricing, financing and structuring transactions, as well as managing assets in the investment portfolio. Prior to that, he was a senior member of the real estate finance and investment banking groups at both Goldman Sachs and Morgan Stanley, where he was involved in all aspects of commercial real estate lending, from originations for balance sheet and commercial mortgage-backed securities to loan structuring, syndication and securitization. Gordon has been working in the commercial real estate space since 2001, including four years in construction management. He holds a BS in mathematics from the University of St. Andrews and an MBA from Columbia University. Location: New York

Marshall L. Glick

Marshall Glick is a Senior Vice President and Senior Analyst in AB’s Securitized Asset Management Group, where he oversees investments in commercial mortgage-backed securities (CMBSs). He first worked at the firm from 1996 to 2002. From 2002 to 2009, Glick was a senior credit officer at Fortress Investment Group, where he sourced, underwrote and managed the assets in a multibillion-dollar investment portfolio that included credit-sensitive CMBSs, B-notes, mezzanine debt and whole loans, along with REIT debt and leveraged bank loans. He previously served as vice president, Structured Products, at AB, where he focused on primary and secondary offerings of CMBSs and covered the REIT debt sector. Prior to joining AB, he was associate director in the Structured Finance Ratings division at Standard & Poor’s Rating Services. Glick holds a BS in finance from the State University of New York, Albany, and an MBA from Fordham University. Location: New York

Eric Goldstein, CFA

Eric Goldstein is a Senior Vice President and Research Analyst for Commercial Real Estate Credit Research on the Securitized Assets Research team. He joined his current team as a desk analyst in June 2015, concentrating on commercial mortgage-backed securities (CMBS) and liaising among Research, Trading and Portfolio Management. In 2013, Goldstein joined the Global Credit team as an associate portfolio manager, after having served in the same role since 2008 on the US Multi-Sector team. He joined AB in 2007 as a Fixed Income rotational program associate on the Securitized Products Research team, where he covered asset-backed securities and CMBS, in addition to serving as a portfolio assistant on the Insurance team. Goldstein holds a BS in finance and marketing from New York University and is a CFA charterholder. Location: New York

Gary Zhu, CFA

Gary Zhu is a Senior Vice President and Deputy Chief Investment Officer of Insurance, where he is responsible for portfolio performance, strategic positioning and customized investment solutions for AB’s Insurance platform. Zhu joined AB in 2020 as the global head of Multi-Sector Insurance on the Fixed Income team, primarily focusing on developing and implementing multi-sector income portfolio strategies. In 2021, he was named director of Insurance Portfolio Management, where he led AB Fixed Income’s insurance business. Under Zhu’s leadership, the Multi-Sector Insurance team was named Investment Team of the Year in 2022 and 2023 by Insurance Asset Risk. He is also a portfolio manager in the US Investment Grade Credit and Sustainable Thematic Credit teams. Prior to AB, Zhu was a senior publishing research analyst and the head of cross-sector research at Wells Fargo Securities. He ranked first for cross-asset strategy in the 2019 Institutional Investor survey and earned the title of Best Cross-Asset Analyst in Global Fixed Income Strategy. Before joining Wells Fargo, Zhu was a senior securitized assets trader and portfolio manager at Genworth, where he managed ~$10 billion of fixed-income investments. Prior to his portfolio-management role, Zhu helped manage Genworth’s $70 billion general account, with a focus on US and European banking exposures during the 2008 financial crisis, and held various roles across the company. He holds a BS (summa cum laude) in finance and economics from Virginia Commonwealth University and an executive MBA (with Dean’s Honors) from Columbia Business School. Zhu is a CFA charterholder and holds the Fellow, Life Management Institute designation. Location: New York

Deanna Leighton, CFA

Deanna Leighton is a Vice President and Lead Portfolio Manager on the Multi-Sector Insurance Portfolio Management team, where she is responsible for formulating insurance portfolio allocation strategies, overseeing daily portfolio-management activities and leading insurance-specific cross-sector, relative-value discussions. Leighton leads the Macro Allocation and Strategy team that interfaces with AB Insurance’s strategic clients in building tailored liability-driven and asset-focused solutions. She uses her deep understanding of both cross-asset investments and insurance company needs to construct tactical and dynamic investment portfolios and co-leads AB’s biggest insurance client’s spread-lending strategies. Leighton is a frequent speaker at industry conferences, and she moderated the inaugural Private Credit panel at ABS East in 2023. Prior to joining AB in 2022, Leighton was a fixed-income portfolio manager at AIG Asset Management, where she oversaw around US$5 billion of high-yield bond investments and helped build AIG’s third-party asset-management business, contributing to its strong commercial success. Before this role, she was an associate portfolio manager for AIG Asset Management’s high-yield bond portfolio. Leighton holds a BA with a concentration in economics from the University of Michigan and is a CFA charterholder. Location: New York