EDR Insight Market Update: Navigating in an Uncertain Market

© 2012 Environmental Data Resources, Inc.

EDR Insight Market Update:

Chicago, IL

October 9, 2012

Navigating In An Uncertain Market Presented by:

Dianne P. Crocker, Principal Analyst




1. STATE OF THE MARKET

Commercial Real Estate

Lending Due

Diligence

• Transaction volume in

2Q12:

• Up 25% over 1Q

• Portfolio work drove

much of the gain

• Slow July and August

• Declining rate of growth

Bumpy Road for CRE Transactions

CRE Deals by Property Type

• Majority of gains driven by:

• Multifamily and Class A office

• The “sweet spots”

• Largely viewed as low risk

• Retail:

• Recovering, but bifurcated

• Development:

• Accelerating

• Distressed asset deals bringing contamination into play.

• Properties and projects that failed are coming back into

the market.

• “We are reviewing portfolios of distressed loans with

significant environmental conditions, some of which

include brownfields that stalled years ago because the

owners defaulted and abandoned their development

plans.”

Senior VP at a major consulting firm

Downturn, Distress, Contamination

• Fewer troubled assets on their books

• The number of “problem banks” is falling (732)

• Lending up albeit moderately

• Mainly for top-quality borrowers, Class-A assets and in

primary markets.

• Assets with any sort of risk profile and borrowers

without a strong track record, however, remain more

difficult to finance.

The Pulse of Lending

• By bank size:

• Large national banks focused on gateway markets

and institutional properties.

• Regional banks have slowly picked up their

commercial lending.

• Obstacles to lending remain for smaller banks

struggling with distressed commercial real estate

assets.

• Still not a great deal of interest—or capital—yet available

• in secondary and tertiary metros

• for average-quality assets

Disparity in Lending

• Loan restructurings continue, past restructurings being

revisited

• Discounted loan pools continue to be offered,

abundantly

• Respondents currently liquidating commercial real

estate loans and REO is still high:

• Liquidating commercial real estate loans (51% of

respondents)

• Liquidating REO (78%)

• Early innings of this process.

Source: EDR Insight’s 2Q12 Survey of Financial Institutions.

Restructuring, Divesting

Up 43% above market’s

Oct. 2009 low point

2012 YTD:

8% above 2011 YTD

-3%

9% 3%

6%

7%

8%

2%

7%

Regional Phase I ESA Activity: 3Q on 3Q

Midwest Region: Q on Q Growth (3Q)

21%

5% -9%

0%

-11%

19%

29%

14%

4%

2%

4%

12%

Illinois: Quarterly Phase I ESA Growth

Top 10 U.S. Metros With Strongest Y-on-Y Phase I Growth (through 9/30)

Page 16


Why It’s Good to be in Chicago…

Why It’s Good to be in Chicago…PART 2

The so-called "sexy six"

markets - Boston, Chicago, Los

Angeles, New York, San

Francisco, and Washington,

D.C. – are attracting the most

capital.

Market Forecast: Where Are We Headed?

Lenders’ Forecast: Originations

20

• Majority of

lenders (88%)

expect increase

in lending

• Most (48%) only

“slightly higher”

• Yet:

• only 6%

expect

decrease

• Market hitting the “pause” button

• Gradual market improvements

• Spottiness will continue

• Long road to recovery, susceptible to set-backs

• Areas of uncertainty

Forecast

"Ultimately, we're going to live in a world that's slower

growth and lower returns for quite awhile."

CEO, retail REIT


2. ATTITUDES TOWARD PROPERTY RISK

“A negative, or rather extremely conservative, mindset

is prevalent with the investors in the market. Many

investors are analyzing assets based on the 'what-

could-go-wrong' view versus spending time focusing

on 'what-could-go-right' and this has had an impact

on pricing and deal velocity."

Steve Timmel, senior vice president of Colliers

International


RISK is the New 4-Letter Word

• Feedback from EPs:

• “Banks continue to fight for no environmental

conditions at a property, regardless of the findings.”

• “Lenders are definitely more risk averse.”

• “Banks appear to be looking for reasons not to make

loans.”

• “My clients are demanding a more consultative approach to

ESA completion as opposed to only report delivery.”

• “In the past, Phase II equaled dead transaction. Now there is

more willingness to consider risking away issues through

Phase IIs.”

• “They want the thorough investigation but are not necessarily

allowing more time for it. The lenders are very competitive

with one another, so they don’t have the luxury of higher due

diligence fees or longer due diligence periods.”

• “Overall, price still remains king as opposed to real risk

concerns.”

Source: EDR Insight’s 2Q12 Quarterly Survey of EPs.

