Presented by: Dianne P. Crocker Boston DDD, December 4, 2013 In the grand scheme of market recovery, we now stand at the start of the second act. The past five years were all about survival. 2013 was the true start of market rehabilitation. And now as we prepare for 2014, optimism has finally taken root. Business confidence, profitability and investors’ forecasts are more positive than they have been in recent years. Despite the uncertain economic outlook, the prospects for property assessment firms are more encouraging than at any time since 2008. 2014 will be a year of refocusing and repositioning in a still-challenging market. Get the latest take on the market’s new normal: -Pricing and turnaround time benchmarks -The new clients, new lenders, new drivers -Trends reshaping the market -A look at what to expect in 2014

1. Strategic Plays for the 2nd Half of
Market Recovery
Presented by:
Dianne P. Crocker, Principal Analyst
For presentation at:
Boston Due Diligence at Dawn workshop
December 2013

2. Market in Transition
2008 2009 2010
2011
2012
2013
2014
Survival Mode
True start of
market rehabilitation
Year of
refocusing
and repositioning

3. © 2013

4. 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,
November 2013
© 2013

5. View of Market: 50,000 Feet
CRE Lending
-SBA Lending
+14%
+13%
Property transactions:
-Large
+27%
-Small (<$5M)
+18%
-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.

6. Large Commercial Real Estate
Deals Up
• 4Q12: the most active
quarter since 4Q07
• By 3Q13, deal flow up
27% in 3Q YTD
• Poised for healthy
finish to the year

7. Small Cap Transactions
• The velocity of small-cap sales is more than
keeping pace with the larger CRE investment
market.
• Up 17% YTD this year
• Transactions continue to grow at a faster clip in
bigger cities than smaller ones.

8. Property Types in Favor
• Multifamily is still the “belle of the ball” (up 31%
Y-on-Y)
• Retail: sales of strip centers are up 30%
• Office/industrial getting more interest
• Warehouse activity, especially in port cities

9. Properties in Flux
•
•
•
•
•
•
•
•
U.S. Retail Store Closings in 2013:
Blockbuster (460)
Fashion Bug
GameStop
Barnes & Noble
The Gap
US Cellular
Sears/Kmart

10. Good News on the CMBS Front
• 2012:
• Post-recession high
of $48B
• 2013:
• Already surpassed
year-end 2012
issuance
• 46% growth forecast
for 2013

11. Banks’ Sell-off of Nonperforming
Assets

12. Commercial Property Lending
Volume
• Lenders have returned to originating commercial real
estate loans as values and credit quality improve and
demand increases
• Commercial and multifamily real estate borrowing and
lending continued at a moderate clip in the third quarter.
• Origination volumes:
• 29% higher than in Q3 2012
• Flat compared to 2Q13
• Up 14% year to date

13. LENDING: A Positive Take
“More banks were lending on incomeproducing commercial real estate
properties in more places in the 3rd
quarter. 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

14. Bottom Line on Lending
• The comeback of commercial real estate lending is
gaining momentum, especially credits backed by
apartments and leased properties.
• CRE lending was a scourge for scores of community
banks during the financial crisis, but more banks are
warming up to it in their quest for higher returns.
• However, CRE lending volumes remain well below the
highs of six years ago.

15. SBA Lending: A Bright Spot
• 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
• The number of 7(a) loan increased to 46,399 in 2013, 4.6%
over the number of loans in FY 2012.
• The 504 loans produced more than 7,700 loans in FY 2013, a
slight decrease from FY 2012.
• 7(a) lending is picking up steam after being halted by the
government shutdown.

