With continued solid markets in the Southeast and hopes of another cut in interest rates, lenders from around the Southeast have expressed the same sentiments as Larry Brown, president and CEO of Deutsche Banc Mortgage Capital: "This is one of the busiest times I can remember in the business. It's raining loans right now because of the low interest rates."

In order to see what others are forecasting for the Southeast in 2001, Southeast Real Estate Business spoke with seven prominent financial executives: Jonathan Rice , Director, Holliday Fenoglio Fowler, L.P., Atlanta; Daniel Armstrong, Vice President, Collateral Mortgage, Ltd., Birmingham; Ken Reynolds, Vice President, Reynolds & Byars Mortgage Company, Nashville; Karl Francetic, Vice president, ARCS Commercial Mortgage Co., L.P., Jacksonville, Florida; Tom Aschmeyer, Senior Vice President / Regional Manager, Column Financial, Inc., a Credit Suisse First Boston company, Atlanta; Larry Brown, President and CEO, Deutsche Banc Mortgage Capital, Charlotte; and Allen Moczul, Senior Vice President, GMAC Commercial Mortgage, Jacksonville, Florida.

SREB: What property types have you been lending on the most?

Rice: The market is strong, but many lenders are relatively conservative on certain property types right now. They are more favorably inclined to make loans in the multifamily, office, industrial and retail categories. In retail, grocery anchors are always the favorite and power centers are the least desired. Multifamily is one of the most favored property types. Companies want them to round out their portfolios. Office is also strong and vacancies are at an all time low. Class A office space is always the most popular, but there is plenty of capital available for others as well. I think there is a little bit of caution with regard to the dot-com's, but it's difficult to say what is really going with them.

Armstrong: As always, multifamily and grocery-anchored or credit-anchored retail are the two most preferred property types. With regard to multifamily, the higher-quality, existing properties are the most popular, and everybody is always after the Class A properties. Suburban multifamily developments seem to be preferred, but it depends on the market. For example, in Birmingham, we don't have a lot of the downtown high-rise properties that are found in other markets.

Reynolds: Retail is definitely the most popular, especially the anchored strip centers because there is more money available for them. The most desirable of all of them are the supermarket-anchored centers with half or less local space. Another property type that people are lending on is office space. Unless it is a pure credit deal, multi-tenant spaces are the most desirable because the lease expiration date helps to spread the risk.

Francetic: We've been lending primarily on multifamily properties, which is what we specialize in. Last year as a firm, we loaned $1.75 billion, and the greatest majority of that was for multifamily. Right now we have over $900 million in apartment financings in our pipeline. So, we're really busy right now. It's exciting.

Aschmeyer: The Southeast region of our company has primarily been lending on multi-tenant office, grocery-anchored retail and multifamily, in that order. Other regions within our company may have a slightly different mix, but those are the major areas in which we participate. Attracting multifamily deals is tough for the securitized lenders because of the pricing imbalance the agencies have been enjoying over the past 24 months, although that gap is narrowing. Our multifamily deal is generally a solid A-, B or C+ property with full leverage, which is underwritten on existing cash flows. In the retail market, we like to focus on the grocery-anchored neighborhood shopping centers. It's getting a little harder to finance some of the big box retail. The recent bankruptcies, store closings and general overall negative attitude toward retailing has prompted us to dig deeper into a retail deal. We have also been very aggressive on pricing the more conservative low leverage deals although, the well located strong centers will continue to attract full loan dollars.

Moczul: A large percentage of our production volume in Florida has been multifamily, grocery anchored retail and mobile home parks. We have also done our share of office, self storage and even a luxury oceanfront resort.

SREB: Are there property types that you are avoiding?

Rice: We're not avoiding anything in particular, but some property classes are more difficult than others. The markets are pretty much in balance right now so I don't see any significant overbuilding in a particular area.

Armstrong: Based on what the market has sought after, most people think that the limited-service hotels are overbuilt. And some of the unanchored retail has been very difficult to finance, due in part to overbuilding.

Aschmeyer: Right now, single tenant deals are tough any way you look at them. Whether it's office, industrial or retail, single tenant deals are too much risk for the investor community today.

Brown: People are avoiding health care because it's business-related income. Although it was once popular to lend on, health care is not as reliable a source of income as other real-estate-related products that people are focusing on right now.

Moczul: I wouldn't say we are avoiding any property type, but lenders are underwriting big box retail and multi-tenant office product more conservatively. The recent announcements of store closings for many retailers have lenders focusing on the credit of the tenant, the marketshare a particular retailer has in the area as well as individual store sales.

SREB: How do lenders see the Southeast market in 2001?

