In his exclusive interview with The Wall Street Transcript, MetLife Chief Investment Officer Steve Kandarian says commercial real estate valuations have reached their bottom, with early signs of improving leasing activity and hotel occupations already becoming apparent.
“We believe that commercial real estate valuations have bottomed out, with an average peak-to-trough decline of about 40%,” said Kandarian, who first called the real estate bubble and reduced MetLife’s exposure to risky real estate sectors in 2005, at the same time reducing the loan-to-value ratio in the company’s commercial mortgage portfolio.
“The loan-to-value ratio of our portfolio increased slightly in the first quarter to 69%, based on a rolling four-quarter valuation process. Importantly, though, only 2% of our portfolio has a loan-to-value ratio greater than 80%, and a debt service coverage ratio of less than 1.0 times,” Kandarian said.
The CIO projects a loss of 2% in MetLife’s commercial mortgage portfolio over the next several years and predicts any delinquencies incurred to be manageable.
“We focus on A-quality properties in the prime U.S. markets. We rarely do things like construction loans and loans on raw land, which tend to be the sectors that are hit the hardest when a downturn occurs,” explained Kandarian, whose department underwrites its own commercial mortgages.
“We’re a long-term investor in this sector. We’ve been at this for many decades, and we have offices across the United States that are dedicated to understanding their local markets, and conducting extensive due diligence and very stringent underwriting.”
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