This document summarizes the key points from a presentation on risk management in an uncertain commercial real estate market. It discusses trends seen in 2013 such as uneven transaction volume and stronger growth at year-end. It also notes positive signs in CMBS issuance and recovery in office and apartment prices. Top US markets for investment are identified. The challenges of balancing risk management, regulatory pressures, and education are examined.
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.
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