The middle market advantage
While different kinds of investors may find suitable opportunities in each market segment, we believe that the middle market offers the best combination of diversification, risk management and returns.
Unlike larger borrowers, which are concentrated in a limited number of markets, middle market borrowers are located in every region of the country. They range from retail property managers to lessors of warehouse, industrial, residential and office space. The breadth of lending options in the middle market space makes it relatively easy for a financer to build a diversified portfolio of commercial loans across different locations and industries that align with their specific return-risk profile.
Direct lenders have greater control over managing credit risk than bondholders. They can negotiate favorable lending terms, including covenants and workout provisions. In the event the borrower becomes insolvent, direct lenders’ claims for payment and collateral have a higher priority than those of bondholders and stock shareowners.
Investment managers who focus on the middle market generally have more experience developing and managing properties and are more familiar with the structure and provisions of commercial loans than small-market borrowers. The most credit-worthy firms also have extensive knowledge of the demographics, zoning laws, land values and economic climate in the areas where they’re developing and managing properties.
Middle market lending sweet spots
In our experience as a commercial lender, we’ve found that the most reliable middle market borrowers are well-established real estate companies that own affordable, moderately sized properties in stable suburban communities. These properties may include smaller shopping centers in prime locations leased primarily by local or regional retailers, multi-tenant warehouses and established residential communities catering to working families and retirees.
These firms are firmly entrenched in their locations and understand the demographics, zoning laws, land values and economic climate in the communities where they acquire and manage properties. They’re usually less affected by cyclical economic factors than firms that focus on leasing office space or specialized manufacturing facilities. We also favor real estate firms that lease to multiple residential or commercial tenants. While collecting rent from a single lessee may be easier to manage, it may be more difficult to find a replacement should the tenant terminate their lease. And while there may be more turnover in a multi-tenant unit, the temporary loss of rent from a single vacated space can be cushioned by the consistent stream of income from other long-term tenants.
About Securian Asset Management
Securian Asset Management, Inc. based in St. Paul, MN, is an institutional asset manager specializing in public and private fixed income, commercial real estate debt and equity, pension solutions and alternative investments strategies with more than $44 billion under management as of September 2019. The asset manager was established in 1984 and traces its history to the founding of parent firm Securian Financial Group in 1880. The author of this article, Sean O’Connell, CFA, Senior Vice President of Securian Asset Management, has more than 26 years of investment management experience. For more information on commercial loan strategies available to institutional investors, please contact the Securian Asset Management team at 651-665-5097.