Manulife's Lee: CRE credit has shifted to a capital allocation problem

Commercial real estate credit has largely shifted from a liquidity problem to a capital allocation problem, Jessica Lee, Manulife Investment Management's chief investment officer of real estate credit, said in an Insurance AUM Journal Q&A.

Liquidity across U.S. commercial real estate has improved significantly over the past year or so, Lee said. The reason is that the public securitized markets, CMBS and CRE CLOs, have reopened and that private lenders and insurers have stayed active, in her account. What varies is where the capital goes: Lee said availability differs by property type, market and borrower, and that the question is less whether capital exists than how it is priced and which lenders are willing and able to provide it. In her description, real estate credit has become a relative value business rather than simply a yield business.

For an insurer weighing a general-account allocation to real estate debt, the return case rests on a manager's sourcing, structuring and loan management rather than on a favorable rate or cap-rate environment. Lee said disciplined lenders can generate alpha in the current dislocations that way. The diligence question that follows is whether a given manager's origination record supports the claim.

She also points to a wider range of possible outcomes for growth, inflation and interest rates, which she said increases the importance of risk pricing and selectivity. Banks, insurers, debt funds and the public markets are each willing and able to finance different situations, she said. Dispersion runs across property types, markets and borrowers.

The Q&A describes inflation as still stubbornly high and rates as difficult to predict. Lee said that makes it vital to focus on structuring loans and targeting assets that can withstand the challenges of macroeconomic volatility.

"Sponsors are increasingly valuing lenders that can tailor solutions to the specific circumstances of an investment and truly be their partners throughout the process," she said in the Q&A.

The Q&A frames real estate debt's appeal to investors as a combination of downside protection and differentiated return drivers. In Lee's framing, the shift from liquidity to allocation puts the emphasis on loan-level work: pricing risk, structuring terms and choosing assets that can hold up through macro volatility. The case she makes is that returns from sourcing and structuring do not require a favorable rate or cap-rate backdrop.