Insight DDD Orange County October 2012

© 2012 Environmental Data Resources, Inc.

EDR Insight Market Update:

Orange County

October 11, 2012

Navigating In An Uncertain Market Presented by:

Ashley Gowen, Research 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

• More options to buy at cheaper prices

• Distressed asset deals bring contamination into

play

• Failed properties & projects returning to market

• Fewer troubled assets on their books compared to last

year

• 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.

• Refis and loan sales are strong drivers for EDD

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 deals of interest—or capital—yet

available

• in secondary and tertiary metros

• for average-quality assets

Disparity in Lending

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

California & West Regions: 3Q on 3Q Growth

California: Quarterly Phase I ESA Growth

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

*Orange County – 22%

*Inland Empire

(Riverside) – 14%

*Los Angeles – 4%

Metro Activity: California

Why It’s Good to be in Los Angeles…

The so-called "sexy six" markets – Boston, Chicago, Los Angeles,

New York, San Francisco, and Washington, D.C. – are attracting the

most capital.

Why It’s Good to be in Los Angeles…

Los Angeles: Number two on both Real Capital Analytics’ and Jones Lang LaSalle’s

ranking based on first half 2012 volume, but it has remained flat as an investment

market. Prices are almost back to pre-recession levels.

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: CRE Expectations

17

• 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


3. AREAS OF OPPORTUNITY


Areas of Opportunity

1. Lending Sources

2. U.S. SBA lending

3. REITs

4. Retailers

5. Benchmarking Requirements

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?

Watch out for shifts towards 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 26

2. SBA Lending

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

since FY10, excluding FY11

Strongest SBA Lenders in the U.S.:

Page 28

Are you supporting SBA lending?

If so, these top 10 lenders should point you down the right path!

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.

3. REITs: A Win-Win


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

4. Retail

• 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

• NYC’s 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.

• Creates opportunities for environmental consultants in

contributing data and information to this and similar

reporting in growing number of metros.

5. Benchmarking Requirements

• “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:

• Signed into law by Governor Schwarzenegger in September 2007

• Applies to certain nonresidential buildings in California and

requires benchmarking of a building’s energy consumption using

the EPA’s Portfolio Manager system and disclosure of the

building’s energy usage to potential buyers, lessees, and lenders

of the entire building

• Originally, AB 1103 required implementation on January 1, 2010.

• Thereafter, AB 531 became law and assigned the implementation

and schedule of compliance for AB 1103 to the California Energy

Commission (“CEC”).

A Look at California’s AB 1103

• Was belief CEC would delay implementation by 12 months to

January, 2011.

• Ended up pushing implementation to 2012

• CRE community was bracing for July 2012 implementation date

• End of March, the CEC issued proposed regulations that sets out

the following phased implementation of AB 1103 in 2013 through

2014:

• “(a) On or after January 1, 2013, for a building with total floor area

measuring more than 50,000 square feet.

• (b) On or after July 1, 2013, for a building with a total floor area

measuring more than 10,000 square feet and up to 50,000 square feet.

• (c) On or after January 1, 2014, for a building with a total floor area

measuring at least 5,000 square feet and up to 10,000 square feet.”

A Look at California’s AB 1103

What Investors Pay Attention To:

"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.”

Green buildings:

• Are easier to fill, especially with young, urban residents

who want that “lifestyle”

• Hold their value

• Are easier to sell when the time comes

• Are CHEAPER to operate


4. STRATEGIES TO WIN


Prevailing in Turbulent Markets

• Companies that perform better aren’t better at predicting.

• They have a better understanding that if you can’t predict, you

have to prepare.

Your best bet against in an uncertain market…consider…

To have on your team

To go after

NOTE: They cynics will say

companies prevailing

through uncertainty in the

market are growing

because of lowered prices.

NOT NECESSARILY!

Strategies to Win

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

You get out there









Strategies to Win

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

Strategies to Win

You get out there









Strategies to Win

You get out there









Strategies to Win

You get out there









Strategies to Win

You get out there









Strategies to Win

You get out there









• Technology becomes avenue for improving efficiency

• Speed, efficiency are critical, especially on portfolios.

• Firms are charging a premium for fast TAT.

• Technology has helped a lot of high growth firms stay

competitive

The Challenges of Time Constraints

NOTE: In some cases, being able to deliver quickly matters MORE to

clients than delivering cheaply!

Strategies to Win

You get out there










Parting Thought

• Think critically about where you can compete

most effectively!


Documents

Insight DDD Orange County October 2012