EDR Insight Update

1. EDR Insight Market Update:
Navigating In An Uncertain Market
Presented by:
Dianne P. Crocker, Principal Analyst
For presentation at:
Boston Due Diligence at Dawn workshop
February 2013

2. 4 Keys to Navigating an Uncertain Market

3. 1. MARKET METRICS

4. Bumpy Road for Commercial Real Estate
• 4Q12: the most active
quarter since 4Q07.
• Deal flow increased
37% for the year.
• Now well above „09
trough.

5. Multifamily, Office Drive Property Deals
• Majority of gains driven by:
• Multifamily +47%
• Class A office +20%
• The “sweet spots”
• Largely viewed as low risk
• Retail: +19%
• Recovering, but bifurcated

6. Good News on the CMBS Front
• Post-recession high of $48B in 2012
• Robust start to 2013.
• January saw the highest monthly volume since
December 2007.

7. Capital Remains Concentrated in
Largest Metros

8. Reason #2 to Love Boston…
6th most active
market for
property deals in
the U.S.

9. Top 10 Markets for 2013 Investment

10. Top 10 Buyers in Boston
1. Colony
2. Invesco
3. The Davis Companies
4. Farley White Investors
5. Synergy Investments
6. Cole Real Estate Investments
7. JP Morgan
8. DivcoWest
9. Clarion
10. Albany Road Partners

11. 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.”

12. Commercial Real Estate Loan Volume
• Commercial and
multifamily mortgage
originations hit their
highest levels since
2007 in 4Q12.
• Originations in 2012
increased 24 percent
over 2011.

13. 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. 2012 volume:
16% above 2011
Now 50% above
market’s Oct. 2009
low point

15. New England Phase I ESA Growth

16. MA Quarterly Phase I ESA Activity
4Q12:
+10% over 3Q12
+26% over 4Q11

17. 2. ATTITUDES TOWARD RISK

18. 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 VP of Colliers International

19. 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.”

20. Feedback from EPs
• “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.

21. 3. AREAS OF OPPORTUNITY

22. 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

23. Focus On Who’s Lending:
Top Originators

24. 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

25. Focus On What Lenders Value Most

26. • The U.S. SBA is one of only a handful of federal
agencies with a bigger budget in FY13 than in FY12:
• As much as $16 billion in loans through the popular
7(a) program
• 15 percent increase over FY12.

27. Strongest SBA Lenders in the U.S.:

28. 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

29. REITs (cont’d)
• Among REITs‟ top concerns are risks related to factors that
could devalue their properties, including environmental liability.

30. Retailer Category Planned Openings
through 2015
Dollar General Dollar 1,300
Family Dollar Dollar 1,000
Dollar Tree Dollar 600
CVS Drug 600
Walgreens Drug 400
Advance Auto Parts Auto 320
AutoZone Auto 125

31. Robust Forecast for New Store Openings
• U.S. retailer store-openings in 2012 reached 5-year high
• 81,990 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

32. Foreign Investors and EB-5 Program
• Old program gaining new interest as avenue to stimulate
capital investment by foreign investors.
• Boston 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.

33. 4. ADOPT WINNING STRATEGIES

34. 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.

35. 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.

36. 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.

37. 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.

38. 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

39. 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
force or the
Somewhat,
pending changes Not at 25%
and would greatly all, 63%
appreciate any
information.”
~community
lender

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.

43. 2013 Forecast
• Improvements in both the cost and availability of
commercial mortgage capital are expected to drive
increases in 2013:
• Total investment transaction volume? +10 to 20%
• CMBS issuance? +50%
• CRE loan originations? +11%

44. Forecast for Risk Management
1. Continued focus on modeling the downside
2. More emphasis on technology, streamlining
3. Repurposing the oversupply of obsolescent properties
4. More deferred maintenance issues arising on refis or
neglected properties
5. Property Condition Assessments growing in importance

45. 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.

46. 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!

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