For presentation at:

Pleasanton Due Diligence at Dawn workshop

March 2014

Strategic Plays for the 2nd Half of Market Recovery Presented by:

Dianne P. Crocker, Principal Analyst

Survival Mode

True start of

market rehabilitation

Year of

refocusing

and repositioning

Market in Transition

2008 2010 201220112009 2013 2014

© 2014

© 2014

Status of Commercial Real Estate

The year 2014 may well be the year that

the real estate markets “recover from the

recovery.”

PricewaterhouseCoopers Emerging Trends in Real Estate

View of Market: 50,000 Feet

Y-on-Y Growth

CRE lending +15%

-SBA Lending +13%

Property prices: +15%

Property transactions:

-Large +19%

-Small (<$5M) +17%

-Portfolios +20%

CMBS Issuance +46%

• All debt spigots are open.

• Growing investor confidence.

• More diversity in lenders,

investors.

• Activity across broader spectrum

of properties.

• Improving property

fundamentals.

•Stronger-than-expected 4Q transactions

•January traditionally slower than December

•…but up 32% versus Jan 2012

Large Commercial Real Estate Deals Up 13%

• The velocity of small-cap sales is more than

keeping pace with the larger deals.

• Forecast: Another double-digit year in 2014

• Source: Boxwood Means

Small Cap Transactions Are Up 17%

• Multifamily was the “belle of the ball”

• Up 31% Y-on-Y

• Industrial sector fast emerging as the new

favorite, particularly warehouse properties

• Office is getting more interest in some metros

• Retail:

• Sales of strip centers up 30% Y-on-Y

• More interest outside of Class-A malls,

institutional shopping centers

Property Types in Favor

• U.S. Retail Store Closings in 2013:

• Blockbuster (460)

• Fashion Bug

• GameStop

• Store Expansions in 2014:

• Walmart (just doubled its forecast)

• Dollar General

• Family Dollar

RETAIL: Properties in Flux

Good News on the CMBS Front

• 2012:

• Post-recession high of

$48B

• 2013:

• Easily surpassed year-end

2012 issuance

• 2014 forecast:

• Reach $100 billion for

1st time in six years

Banks’ Sell-off of Nonperforming Assets

• Higher property prices, better credit quality are driving

demand for lending again.

• 4Q13 originations were the highest quarterly volume since

2007.

• 2014: 7%

• 2015: 6%

• 2016: 5%

“Come-Back Year” for Property Lending

LENDING: A Positive Take

“More banks were lending on income-

producing commercial real estate

properties in more places by year-end

2013. The number of lenders who plan

to increase property loans in next 12

months far outnumber those who plan

to lower them.”

~ Sam Chandan, president and chief

economist at Chandan Economics

• A lot of optimism out of MBA CREF show last month

“All of a sudden, the banks are comfortable with real

estate, which scared the daylights out of them from

2007 to 2009, and they are looking for opportunities.”

• 91% of the top firms expect originations to increase in 2014

• Almost two-thirds (64 percent) expect their own firm’s

originations to increase by 5 percent or more.

• More aggressive lending, strong borrower appetite, intense

competition among lenders expected.

Source: 2014 MBA CREF Outlook Survey, December 2013.

Bottom Line on Lending

• Supported more than $29B in loans in FY13—its third-highest

year ever.

• More than 54,000 loans backed through its 7(a) and 504

programs

• 4.6% growth in 7(a) loans in FY 2013.

• 7(a) lending is picking up steam after being halted by the

government shutdown in 4Q.

SBA Lending: A Bright Spot

More Metros Showing Promise

Source: PricewaterhouseCoopers’ Emerging Trends in Real Estate.

Reflects a

rising level of

confidence

in the

economics of

secondary

markets for

investment.

Metro Spotlight:

SAN FRANCISCO

#1 spot on the list

of U.S. metros to

watch for overall

real estate

prospects…

…for the 2nd year

in a row.

Other Area “Metros to Watch”

San Jose #3 in the U.S…

…for the 2nd year in a row.

• Tech-oriented market attracts young workers.

• Economic growth forecast to continue to thrive in 2014.

• Homebuilding prospects: 1st in the U.S.

• Development prospects: 1st in the U.S.

• Investment prospects: 2nd in the U.S.

• Solid “buy” recommendations for:

• Industrial properties: Ranked 7th

• Multifamily: Ranked 7th

• Retail properties: Ranked 8th

• Office properties: Ranked 10th

Points in SAN FRANCISCO’s Favor

• Homebuilding prospects: Ranked 3rd in the U.S.

• Investment prospects: Ranked 5th

• Development prospects: Ranked 5th

• San Jose’s technology industry attractive to investors.

• Strong job and income growth to support property

demand.

• Technology-focused economy

• Highly educated population

Points in SAN JOSE’s Favor

© 2014

APPROACHES TO

ENVIRONMENTAL RISK

MANAGEMENT

• 94% of institution’s boards now devote more time to risk

management oversight than five years ago

• 80% percent of chief risk officers report directly to either

the board or the CEO

Source: Deloitte lender study

Banks and Risk Management

• 55% of respondents agree:

• My clients are demanding more thorough environmental

due diligence on deals today than in past quarters.

• 51% agree:

• Lenders tightened their environmental due diligence

standards in 4Q13 and are more demanding in terms of

having thorough environmental due diligence conducted.

• 42% of EPs agree:

• My clients are more willing to discuss Phase II

sampling and other forms of additional investigation than

they have been in past quarters.

