CHERRY HILL, NJ—TD Bank said late last month it had closed more than 200 commercial real estate loans in 2013, for a volume last year of $3.9 billion, numbers that speak to the resurgence of borrowing as well as lending. Demand shows no sign of slowing down this year for the US subsidiary of Toronto-Dominion Bank of Canada, even as competition has intensified. Gregg Gerken, SVP and head of US commercial real estate lending for at TD Bank, spoke recently with about the recent past, present and near-term future of CRE financing. How did 2013 compare with what you saw in 2012?

Gregg Gerken: A lot of lenders who were on the sidelines in 2012 were back in 2013 in a big way. The biggest disitinction between the two years was the amount of capital that was available, up and down the capital stack: the amount of equity that was available as well as the number of banks that were back in the market. And you can see it in some of the public numbers that are published: CMBS activity was up markedly from ‘12 to ‘13. Bank of America Merrill Lynch recently cut its full-year forecast for new CMBS issues. But CRE lending otherwise shows no sign of slowing down, is that correct?

Gerken: I would have to agree. Where are you seeing interest, and in particular are there markets where you’re seeing more interest so far this year than last?

Gerken: If you were a borrower and an acquirer in ‘12, you were probably still very focused on the gateway cities: New York, San Francisco, Washington, DC. Through ‘13, we saw a lot more interest focused on the Bostons and some of the other growth markets. In 2014, we’re starting to see a lot more interest in the secondary cities and, in some cases, even the tertiary markets. Partly that’s because some folks would argue that some of the gateway cities have reached a pre-2007 high. Potential buyers may also feel that even if they could enter and win these bidding wars, their return requirements couldn’t be met at these cap rates.

Gerken: There is more concern among buyers today on whether there will be a return, because if you buy at a very low cap rate and interest rates were to go up, you might not get that same money out of the property unless you have the ability to increase rents, or if you’re buying a turnaround or an opportunistic acquisition. That’s also why we’re seeing more activity in secondary markets and those that didn’t peak as early. In those secondary markets, are buyers focusing on core or opportunistic?

Gerken: Both. Where there is core available and you can buy it for a long-term hold at the right price, definitely we see money going there. Because core in those secondary, non-gateway markets is probably as overvalued as it is in New York. But wherever there’s opportunistic or a potential value play, we see a lot of interest in those properties, especially when cap rates are so low today. Because your exit at some point is going to come from the value you create. And that value, hopefully, is at a rate that’s higher than the cap rate compression would otherwise be. But cap rates in those secondary markets are less compessed than in New York, and they’ll probably stay that way, correct?

Gerken: I don’t think they can compress as much. There just isn’ as much institutional and foreign demand in those other markets that would compres it to that same degree. Who’s especially active in the marketplace?

Gerken: We see pretty much the entire market being active, at least in our market. Everyone from the regional developer to the more national in scope, and then up into the institutions and funds. TD lent straight through the downturn, because we were in a fairly good capital position. Even with the greater number of lenders competing in the market,  is underwriting still more conservative compared to seven or eight years ago?

Gerken: I would say so, given the heightened regulatory environment and the fact that any time you come out of a downturn, banks will become much more conservative than they were. Our underwriting standards haven’t really changed much, but by the same token we have to look at more deals in order to win one. And by virtue of that, I wouldn’t say that more banks have loosened their underwriting standards, or we would be coming in second, third or fourth on deals.

Competition has heated up and whenever that happens, it’s probably better for a borrower than a lending institution. But for the most part, underwriting standards have remained prudent and equity going into projects is more than it had been.