Rice: Generally speaking, they are favorably inclined toward the Southeast for the same reasons they have been for some time now: favorable demographics, strong growth and the fact that it's a desirable place to live.

Armstrong: Overall, the lenders' views are very positive. With a few exceptions, we haven't seen some of the major employer job slashing that they've seen in the Midwest because, for the most part, the Southeast has diversified. Its economies are not as heavily oriented toward manufacturing, so they don't seem to be as susceptible to some of the cuts. Another trend has been for companies to relocate to the Southeast because the region doesn't have a lot of expensive union labor.

Reynolds: I think Tennessee, and more particularly Nashville, is a solid market. Some people think the Nashville office market may be overbuilt, but there is a 10 percent vacancy rate. So, the market isn't as overbuilt as it may seem.

Francetic: The market is wonderful. I can't speak for my competition, but I know that we're jazzed about it, we're looking at every opportunity we can. There are some limited soft markets, but for the most part, the markets we see are favorable. Interest rates are down. Right now we are closing loans every day at under 7 percent. To get non-recourse financing on an apartment property at low 7 percent or high 6 percent rates is tremendous for a borrower.

Aschmeyer: Caution seems to be the word. We do seem to have overall balance, but we will continue to monitor and react. You just have to pick your spots. The Southeast still continues to have a very positive dynamic. Population and job growth says it all.

Moczul: The Southeast markets continue to perform well. Most lenders we deal with have production goals for 2001 equal to or greater than 2000. As long as the markets stay in reasonable supply/demand balance, mortgage capital will be readily available. In that we are in a slowing economic environment, lenders will be following market dynamics very closely. Any significant increases in vacancy rates or lowering rental rates could shift a particular market out of favor rather quickly.

SREB: What are your thoughts on interest rates: Are they stable? Do you project an increase? If so, when?

Rice: We're really in a very favorable interest rate environment for real estate. For long-term rates, I think we're at an all-time low. On the short end of the interest rate curve, we're seeing rates come down. The Federal Reserve cut rates 100 basis points recently, and this reduction is reflected in the rates charged to borrowers.

Reynolds: I predict that interest rates will go down to not much less than 7 percent, maybe 6.75 percent. It's a little hard to predict because there are so many unknowns with the new Bush administration. But the Federal Reserve looks like it's easing up.

Francetic: The indications I see suggest they should come down again. All of the economic indicators point toward this and my borrowers certainly see that. I'm getting a lot of phone calls from developers who want to capitalize on the market as quickly as they can. Right now they are getting two points of positive leverage here, which is terrific.

Brown: I think we will continue to see downward momentum. I think the Federal Reserve will ease rates again and that bodes well for our interest rates.

Moczul: Predicting interest rate direction is a tricky proposition. Obviously, with relatively weak economic growth, the prospect for lower or at least stable interest rates is quite good in the near term. However, if the economy improves due to rate cuts already in place, the bias may change toward controlling the rate of growth and the probability of a further reduction in interest rates would be diminished. At this time we are advising our clients to take advantage of the sub-8 percent rate environment rather than waiting and potentially missing the window.

SREB: Will the Southeast see a slowdown in development?

Rice: That really depends on the market and the demand for space. The capital markets have kept things in balance by not allowing the overbuilding we've experienced in the past. There seems to be an air of conservatism by some of the construction lenders, but so far there is still some pretty active development going on.

Reynolds: It doesn't appear that any market is overbuilt, and there's no slowdown in the availability of money to build new properties. The banks may slow down and reassess a little bit, but there are plenty of sources to go to other than banks if they do slow down. I see no reason for the markets to slow.

Francetic: I think that certain markets are experiencing a little softening right now. Orlando has some submarkets that are getting a little soft, at least in the apartment market segment, but we are still looking at deals and closing loans there. I would not make a broad-brushed statement about any market because every market I'm seeing has opportunities in it. And frankly, I think they are very good opportunities.

Aschmeyer: I would say in certain sectors, you're going to see a slow down because market information is too fluid these days for excessive overbuilding to occur. The bigger question is, "Is our occupancy over-inflated?"

Brown: I'd say it might slow down a little. There's nothing marked, but I think we have reached a breathing point. I don't know if we are going to see a slowdown, but I don't think we're going to see it going up either. I think it will be streamlining for a while.

Moczul: If economic growth picks up in the second half of 2001, I think development in the Southeast will continue at a healthy pace. It is likely to be at a reduced pace as compared with the last several years. Spec development will be less appealing due to uncertainties in office and retail demand. Multifamily construction should remain strong fueled by continued immigration to the Southeast. If economic growth does not improve, I would expect to see a more significant reduction in construction activity.

©2001 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.