Boston DDD: Risk Management Trends in the 2nd Act of Market Recovery Presented by Dianne Crocker 12/2/14

1. 1
BOSTON DDD:
RISK MANAGEMENT TRENDS IN THE
2ND ACT OF MARKET RECOVERY
December 2, 2014
Presented by:
Dianne P. Crocker, Principal Analyst
EDR Insight

2. 2
TODAY’S HIGHLIGHTS
1. RECOVERY IS GAINING TRACTION.
2. RISK MANAGEMENT IS GETTING SMARTER.
3. OPPORTUNITIES ARE BEING CREATED FOR ALL OF US.

3. 3
1. RECOVERY GAINING TRACTION

4. 4
RECOVERY IN REAL ESTATE: 2014
• Q1 WAS AN ANOMALY.
• ECONOMIC ACTIVITY LARGELY PICKED
BACK UP IN Q2 AND Q3.
• IMPROVED OUR OUTLOOK FOR ALL
MAJOR COMMERCIAL REAL ESTATE
SECTORS…

5. 5
BAROMETERS POINTING TO MOMENTUM
• THE JOBS MARKET IS GETTING BETTER.
• CORPORATE EARNINGS ARE GETTING BETTER.
• INVESTMENT ACTIVITY IS BACK IN VOGUE.
• MARKET FUNDAMENTALS ARE IMPROVING.
• INTEREST RATES ARE STILL LOW.
• ALLOCATIONS TO REAL ESTATE ARE GROWING.

6. 6
DEAL MAKING: WHO’S INVESTING?
• MAJOR BUYING CLASSES
• Real estate investment trusts (REITs)
• Foreign investors
• Private equity funds
• Hedge funds
• Traditional developer/owner/operators
2014 Top Buyers, All Core
Property Types
ARCP
Blackstone
JP Morgan
Norges Bank Investment Mgt
Hines
OMERS
Starwood Capital Group
MetLife
Essex Property Trust
David Werner Real Estate

7. 7
CONSTRUCTION IS BACK!
• UPTICK IN NEW CONSTRUCTION MARKS START OF NEW
DEVELOPMENT CYCLE (FINALLY)
• STALLED PROJECTS ARE GETTING THE GREEN LIGHT
• BEYOND KEY METROS (NY, SAN FRAN, BOSTON)
• TOP 10 STATES:
1. Texas
2. Louisiana
3. New York
4. California
5. Iowa
6. Florida
7. Maryland
8. Georgia
9. West Virginia
10. Oregon
•

8. 8
Small cap property sales were up 31% through August,
and are on pace to set record volume for the year.
Large property sales were up 33% for the 3rd quarter with
sales accelerating across all sectors.

9. 9
PROPERTY PRICES RECOVERED

10. 10
PROPERTY DEALS TILT TOWARD SMALLER
METROS
• HIGHER PRICING, MORE COMPETITION IN MAJOR MARKETS
• INVESTORS SEEKING HIGHER YIELDS, LESS INTENSE
COMPETITION
• MORE ACTIVITY IN SMALLER METROS…

11. 11
METRO HOT SPOTS, 2014
Top 10 Metro Leaders:
Phase I ESA Growth in 2014
Cincinnati, OH 40%
Austin, TX 23%
Oklahoma City, OK 19%
Pittsburgh, PA 16%
Dallas, TX 16%
Houston, TX 15%
Richmond, VA 12%
Portland, OR 12%
Seattle, WA 11%
Kansas City, MO 10%

12. 12
LENDING: SLOW PACE OF GROWTH IN
ORIGINATIONS
• AVAILABILITY OF CAPITAL IS VITAL TO THE RECOVERY
• BANKS HAVE $ TO LEND, BUT STILL VERY CAUTIOUS
• EXTREMELY COMPETITIVE
• HEADING INTO NEW ROUND OF REFINANCING WITH $360B IN
LOANS MATURING BY 2017

13. 13
POINTS IN LENDERS’ FAVOR
• BANKS’ NET INCOME IS RISING
• BANKS SET ASIDE LESS MONEY TO COVER SOURED LOANS,
HELPING TO BOOST PROFITS.
• LOAN LOSSES ARE FALLING
BOOSTS THEIR CASE FOR INCREASED LENDING ACTIVITY…

14. 14
BANK LENDING HITS ITS STRIDE

15. 15
BANK LENDING HITS ITS STRIDE
CRE
loans
only:
7.3%

16. 16
NEAR-TERM LENDING FORECAST
Forecast calls for modest 5-6 percent
growth in commercial/multifamily
originations over next two years.