Source: EDR Insight’s 4Q13 Quarterly Survey of EPs

Attitudes Toward Environmental Risk

Benchmarks in Environmental Due Diligence

4Q11 4Q12 4Q13

% of EDD for

foreclosures 17% 11% 5%

Liquidating CRE

loans (% of

respondents)

51% 38% 32%

Selling REO

(% of

respondents)

77% 69% 60%

Phase Is

proceeding to

Phase IIs

6% 10% 16%

Phase I ESA Market Benchmarks

California Phase I ESA Trend

• Quarterly volatility

• 8,457 Phase I ESAs in 4Q13

• 2% growth vs. prior year

Source: EDR ScoreKeeper Model, State Profile Report 4Q13

California Metro Performance

Intense Pressure

Intense Pressure

• Intense pressure on price and turnaround time continues.

• Latest results show that $1,800 - $2,400 is a typical basic

Phase I ESA pricing range

• Higher prices on the East and West coasts.

• Average turnaround:

• 2-3 weeks

• As short as 8-10 days on portfolio projects.

• Speed has become a differentiator…

Phase I ESA Pricing and Turnaround Time

• “Due to demands for fast turnaround and specialized service,

we have felt justified in charging more for our services.

Even with increased rates, we are still being awarded the

work. Might raise our prices a bit more next quarter.”

• “Based on large volume of work coming in the door and the

demand for quick turnaround times, we have increased our

prices and are choosing the clients we want to work with.”

Turnaround Time and Phase I Pricing

“It’s a dog eat dog world. I say we just wait it out.”

© 2014

2014 Strategic Playbook

© 2014

Strategic Plays for 2014

1. Pay attention to the drivers

2. Target the strongest opportunities

3. Leverage technology

4. Seize every opportunity to stand out

• Developers

• Equity REITs

• Foreign investors (Asia, Europe forming U.S. alliances)

• Institutional capital and equity funds

• Financial institutions, insurance, credit unions

• M&A

• Retail/big box

STRATEGY #1:Target the Strongest Drivers of Phase I ESA Growth

• The universe of buyers is growing rapidly:

The number of active buyers over the past twelve

months grew by 3,300 participants with the private

sector seeing the greatest growth.

• All are new opportunities for expanding your client base

Target Emerging Clients:

10 Most Active Buyers

Most Active Sellers of CRE

Top 10 Developers

• Wells Fargo

• 1st for 5th consecutive year ($ volume)

• Approved 18% more 7(a) loans in ’13 over prior year

• Chase

• 1st for 4th consecutive year (# of loans)

• Approved 4,104 7(a) loans in FY13

• Other institutions that dominate SBA lending include:

• Key Corp., Regions Financial, Huntington

Bancshares, M&T Bank, Citizens Financial

Group, Citigroup, Bank of America, TD Bank, US

Bank, PNC Bank and SunTrust Bank.

Top SBA Lenders

• “We've recently seen lenders aggressively come back to

this business who retreated during the crisis," said Philip

B. Flynn, CEO of Associated Banc-Corp.

• SunTrust Banks:

• “We’ve put our distress problems behind us and are back

to focus on growth."

• Growing its retail, office, multifamily and industrial CRE

relationships.

• Also building out its REIT business

• GE Capital Real Estate is increasing lending by 40% this year

Which Lenders Are Growing Originations?

• Efficiency is KEY to data

management

• Need for constant

communication

• Better collaboration

• Reduced cost/time

• More engagement with clients

• 29% of EPs believe that the

adoption of new

technologies is "extremely

important, gives us an edge“

(4Q13 Survey)

STRATEGY #2:Leverage Technology

One EP’s Take on Technology

How has technology changed the way that you conduct

Phase I environmental site assessments?

“Now I can go on a site visit, take photos on my smartphone or tablet,

record my notes in real time, go to a coffee shop, upload everything to

my computer and write my report. I can do all of this in between site

visits, especially if I’m on the road or out of town. I used to carry

around too much clutter to a site visit. Each time I performed a new

function, I would have to put down one object to use another,

distracting me from my greater purpose. Going into the field with just a

smartphone or tablet is one of the most enlightening experiences for

me.”

Duncan Anderson, Odic

Most Used Apps by EPs

• NYC technology conference:

“More data. More transparency. If we can all get data into

people’s hands faster, it’s a win-win for everyone. And

these apps need to be rapidly deployed. They can’t take users

even one second longer to use.”

• Xceligent has a mobile app, eXplore™ iPad App, that gives

commercial real estate professionals real-time access to over

50 fields of data by using a set radius or by drawing a polygon

around a customized search area.

CRE and Tech Intersect

STRATEGY #3:Seize Opportunities to Educate

Out in Front on Education Related to ASTM E 1527-13:

Page 49

• Refocuses attention on education and awareness

• Some new clarifications, requirements to consider

• Valuable reminders on certain areas of EDD (e.g., user

responsibilities) that risk managers may not have given much

thought to in the past eight years

Impact of a New ASTM Standard

• Vapor intrusion awareness

• New SBA SOP 50 10 5(f) as of Jan. 1st

• OCC Guidance, August 2013

• Real-world examples/reminders of why environmental

due diligence is critical

Other Opportunities to Educate

1. Watch the market barometers.

2. Be strategic in your business targets.

3. Leverage technology.

4. Get your name out there as a technical expert.

Playbook Strategy Summary

• Property markets:

• Improving…but slowly

• More $$, more players, more metros

• Risk:

• Fear, uncertainty, regulators breed risk aversion

• Your Challenges:

• Competition, efficiency, pressures on cost/TAT

• Forecast:

• There’s now a viability to the recovery that we haven’t

seen thus far since the market downturn began.

The Bottom Line for 2014

Dianne P. Crocker

Principal Analyst, EDR Insight

Research and Analytics:

www.edrnet.com/EDRInsight

Twitter:

@dpcrocker

Email:

dcrocker@edrnet.com