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EDR Insight Market Update:
Risk Management In An Uncertain Market

Presented by:
Dianne P. Crocker, Principal Analyst



For presentation at:

EBA, New Orleans

January 2013                           © 2012 Environmental Data Resources, Inc.
Commercial
       Real Estate




Environmental
Due Diligence




        Challenges




  Forecast
EBA Jan 2013 Risk Management In An Uncertain Market
Bumpy Road for Property Deals

 • Transaction volume uneven in 2013.
 • Slower rate of growth Q1-Q3.
 • Year ended strong.
Good News on the CMBS Front
• Strong 4Q, robust start to 2013.
• Major deal in January involving 100+ properties.
• As much as $8 billion in deals for January:
   • the highest monthly volume since December 2007.
• Issuance poised to climb 50 percent to $60 billion in
  2013.
CMBS Forecast
Office, Apt’s Lead Price Recovery
Capital Remains Concentrated in
Largest Metros
Top 10 Markets for 2013 Investment



                                Fastest-
                                growing
                                Phase I
                                metros
                                in 2012
LENDING: Positive Signs

“By almost every observable metric, the
American banking system will enter 2013 with
its strongest balance sheet position since
before the financial crisis.”
Lending in 2013

•   Glacial deleveraging continues.
•   More confidence, more borrowers.
•   Competition for loans heating up.
•   Certain large financial institutions are extremely
    bullish about CRE lending.
EBA Jan 2013 Risk Management In An Uncertain Market
EBA Jan 2013 Risk Management In An Uncertain Market
Lenders’ Approach to Due Diligence
   • Loan closings are being delayed for environmental issues--simply
      because financial institutions are no longer willing to take on risk as
                                                            they once were.”

• “It has brought the opportunity—good or bad—to revisit decisions we
           made during the good times….to rethink our approach to due
                                                            diligence.”

• “What has changed is the relationship with loan officers. Years back,
    they tended to resist environmental due diligence. Now there is much
                                                     greater awareness.”

    • “The definition of Business Environmental Risk is different at our
     bank. Historically, these were covered under Phase I Plus scopes of
   work. Now, these expanded-scope items are an everyday expectation.”
Benchmarks in Environmental Due
Diligence
                           4Q11    4Q12

   % of EDD for            16.7%   10.6%
   foreclosures

   Liquidating CRE loans   51.1%   37.5%
   (% of respondents)

   Selling REO             77.2%   69.2%
   (% of respondents)

   Phase Is to Phase IIs   5.7%    9.6%
EBA Jan 2013 Risk Management In An Uncertain Market
EBA Jan 2013 Risk Management In An Uncertain Market
Weighted Avg Score
                                                        (1=not challenging to
                                                            5=extremely
                                                            challenging)

Balancing risk management with pressure to stay
competitive                                                     3.3

Meeting fast turnaround time pressures internally               3.0

Doing more with smaller risk management staff                   2.9

Complying with changing environmental regulations               2.8

Lack of education on environmental risk internally in
the context of overall lending process                          2.8

Pressure to cut costs                                           2.7

Stringent pressure from bank regulators                         2.6
Challenge of Education:
New E 1527 Standard

• How aware are you of the proposed revisions to the ASTM
  Phase I ESA standard?
                                               Very
                                              aware,
                                               12%

“I have NOT been
privy to the task                              Somewhat,
force or the              Not at all,            25%
pending changes             63%
and would greatly
appreciate any
information.”
Impact of a New ASTM Standard
• Refocuses attention on education and awareness
• Some new 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




                                                            Page 20
EBA Jan 2013 Risk Management In An Uncertain Market
Positive Forces in the Forecast

• Real estate remains attractive to lenders, investors.
• Improvements in both the cost and availability of
  commercial mortgage capital will drive transactions.
• Future consolidation in lending sector is likely.
• Investors are willing to take on more risk in their portfolios
  in 2013 to gain greater yields:
   • more investment and interest in secondary and tertiary
     markets outside of strongholds.
Forecast for Risk Management

• Continued focus on modeling the downside
• More emphasis on technology, streamlining
• Repurposing the oversupply of obsolescent properties
• More deferred maintenance issues arising on refis or
  neglected properties
• Property Condition Assessments growing in importance
Commercial
       Real Estate




