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Kim Diamond: I agree with Peter. I also think that it’s not only a question of property type but also that most of what is showing up in deals these days is very complicated stuff. You’ve got condo interests, you’ve got ground lease financings, you’ve got specialty use properties like water parks and you’re seeing capital availability for even the most complicated or off the run asset classes in a lot of instances. David Brickman: I point to as a good case study the single-family rental space which didn’t exist a few years ago. We identified it early on as an area where there’s a need for capital. Sure enough, now there is a reasonably, well-developed method of financing and capital is flowing through that space so I don’t think a shortage or scarcity of capital is a problem in really any corner. It’s just more challenging to get into than others. Sam Chandan: Where are we with the single-family rental opportunity? Was that a cyclical play that’s run its course now that house prices are up? David Brickman: I do not think it was a cyclical play. There is a longer-term business opportunity. I don’t think it’s as attractive, the money that got in early earned returns that will not be seen again but the notion of being able to operate a platform based on income like any other income producing property is real and it is still out there. It’s probably just smaller when house prices recovered than it was when they were depressed. Kim Diamond: Also there are two segments to that marketplace. That’s a market that is very highly fragmented. It’s not too dissimilar from self-storage where you have a couple of very large, institutional owners, and then you’ve got a lot of smaller, regional owners, and mom-and-pops. A lot of the deals that got done initially were deals that were done by the large institutional owners but there are lending operations that are being set up for the purposes of making loans to the smaller borrowers. Not too dissimilar from commercial conduit lending. Sam Chandan: David, Prudential has been more active in construction lending. How much of that activity right now are you engaging in the multifamily sector; are you reaching out to other property types? From a construction lending perspective, how are you thinking about the other property types? CRE Finance World Autumn 2014 18 David Durning: Our construction lending is almost exclusively focused on multifamily properties. Selectively, we will finance construction on other property types where pre-leasing, low basis, sponsorship skill and financial wherewithal, or other factors, make the loan attractive. Also, our construction loan activity is focused on owners seeking a longer-term hold combined with a longer-term fixed rate loan. Sam Chandan: Would it be fair say that your team is watching construction levels in multifamily very closely? David Durning: Yes, and there are markets today where we are comfortable with our current construction lending activity, but would be selective in adding to that exposure. A life company program is different from traditional construction lenders in the sense that we are looking for someone who wants a long-term hold, combined with a fixed rate of interest. Also, most of our construction loans would have an element of amortization at some point during their term structure. Our view is that we are financing projects that will compete well in their market and will lease at least to market levels. Once the property has stabilized, we anticipate that our lending exposure will be attractive, versus loans being made on stabilized apartments. Sam Chandan: Let’s talk about the degree of competition that the conduit may be facing from some segments of the bank lenders. Peter, how would you describe the competitive environment amongst the lenders having changed over the last year? Peter Scola: There are approximately 40 conduits in the market, with most of the market share concentrated in the top 10 lenders for the most part. The reality is that CMBS lenders not only face competition from each other, but also from local banks and life insurance companies, both of which have been willing to increase their leverage profile for certain assets. Sam Chandan: Are we underpricing that risk? Peter Scola: I don’t know if institutions are underpricing it. I assume they are pricing it for a model that works for them. But I think that is one of the results of being in a lower yield environment. CRE Finance Roundtable: The Risk Cycle


CREFW-Fall2014 10.15.14
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