Q&A: The Prospects for Commercial Real-Estate Lending

Prudential Mortgage Capital Company
David M. Durning, of Prudential Mortgage Capital

Prudential Mortgage Capital Co., the commercial-mortgage business of Prudential Financial Inc., is looking to grow its loan volume up to as much as $11.6 billion this year from $9.7 billion last year. Developments asked David M. Durning, senior managing director at Prudential Mortgage Capital where he sees commercial real-estate opportunities and whether the apartment market is overheating. (This exchange has been edited for clarity and length.)

WSJ: How have low interest rates affected your loan volume?

Mr. Durning: Lower interest rates are one of the factors that have increased our source of funds available. Lower interest rates have also spurred more demand from borrowers to take advantage and put away long-term financing on their properties.

WSJ: Have your phone lines been flooded with borrowers trying to get loans since you announced your financing plans for 2012?

Mr. Durning: There’s two characteristics going on in the market right now. On one hand, there certainly are many people who want to talk to us because of all the new interest rates and the low coupons available. At the same time, the market is still not recovered to where it had been. Most providers of finance are still focused on core properties in the stronger markets at relatively modest leverage levels even though leverage levels are creeping up…There’s lots of appetite for core markets but the appetite becomes much thinner and lending becomes much less aggressive in tertiary and third-tier markets.

WSJ: Is Prudential investing in those smaller markets?

Mr. Durning: We are selective. In general we’d like to see long-term growth driven by employment growth and population. On the debt side as long as the market is stable and loans are amortizing we can make that work. But when you talk about some of the markets in the Midwest, Rust Belt markets, from a regional perspective they may still be in recession. Until a market is growing, it’s typically not an attractive market for lenders.

WSJ: You opened an office in London earlier this year. Why?

Mr. Durning: It adds additional diversity to our portfolio. We’re still excited about markets like Dallas, New York, Los Angeles, San Francisco, Boston and Chicago, but it’s exciting and helpful to our portfolio to also include cities like London and Frankfurt and Amsterdam and Paris. They are strong global cities with long histories and bright futures. Secondly the fact there has been a credit crunch and a credit crisis and the fact that other lenders have been pulling back because of their own exposure offers us the ability to make inroads with borrowers who are part of that market….Some of the markets in Europe may not be growing dramatically but we expect values to be stable and that creates an environment where we have confidence.

WSJ: Back in the U.S., there’s concern the apartment market is overheated. What’s your perspective on the sector?

Mr. Durning: Our perspective would be that certainly, in most attractive markets which recovered first like D.C., where pricing on assets is deterring some new investors, for us it may not be sustainable…But I don’t think aggressive pricing has led to new construction which people were worried about. In the markets that are overheated so far the fundamentals are still strong and there has been improved rent growth. The concern is that the seeds of demise of these markets might come with new supply.

WSJ: Is there an end in sight to the cheaper debt from FHA, Freddie Mac or Fannie Mae that could pull the rug out from under the apartment market?

Mr. Durning: I distinguish between Freddie Mac, Fannie Mae and Federal Housing Administration. As we see what FHA is doing, I see more stability in that going forward. Freddie Mac and Fannie Mae are very important and a big part of what we do…It’s our view that they provide valuable service, especially in non-prime markets where they are in the market every day providing attractive financing for properties that house people. We think that’s a need that should be recognized. There may be changes in terms of how it’s structured and how it’s delivered and technically how it all comes out, but we certainly are building our business plan on the premise that that source of capital or something closely akin to it is going to be in the market.

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