Environmental
Due Diligence




        Challenges




  Forecast
Dianne P. Crocker
Principal Analyst, EDR Insight

Research and Analytics:
www.edrnet.com/EDRInsight

Twitter:
@dpcrocker

Email:
dcrocker@edrnet.com

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EBA Jan 2013 Risk Management In An Uncertain Market

  • 1. EDR Insight Market Update: Risk Management In An Uncertain Market Presented by: Dianne P. Crocker, Principal Analyst For presentation at: EBA, New Orleans January 2013 © 2012 Environmental Data Resources, Inc.
  • 2. Commercial Real Estate Environmental Due Diligence Challenges Forecast
  • 4. Bumpy Road for Property Deals • Transaction volume uneven in 2013. • Slower rate of growth Q1-Q3. • Year ended strong.
  • 5. Good News on the CMBS Front • Strong 4Q, robust start to 2013. • Major deal in January involving 100+ properties. • As much as $8 billion in deals for January: • the highest monthly volume since December 2007. • Issuance poised to climb 50 percent to $60 billion in 2013.
  • 7. Office, Apt’s Lead Price Recovery
  • 8. Capital Remains Concentrated in Largest Metros
  • 9. Top 10 Markets for 2013 Investment Fastest- growing Phase I metros in 2012
  • 10. LENDING: Positive Signs “By almost every observable metric, the American banking system will enter 2013 with its strongest balance sheet position since before the financial crisis.”
  • 11. Lending in 2013 • Glacial deleveraging continues. • More confidence, more borrowers. • Competition for loans heating up. • Certain large financial institutions are extremely bullish about CRE lending.
  • 14. Lenders’ Approach to Due Diligence • Loan closings are being delayed for environmental issues--simply because financial institutions are no longer willing to take on risk as they once were.” • “It has brought the opportunity—good or bad—to revisit decisions we made during the good times….to rethink our approach to due diligence.” • “What has changed is the relationship with loan officers. Years back, they tended to resist environmental due diligence. Now there is much greater awareness.” • “The definition of Business Environmental Risk is different at our bank. Historically, these were covered under Phase I Plus scopes of work. Now, these expanded-scope items are an everyday expectation.”
  • 15. Benchmarks in Environmental Due Diligence 4Q11 4Q12 % of EDD for 16.7% 10.6% foreclosures Liquidating CRE loans 51.1% 37.5% (% of respondents) Selling REO 77.2% 69.2% (% of respondents) Phase Is to Phase IIs 5.7% 9.6%
  • 18. Weighted Avg Score (1=not challenging to 5=extremely challenging) Balancing risk management with pressure to stay competitive 3.3 Meeting fast turnaround time pressures internally 3.0 Doing more with smaller risk management staff 2.9 Complying with changing environmental regulations 2.8 Lack of education on environmental risk internally in the context of overall lending process 2.8 Pressure to cut costs 2.7 Stringent pressure from bank regulators 2.6
  • 19. Challenge of Education: New E 1527 Standard • How aware are you of the proposed revisions to the ASTM Phase I ESA standard? Very aware, 12% “I have NOT been privy to the task Somewhat, force or the Not at all, 25% pending changes 63% and would greatly appreciate any information.”
  • 20. Impact of a New ASTM Standard • Refocuses attention on education and awareness • Some new 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 Page 20
  • 22. Positive Forces in the Forecast • Real estate remains attractive to lenders, investors. • Improvements in both the cost and availability of commercial mortgage capital will drive transactions. • Future consolidation in lending sector is likely. • Investors are willing to take on more risk in their portfolios in 2013 to gain greater yields: • more investment and interest in secondary and tertiary markets outside of strongholds.
  • 23. Forecast for Risk Management • Continued focus on modeling the downside • More emphasis on technology, streamlining • Repurposing the oversupply of obsolescent properties • More deferred maintenance issues arising on refis or neglected properties • Property Condition Assessments growing in importance
  • 24. Commercial Real Estate Environmental Due Diligence Challenges Forecast
  • 25. Dianne P. Crocker Principal Analyst, EDR Insight Research and Analytics: www.edrnet.com/EDRInsight Twitter: @dpcrocker Email: dcrocker@edrnet.com