17. 17
MASSACHUSETTS: PHASE I ESA TREND LINE
Up 6% YoY

18. 18
SCOREKEEPER’S METRO FOCUS
METROS RANKED AMONG TOP 50 IN THE U.S.

19. 19
BOSTON METRO 4TH IN THE NATION
2014 YTD
NYC 11,552
LA 8,124
Chicago 6,428
Boston 5,103
Atlanta 4,666
Dallas 4,556
No. NJ 4,077
Philadelphia 3,922
Houston 3,919
DC 3,370

20. 20
WHY IT’S GOOD TO BE IN BOSTON
“Boston is no different
than the other
major core markets and will
continue to
attract significant amounts
of institutional
capital.”
Boston is the 9th
“Market to
Watch” in the
U.S.
-and the highest
ranked NE market

21. 21
BOSTON (CONT’D)
• STEEP RECOVERY PATH
• BOSTON IS A “VICTIM OF ITS OWN
SUCCESS”
• A LOCAL INVESTMENT MANAGER
LOOKS AT BOSTON’S LIVELY
APARTMENT DEVELOPMENT SCENE
AND SAYS, “WHOA! TOO MUCH!”
• 20TH FOR MULTIFAMILY, BUT STILL
HIGH FOR OTHER PROPERTY TYPES:
• 5th for hotels
• 7th for office investment
• 8th for retail

22. 22
OUTLOOK: NORTHEAST REGION

23. 2. RISK MANAGEMENT GETTING SMARTER
23

24. 24
IN GENERAL, HOW WOULD YOU RATE YOUR
CLIENTS' RISK TOLERANCE IN 2014 VS. 2013?
Less aversion More aversion
SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK SURVEY
OF EP’s, SEPTEMBER 2014

25. 25
TRUE/FALSE?
Clients are demanding more thorough environmental due
diligence on deals today than they were last year.
Less aversion More aversion
SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK SURVEY
OF EP’s, SEPTEMBER 2014

26. 26
TRUE/FALSE?
Clients are demanding more thorough environmental due
diligence on deals today than they were last year.
“The biggest change we have seen
is in volume of work. Although risk
tolerance has not changed, banks
are conducting more deals.”
SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK
SURVEY OF EP’s, SEPTEMBER 2014

27. 27
HOW LENDERS VIEW RISK TOLERANCE
IN GENERAL, HOW WOULD YOU RATE THE
LENDING SECTOR’S TOLERANCE OF
ENVIRONMENTAL RISK IN 2014 VS. 2013?
SOURCE: EDR INSIGHT’S BENCHMARK SURVEY: LENDERS' SCOPES OF
WORK FOR COMMERCIAL PROPERTY DUE DILIGENCE, SEPTEMBER 2014.

28. 28
OTHER SIGNS OF HIGH RISK AVERSION
• DUE DILIGENCE SCOPES ARE BEING MORE TAILORED TO THE
DEAL. NOT ONE SIZE FITS ALL.
• GREATER SCRUTINY OF PHASE I ESA’S BY LENDERS
• AN INCREASE IN PHASE II ESA’S IN 2014
• INCREASE IN ASBESTOS SURVEYS
• MORE PROPERTY CONDITION ASSESSMENTS…

29. 29
INTEGRATION OF DUE DILIGENCE
• NEGLECTED PROPERTIES ARE GETTING ATTENTION FOR
THE FIRST TIME IN YEARS
• RISK AVERSION IS HIGH, SO POTENTIAL INVESTORS ARE
TAKING A MORE THOROUGH LOOK—NOT ONLY AT
CONTAMINATION BUT ALSO AT STRUCTURAL ISSUES.
“BY ADDING THE PCA TO THE DUE DILIGENCE PROCESS, THE
GAPS OR ESTIMATES TYPICALLY FOUND IN THE APPRAISAL
CAN BE BETTER DEFINED IN THE FORM OF REAL DATA FROM
THE SUBJECT PROPERTY.”
~DAVID DRUMMOND, NATIONAL CHIEF ENVIRONMENTAL RISK
OFFICER AND NATIONAL CONSTRUCTION ENGINEERING
MANAGER, KEY BANK

30. 30
PCA’S AND PHASE I ESA’S
• A PCA IS MORE COMMONLY BEING BUNDLED WITH A PHASE I,
ESPECIALLY ON MULTIFAMILY PROJECTS FOR FANNIE MAE,
FREDDIE MAC AND HUD.
• AS OF JULY 2014, FREDDIE MAC IS NOW REQUIRING THAT THE
APPRAISER BE GIVEN THE PROPERTY CONDITION
ASSESSMENTS AND THE ENVIRONMENTAL REPORTS, AND THE
APPRAISER MUST THEN OPINE TO THE IMPACT ON VALUE.
• FIRMS THAT CAN OFFER EXPERTISE IN BOTH PCAS AND
PHASE I ESAS COULD HAVE A DISTINCT ADVANTAGE.