16. M&A Gaining Momentum
• Slow 2012 turned corner
• Uncertainty giving way to
confidence
• Firms turn to M&A for growth on
their own
• 2nd half of 2013 expected to be
active

17. Spotlight on:
BOSTON
• Hot spots?
• Seaport District & Burlington (128 North)
9th in the US for
“Top Markets to
Watch: Overall
Real Estate
Prospects

18. Other Area “Metros to Watch”

19. Points in Boston’s Favor:
• Investment prospects still considered strong.
• In its favor:
• A 24-hour knowledge-based economy
• Job growth outperforming US average
• Boston’s rank by property type as “best places to
buy real estate” in 2014:
• 1st for office property
• 4th for multifamily
• 5th for retail

20. APPROACHES TO
ENVIRONMENTAL RISK
MANAGEMENT
© 2013

21. Banks and 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

22. Attitudes Toward Environmental Risk
• “I know the banks’ Environmental Risk Reviewers would like to tighten
the standards on a more consistent basis, but they get a lot of pressure
from the loan officers to make the deals happen.”
• “I believe that clients are more aware of the potential environmental
risks involved with real estate and are requiring more in-depth
research and diligence before purchasing property.”
• “Our projects are much more likely to go to a Phase II investigation
than in past years.”
• Loan closings are being delayed for environmental issues-simply
because financial institutions are no longer willing to take on risk as
they once were.”

23. Benchmarks in Environmental
Due Diligence
4Q11
4Q12
1Q13
2Q13
17%
11%
7%
5%
Liquidating
CRE loans (%
of respondents)
51%
38%
42%
36%
Selling REO
(% of
respondents)
77%
69%
65%
63%
Phase Is
proceeding to
Phase IIs
6%
10%
17%
16%
% of EDD for
foreclosures

24. Phase I ESA Market Benchmarks

26. Mass Phase I ESA Trend
• Steady growth trend in
2013
• 13% growth in 2Q13
• Continued in 3Q

27. New England Region

28. MASS Metro Performance

29. Intense Pressure

30. Intense Pressure

31. Phase I ESA Pricing and
Turnaround Time
• 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…

32. Turnaround Time and Phase I
Pricing
• “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.”

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

34. 2014 Strategic Playbook
© 2013

35. Strategic Plays for 2014
1.
2.
3.
4.
Pay attention to the drivers
Target the strongest opportunities
Leverage technology
Seize every opportunity to stand out
© 2013

36. STRATEGY:
Target Drivers of Phase I ESA
Growth:
•
•
•
•
•
•
•
Developers
Equity REITs
Foreign investors
Institutional capital and equity funds
Financial institutions, insurance, credit unions
M&A
Retail/big box

37. Recent Trend:
• 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.
• A number of new investors from Asia and Europe are also
growing in influence.
= new opportunities for expanding client base

38. 10 Most Active Buyers

39. Most Active Sellers of CRE

40. Top 10 Developers

41. BOSTON
Top Buyers/Investors in 2013:
1.
2.
3.
4.
5.
6.
7.
National Development
Divco
Artemis
Davis Companies
AEW
Spear Street
Campanelli
Source: Cassidy Turley MA

42. Top SBA Lenders
• Wells Fargo
•
•
•
•
1st for 5th consecutive year ($ volume)
2nd largest in 7(a) loan units (3,481 loans in FY13)
Approved 18% more 7(a) loans over prior year
504 loan dollars up by 38 percent in 2013
• Chase
• 1st for 4th consecutive year (# of loans)
• Approved 4,104 7(a) loans in FY13
• At state level: top in Arizona, Illinois, Louisiana, New Jersey and
New York.
• Huntington, TD, US Bank

43. Which Lenders Are Growing
Originations?
• “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

44. Regional Banks 3Q13 Loan Growth
• PNC Financial Services Group (PNC), U.S. Bancorp
(USB) and KeyCorp (KEY) all reported loan growth of at
least 5% in the third quarter
• Loan growth for the regional banks is outpacing the
growth of the industry overall

45. STRATEGY:
Leverage Technology
• Efficiency is KEY to data
management
• Need for constant
communication
• Better collaboration
• Reduced cost/time
• More engagement with clients

46. 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

47. Most Used Apps by EPs

48. CRE and Tech Intersect
• 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.

49. STRATEGY:
Seize Opportunities to Educate

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

52. Page 52

53. 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 53

54. Other Opportunities to Educate
•
•
•
•
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

55. Playbook Strategy Summary
•
•
•
•
Watch the market barometers
Be strategic in your business targets
Leverage technology
Get your name out there as a technical expert

56. Dianne P. Crocker
Principal Analyst, EDR Insight
Research and Analytics:
www.edrnet.com/EDRInsight
Twitter:
@dpcrocker
Email:
dcrocker@edrnet.com