Last July, Rick Coppola, managing director and head of commercial mortgage investments for New York-based TIAA-CREF, called in his team. The commercial lending market had shifted radically since the beginning of the year, and it was time to revisit corporate strategy. But the mood was different at TIAA-CREF than it was at other boardrooms at other financial organizations during the same period of time. [??] Down the neighboring mean streets of Manhattan, at other New York companies such as Citigroup Inc., Merrill Lynch & Co. Inc. and Bear Stearns & Co. Inc., there was panic in the eyes of executives as the subprime mortgage crash quickly blossomed into a full-fledged credit crisis. At TIAA-CREF, the mood of the meeting was more positive as the financial market disruptions created opportunities for the balance-sheet lender. [??] In the commercial mortgage arena, TIAA-CREF had long been known as a large-loan lender--that is, deals of more than $100 million. In the early part of 2007, however, the financial services firm serving university and nonprofits started pulling back on large loans. "We weren't seeing a lot of relative value in really large deals because spreads had gotten very tight," explains Coppola. "So we changed focus. In the first half of 2007, we sought medium-sized deals, in the $25 million to $50 million range."
TIAA-CREF was successful in placing its capital, recently doing $750 million of medium-sized transactions with the average deal size of $35 million, Coppola says.
Then in July, the market changed significantly, he recalls. Coppola says, "We got together in a small meeting room and addressed the questions: What is the best way for us to manage the shift in the market? And how do we now operate in a landscape where the market has turned upside down?"
The answer was fairly obvious to the group: Get back to large-loan lending. With the subprime mortgage meltdown and subsequent credit crunch, many of the big investment and commercial banks pulled back from real estate lending. All at once, the large-loan space was much less crowded.
From July through the end of the year, virtually the only commercial mortgage lenders still active were the big life insurance companies--portfolio lenders that kept mortgage loans on their books and did not in a major way slice-and-dice them to sell as commercial mortgage-backed securities (CMBS).
"All of a sudden there was just a handful of us doing that business, and it is a good business because it is with the same borrowers; it's everything that we know, with everyone that we know," Coppola says.
"Strategically, this was to our advantage. It was not just about getting higher spreads, although that was certainly a result; but it was moving the portfolio back in a direction that was more difficult [to do] in the first half of the year."
For the past few years, TIAA-CREF had averaged between $2.5 billion and $4.5 billion in mortgage loans a year, and its portfolio totals about $20 billion--making it one of the largest in the industry, reports Faye Friedman, director of portfolio management for the organization's commercial mortgage investments group.
While big, the portfolio is also somewhat concentrated in the office and retail sector. About 35 percent of the portfolio is just in malls, says Coppola. TIAA-CREF wanted to broaden its portfolio to do more multifamily, industrial and lodging, but lending in those sectors had really been competitive with the conduits very active, so there weren't many deals that met the organization's lending parameters.
With so many competitors--most in the conduit space--now having slowed production, the changing market presented TIAA-CREF with opportunities to lend in some of those other sectors.
"We decided to focus on certain asset classes, such as industrial and multifamily, which are usually smaller deals," says Coppola. "It was hard to get a lot product. After July, a number of deals arose in these sectors, some of which were larger transactions because they were with a portfolio. For example, we refinanced a $200 million portfolio of warehouse/distribution properties."
Getting to a good place
The TIAA portion of...