Risk Aversion (cont’d)


3. AREAS OF OPPORTUNITY


Areas of Opportunity

• New sources of debt

• U.S. SBA lending

• REITs

• Retailers

• Energy audits

Status of CRE Lending by Source:

Commercial banks Flat/moderate growth

Government (Fannie/Freddie) Active

Credit Unions Expanding

Private Equity Expanding

Life Insurance companies Peaking

CMBS Securitizations Recovering

1. Who’s Lending on Properties?

Focus On Who’s Lending: Top Originators

Status of CRE Lending by Source:

Commercial banks Flat/moderate growth

Government (Fannie/Freddie) Active

Credit Unions Expanding

Private Equity Expanding

Life Insurance companies Peaking

CMBS Securitizations Recovering

Watch for shifts toward other lending sources:

• The U.S. SBA could be one of only a handful of federal

agencies that winds up with a bigger budget next year than it

had this year

• Current proposal:

• As much as $16 billion in loans through the popular 7(a) program

• 15 percent increase over $13.9 billion in 7(a) loans so far this

year

Page 31

FY13 could be the most robust year for 7(a) lending

since FY10, excluding FY11

Strongest SBA Lenders in the U.S.:

Page 33


REITs Are Raising Capital:

Notable Private Funding Raisings in 1H2012

Firm Name Capital Raised

Blackstone $6.6 billion

UBS $1.8 billion

Carlyle Group $1.4 billion

Rockpoint Group $1.3 billion

GEM Capital $1.3 billion

McMorgan & Co. $977 million

• Among REITs’ top concerns are risks related to factors that

could devalue their properties, including environmental liability.

REITs (cont’d)

1. REITs will dominate this year’s news on property

acquisitions.

“REITs are aiming to capitalize on low interest rates and

acquire assets in prime real estate locations.”

2. This is a client sector that already recognizes the risk

that environmental issues pose to property value and

their own liability, the 7th highest risk factor they face.

REITs: A Win-Win

Retailer Category Planned

Openings

Dollar General Dollar 625

Family Dollar Dollar 450-500

Dollar Tree Dollar 315

CVS Drug 225-250

Walgreens Drug 150-175

Advance Auto Parts Auto 130-150

AutoZone Auto 125

RiteAid Drug 100

• U.S. retailer store-opening plans hit a four-year high in

July

• 78,000 new stores planned over the next 24 months

• Up 11 percent from the 2-year period ended in 2011

• Very focused in specific sectors, geographic areas

Forecast for New Store Openings

Page 38

• 1st benchmarking report on Local Law 84 (LL84), which

requires all privately-owned properties with individual

buildings over 50,000 square feet to annually measure

and report their energy and water usage.

• Create opportunities for environmental consultants in

contributing data and information to this and similar

reporting in growing number of metros.

Page 39

• “The New York LL84 benchmarking law is part of a nationwide

trend that we've seen for disclosure of energy use in buildings.

The implication will be that energy efficient buildings will

continue to become more valuable in the real estate market

than their energy glutton counterparts."

Nate Gillette, Vice President and Director of Energy Finance

Analytics

• “NYC is just the beginning. Other cities and states have similar

benchmarking regulations – like California’s AB 1103. Clearly,

building energy performance assessment due diligence is

finding its way into the commercial real estate transaction as

one more factor to evaluate.“

Brian Burstiner, Sustainable Real Estate Solutions, Inc.

Implications for the Market:

Energy Audits • Drivers

• Rising energy costs

• Metro disclosure laws

• Federal requirements

• HUD now has a requirement that all Physical Needs

Assessments (its PCA equivalent) be accompanied by

energy audits at all Public Housing Authority sites

• Environmental firms already getting onboard

"Green building is not a curiosity anymore -- it's a huge

market," said Aditya Ranade, a senior analyst with Lux

Research in Boston. "The green building sector will be a $280

billion global industry by the end of the decade.”


4. STRATEGIES TO WIN


Prevailing in Turbulent Markets

Those who perform better aren’t better at

predicting.

They have a better understanding that if you can’t

predict, you have to prepare.

Strategies to Win

Page 44

You get out there.

You think beyond Phase Is.

You connect the dots for clients.

You embrace a “customer first” attitude.

You have an active business development function.

You’re investing in people.

You have a key differentiator.

You’re investing in technology.

You can name the last CRE conference you went to.

Strategies to Win

Page 45

You get out there.









Strategies to Win

Page 46

You get out there.










Education Is Key As Market Recovers

• New lending, investments are on the board for 2012.

• Banks, investment firms are replacing past layoffs with

junior staff.

• Leading to a “rustiness” in engaging Phase I ESAs.

• A learning curve as market adjusts to new risk aversion.

• New E 1527 standard

• Vapor intrusion awareness

• Updates to policies like SBA and HUD

• Interesting projects

• Fannie Mae’s new scope

• Cases involving owner or lender liability for

contamination

Topics for Client Education Efforts

Page 48

Strategies to Win

Page 49

You get out there.









Strategies to Win

Page 50

You get out there.









Strategies to Win

Page 51

You get out there.









Strategies to Win

Page 52

You get out there.









Strategies to Win

Page 53

You get out there.









• Speed, efficiency are critical, especially on portfolios.

• Firms are charging a premium for fast TAT.

• Technology becomes avenue for improving efficiency.

The Challenges of Time Constraints

Strategies to Win

Page 55

You get out there.





tie in w/ markets drying up as others emerge






Parting Thoughts

• A steady supply of overleveraged assets will

continue to come to market.

• Mispriced risk creates attractive investment

opportunities for new buyers.

• As traditional debt capital remains limited,

new sources are forming.

• Think critically about where you can compete

most effectively!


Dianne P. Crocker

Principal Analyst, EDR Insight

Research and Analytics:

www.edrnet.com/EDRInsight

Twitter:

@dpcrocker

Email:

[email protected]

http://www.edrnet.com/EDRInsight

mailto:[email protected]

Documents

EDR Insight Market Update: Navigating in an Uncertain Market