31. 31
3. OPPORTUNITIES BEING CREATED

32. 32
MORE INTEREST IN REDEVELOPMENT
• MUNICIPALITIES HAVE REASSESSED THE POTENTIAL FOR
REDEVELOPING INDIVIDUAL PROPERTIES, AND ARE MAKING
DEVELOPMENT ON THESE PROPERTIES EASIER IN AN EFFORT
TO LURE DEVELOPERS.
• OWNERS, DEVELOPERS AND LOCAL GOVERNMENTS ARE IN
POSITION TO RESTART PREVIOUSLY-STALLED PROJECTS.
• MANY INVOLVE SITES WITH CONTAMINATION DEEMED TOO
COSTLY FOR REDEVELOPMENT.
• MORE DEMAND FOR URBAN LOCATIONS BRINGS
CONTAMINATED SITES INTO PLAY.

33. 33
LOCAL INCENTIVES ARE CRITICAL
“WITH THE COMEBACK ECONOMY, DEVELOPERS
EXPECT THEIR CONSULTANTS TO UNDERSTAND
AND PROCURE ECONOMIC INCENTIVES. WE HAVE
COUNTLESS REDEVELOPMENT PROJECTS
RELYING UPON A NUMBER OF INCENTIVES FROM
EPA SITE ASSESSMENT GRANTS, FEDERAL,
STATE AND LOCAL TAX INCREMENT FINANCING
OPTIONS, STATE GRANTS, LAND BANKS, ETC.”
~MIKE KULKA, CEO, PM ENVIRONMENTAL

34. 34
TECHNOLOGY: LEAPS AND BOUNDS

35. 35
“I AM ALL ABOUT MULTI-PLATFORM TECH THESE DAYS, I’VE GOT MY
LAPTOP, PHONE AND TABLET CONFIGURED TO SYNC ALL MY
CRITICAL FILES AND PRODUCTIVITY APPS AS MUCH AS POSSIBLE
AND (FINALLY) IT IS HELPING ME BE MORE PRODUCTIVE. SOME
PEOPLE ARE GREAT AT BEING PRODUCTIVE IN FIELD BUT AWFUL
WHEN THEY GET BACK TO OFFICE AND VICE VERSA. SO
INTEGRATING EMAILS, TO-DOS TASK MANAGEMENT,
TRAVEL/EXPENSES, PHOTOS STORAGE EDITING, REPORT WRITING
NEED TO BE INTEGRATED.”
~EP IN ATLANTA

36. The FAA predicts that as many as 10,000 commercial drones
36
will be licensed by 2018.

37. “The Phase I ESA industry is so uber-competitive right now that
the firms that are succeeding are the ones open to adopting
new technologies, taking them past the 'wow!' factor and
putting them into practice. The ability to cheaply fly over a
property and get data especially on sites that are inaccessible
by foot can be a major selling point on some projects. Only a
handful of firms have embraced it thus far, so the field is wide
open, keeping an eye out for what the FAA does to regulate, of
course.”
~Bloomberg BNA Daily Environment Report
37

38. 38
WHAT’S NEXT?

39. 39
2015 FORECAST
• MARKET HEALTH:
• Back on track after slow start to ‘14
• More $$s, more players, broader geographic reach
• LENDERS ARE GETTING MORE COMFORTABLE RAMPING UP
NEW ORIGINATIONS, AND MOVING PAST THE LOAN WORKOUTS
AND FORECLOSURES THAT DOMINATED THE PAST FEW YEARS.
• RISK
• Still a general sense of risk aversion
• YOUR CHALLENGES:
• Competition, efficiency, speed
2015 FORECAST:
• Modest but steady growth
• Viability to the recovery that we haven’t seen thus far

40. RISK MANAGEMENT TRENDS IN
THE 2ND ACT OF MARKET
RECOVERY
Baby stepping our way back
40