Aflac Exec Assesses Slump in Office Building Market
Max Brodén, the insurer's chief financial officer, sees the downturn cutting prices by as much as 60%.
An Aflac executive told securities analysts last week that the office market slump has cut typical building prices by 25% to 40%, and by as much as 60% in some cases.
“The commercial real estate markets are going through their worst cycle in decades,” Max Brodén, Aflac’s chief financial officer, said during a conference call.
He compared the current slump to the 2007-2009 Great Recession, noting that prices fell about 35% to 40% then.
What it means: The slump will hurt funds with large investments in office buildings. It could help clients who want to invest in office buildings.
The context: Many of the employers that sent employees to work at home during the COVID-19 pandemic still have employees working away from the office.
The true physical occupancy rate for office buildings in big U.S. cities is only about 50%, according to Kastle, a company that runs building entry systems.
Meanwhile, interest rates have increased rapidly, meaning that the payments on new mortgages will be higher than the payments on old mortgages.
Only half of the U.S. office buildings with loans set to mature in 2024 look as if they can afford to refinance, according to Bob Vrchota, a Fitch Ratings analyst who spoke at a Fitch conference in October.
Aflac: Aflac is a Columbus, Georgia-based company known for writing accident insurance and supplemental health insurance in the United States and for selling cancer insurance and medical insurance in Japan.
It reported $1.6 billion in net earnings for the third quarter on $5 billion in revenue and $111 billion in assets. It has $13 billion invested in commercial mortgage loans and other loans.
CFO’s perspective: Brodén said that Aflac has commercial mortgage loans worth about $1 billion on a watchlist, and that about two-thirds of the properties behind the loans are in foreclosure proceedings.
The company has taken over two buildings and written them down by $53 million, and it has added $34 million to reserves to account for possible problems with other buildings.
“We do not believe the current distressed market is indicative of the true intrinsic economic value of the underlying properties currently undergoing a foreclosure process,” Brodén said.
Aflac has the resources to take over buildings and manage them until the slump ends, and it believes that will maximize recoveries, he said.
Aflac has invested most of its portfolio in fixed-rate bonds. Overall adjusted net investment income was 13% higher in the third quarter than in the year-earlier quarter.
Credit: ALM