COVER STORY, FEBRUARY 2007

A WALK ON THE LENDING SIDE
Three financial experts tell Texas Real Estate Business what to expect on the banks and lending front in 2007.
Lindsey Walker

Texas continues to be one of the nation’s most active states for commercial real estate lending. Low interest rates combined with booming job and population growth made the Lone Star State an attractive place for investors in 2006, and, if all indicators are correct, 2007 should be just as strong for banks and lending. Texas Real Estate Business spoke with Ben Singleton of Love Funding Corporation, Rex Paine with Torreón Capital and Alex Katz of Meridian Capital Group to discuss what they are seeing in their respective areas of the state.

TREB: What is the lending climate like in your area? With your property types?

Singleton: The climate is good for refinancing of apartments in Texas. Interest rates have remained low for apartments while rent increases are forecast to increase faster than the consumer price index. Job growth for the state of Texas is forecast to be 2 percent while the U.S. forecast is lower at 1 percent. Currently, construction is at a moderate level, but an increase is expected for 2007.

Paine: I’d say what’s happening, and frankly what’s been happening for the past 2 or 3 years, is most of the opportunities you see are ground-up development projects as opposed to purchasing an existing property. With how strong the real estate market is and with all the money that’s in the market, it’s very hard to buy something already existing, reposition it and sell it in a relatively short amount of time and still make a very good upside. So, mostly what’s happening with us and our partners is that we’ve turned to development and go ground-up and develop properties.

Katz: In terms of the lending climate, one thing that I’ve noticed and part of the reason that I was brought on by Meridian is that the investor of 5 or 10 years ago used to rely a lot more on the mortgage professional to just handle everything for them. And, I guess the key is that in the last few years, borrowers have become a lot more knowledgeable and a lot more involved in the process. Borrowers are demanding these days not just for  a strong sales ability but really much more in the sense that — myself, for instance, being a lawyer and being a real estate developer, I’ve been able to add value that other lenders may not necessarily be able to add to the clients in terms of their investment opportunities. I think the key going into 2007 is that the brokerage community is going to have to step it up from a knowledge-based standpoint and really bring the value to the table that’s going to help the clients gear their investments as the climate continues to change.

TREB: What loan products are particularly popular right now?

Paine: There are a lot of lenders now that are providing what they call a stretch bridge loan because people are buying property that they don’t have titled or they don’t have all of their tenants lined up completely. They’re needing a lender that will come in and provide that bridge financing until they can close it to a construction loan at the time that they’re ready to go vertical on a project.

Singleton: The CMBS (conduit) continues to be the most popular loan product for refinance.

TREB: What are the latest trends in real estate financing in Texas?

Singleton: They are similar to the national picture. Since 2001 and 2002 when the Fannie Mae DUS program held the majority of originations, the CMBS or conduits have had a majority of the originations in 2003-06. Increasing construction costs (15 to 20 percent) since Hurricane Katrina have negatively affected the new construction of apartments in Texas. However, improving occupancies and increasing rents are providing opportunities for new construction in select locations.

Paine: There’s a lot of money out there and there continues to be a lot of money available for investment.

TREB: What areas of the state are hot right now?

Katz: I think some submarkets have been stronger depending on property type. For instance, right now in the Dallas/Fort Worth (DFW) area, there are 350 plus people coming every single day to this market. With the increased population, increased job growth and increased opportunity, it just makes this area really booming for multifamily. Accordingly, for outsiders on the East and West coasts and nationwide, it makes Texas look ripe for investment. Because as an investor, you look for areas that are booming from a housing perspective and from a job perspective. So I believe that the DFW area continues to be perfectly poised for moving forward.

With respect to Austin, some people have argued that maybe it’s getting too hot in terms of the market and the prices getting too high, but I’m finding that to investors that are used to being on the coasts with cap rates substantially lower, I think they’re still finding some real value-add opportunities in a market like Austin where occupancy still remains high and there’s just a real opportunity to continue substantial job growth there.

Houston is also very, very strong from a multifamily perspective. There are new developments popping up all over the place there. There was a swell of people that came to Houston due to Katrina, and many of those people have actually stayed and made this a temporary to permanent move. The multifamily community there is responding and there are new developments online for 2007.

We also are working on closing a couple of different properties in San Antonio. Really, if you go to any of the key markets in Texas, you’ve just got so much growth and opportunity. Texas overall is one of the most growth-friendly and entrepreneurial-friendly states and it’s really allowing people to come in and make it a home.

TREB: Are there any predictions you’d like to make regarding the lending environment in Texas?

Singleton: Lenders tend to behave like sheep and typically follow the one in front of them. I think we will see more new construction of apartments in the Texas market than in the last few years. Most active will be the metropolitan areas of the state. Austin and El Paso appear to be most poised for new construction of apartments.

TREB: What do you predict will happen with interest rates? How will this affect acquisition financing in real estate?

Katz: I think that what we’re going to see is continued hovering in the same favorable area that we’ve seen in recent months going into the first quarter of 2007, with a possible uptick in the middle and latter part of 2007. What that translates into for Meridian’s borrowers is that we are actually really honing in on what the strategies are for the borrowers in terms of their investment horizons and the time frame they are planning on holding these properties. Because, when rates do increase, we want to be able to protect those investors that want to be in these assets for longer terms.

Paine: It’s just been a continuation of the same. Low interest rates certainly have made projects more financeable. It’s a great time to own a piece of property you want to sell. The challenge I think for developers is, in this really strong real estate market, to be able to purchase land at a price that makes it feasible for them to sell because prices are really high. You’re having to make some assumptions about what you can sell it for in the future, that can be based on cap rates or based on interest rates. Nobody knows 2 to 3 years down the road what interest rates are going to be or what cap rates are going to be. So, that’s a challenge for developers and for people providing capital.

TREB: How do you think the lending environment will change during 2007?

Paine: As far as I can predict, everything seems to be lining up to be fairly stable.

Singleton: I think we will see an uptick in the amount of new construction over the previous year.

TREB: What are the biggest factors affecting the industry?

Singleton: Job growth is the biggest factor along with existing occupancy and effective rents.

Katz: I think on the multifamily side, with the economic growth here, the more people that come here, the more people that need a place to live, the more jobs that are created, the more office space that’s built up, and then the more retail potential and opportunity there is. I think that is the driving force — the continued population and job growth in the area. I believe that will continue into 2007 and help sustain this growth.


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