4. Bumpy Road for Commercial Real Estate
• Transactions in 3Q12:
• Up slightly from
3Q11
• Well above „09
trough
• In recent quarters, rate
of growth has declined.
5. Multifamily, Office Drive Property Deals
• Majority of gains driven by:
• Multifamily and Class A office
• The “sweet spots”
• Largely viewed as low risk
• Retail:
• Recovering, but bifurcated
• Development:
• Accelerating
6. Downturn, Distress, Contamination
• Distressed asset deals bringing contamination into play.
• Properties and projects that failed are coming back into
the market.
• “We are reviewing portfolios of distressed loans with
significant environmental conditions—including projects
that stalled years ago because the owners defaulted and
abandoned their development plans.”
Senior VP at a major consulting firm
7. The Pulse of Lending on Properties
• Fewer troubled assets on their books.
• The number of “problem banks” is falling.
• 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.
8. The Liquidity Squeeze is On
• Lenders face added regulatory burdens, the
need to minimize risk and compete for
borrowers:
• 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
community banks struggling with distressed
commercial real estate assets.
9. Positive Signs in Lending
• Many have worked through their distressed assets
and are ready to start growing again.
• More confidence, more borrowers.
• There is pressure on pricing as competition for loans
heats up.
• However, lenders view CRE as still inherently risky
Tight underwriting
10. 2012 YTD:
8% above 2011 YTD
Up 43% above
market’s Oct. 2009
low point
14. Reasons to Love Dallas…
7th most active
market for
property deals in
the US
15. Reasons to Love Dallas…
6th most active
metro in terms of
deals by foreign
investors
16. Reasons to Love Dallas…
• Dallas is 2nd in the US for job growth
• Houston is first
• 4 of the top 5 are in Texas
Page 16
17. Dallas is 9th on Top US “Markets to
Watch” for Property Investment,
Development
Page 17
18. Dallas on Investors’ Radar:
• Investors favor primary coastal markets (San Francisco,
New York City, Boston, and Washington, D.C.)
• Moving behind those into top secondary metros are:
Austin, Houston, Seattle, Dallas and Orange County
• Investors look for:
• Consistent job growth.
• Strong, sustainable industries such as technology,
health care, education, and energy.
20. Risk Aversion Is High Among Investors
“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
21. Risk Aversion Is High Among Lenders
• More lenders paying closer attention to findings and
recommendations, considering their risk if recommendations
are ignored.
• More clients want detailed assessment of potential risk and
recommendations for mitigation of known conditions.
• More community banks are attempting to develop more
current risk management policies.
22. 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.”
23. Risk Aversion (cont’d)
• “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.”
Source: EDR Insight‟s Quarterly Survey of EPs.
24. Risk Management is Now “Everyone’s
Business”
• “What happens today that was not back in 2006 and 2007 is that
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.”
26. 1. Focus on the Most Active Lenders
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
28. Watch for shifts toward other lending
sources:
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
29. • 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.
30. FY13 could be the most robust year for 7(a) lending
since FY10 (excluding FY11)
32. 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
33. REITs (cont’d)
• Among REITs‟ top concerns are risks related to factors that
could devalue their properties, including environmental liability.
34. Retailer Category Planned Openings
Dollar General Dollar 625
Family Dollar Dollar 450-500
Dollar Tree Dollar 315
CVS Drug 225-250
Walgreens Drug 150-175
Advance Auto Parts Auto 130-150
AutoZone Auto 125
RiteAid Drug 100
35. Robust Forecast for New Store Openings
• U.S. retailer store-opening plans hit a four-year high
• 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
36. • 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.
• Disclosure laws like NYC‟s create opportunities for
environmental consultants in contributing data and
information to this and similar reporting in growing
number of metros.
37. Strong Drivers for Energy Audits
• Rising energy costs
• Weak appreciation in property prices
• Metro disclosure laws
• Federal requirements
• HUD now has a requirement that all Physical Needs
Assessments (its PCA equivalent) be accompanied by
energy audits at all Public Housing Authority sites
"Green building is not a curiosity anymore -- it's a huge
market. The green building sector will be a $280 billion global
industry by the end of the decade.” Lux Research, Boston
38. Foreign Investors and EB-5 Program
• Old program gaining new interest as avenue to stimulate
capital investment by foreign investors.
• Dallas is a top target of foreign investors
• In FY12, the number of EB-5 projects approved was triple
FY09 levels.
• “Typically as a condition of closing, the borrower will
need to provide a clean Phase I environmental site
assessment report along with other due diligence items.”
• EB-5 presents a way for EPs to connect with key players:
• 209 Regional Centers in 40 states.
40. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.
41. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.
42. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.
43. 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.
44. Topics for Client Education Efforts
• New E 1527 standard
• Vapor intrusion awareness
• Updates to policies like SBA, HUD, Fannie Mae
• Real-world examples/reminders of why environmental
due diligence is critical
45. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.
46. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.
48. Positive Forces in the Forecast
• Improvements in both the cost and availability of
commercial mortgage capital are expected to propel
transaction volumes in Q4 and into 2013.
• Real estate remains attractive to lenders, investors.
• An improving picture in the jobs market is expected to
boost the commercial real estate recovery in 2013.
• 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 such as New York and
San Francisco.
49. Parting Thoughts
• The market is recovering.
• Market uncertainty creates aversion to risk.
• New players and new markets are emerging.
• Think critically about where and how you can
compete most effectively.
Page 49
50. Parting Thoughts
• The market is recovering.
• Market uncertainty creates aversion to risk.
• New players and new markets are emerging.
• Think critically about where and how you can
compete most effectively.
Be strategic and grow!
Page 50
51. Dianne P. Crocker
Principal Analyst, EDR Insight
Research and Analytics:
www.edrnet.com/EDRInsight
Twitter:
@dpcrocker
Email:
dcrocker@edrnet.com