Survey update on commercial real estate in the Boston market.

1. CRE MARKET
UPDATE
DDD Boston
By:
Dianne Crocker, Principal Analyst
EDR Insight
November 16, 2016

2. 0%
10%
20%
30%
40%
50%
60%
Rising quickly Rising slowly Plateauing Declining
11%
33%
41%
15%
The Boston due diligence market is:
SURVEY 44% characterize
Boston as a growing
market.

3. Your commentary on the Boston due diligence market:
▸“Steady and extremely competitive.”
▸“Active and opportunistic, yet prudent environmental due
diligence is valued in transactions.”
▸“Up and down”
▸“Seems to be leveling out a bit based on past years”

4. US Economy and CRE
2016 looks much like
it did in 2015—with
somewhat less
impressive numbers

5. CRE TRANSACTIONS: Small Is Big
▸Rate of growth is tapering off.
▸Fewer portfolios hurt large cap deals
but individual deals up 2% YonY.
▸Secondary metros in vogue…
‘11 ‘12 ‘13 ‘14 ‘15 ‘16

6. …3QYTD Fastest-Growing Metros: Phase I ESAs
2016
Rank
Metro Volume YonY Growth
1 San Antonio, TX 1,430 19%
2 Nashville, TN 1,516 12%
3 Milwaukee, WI 1,025 12%
4 Austin, TX 1,146 10%
5 Raleigh, NC 1,638 10%
6 Portland, OR 2,365 8%
7 Oklahoma City, OK 857 8%
8 Denver, CO 2,207 5%
9 St. Louis, MO 1,535 5%
10 Boston, MA 5,758 3%
“Investors are looking to smaller,
up-and-coming cities that still offer
good values. Cities like Austin, San
Antonio, Raleigh and Portland.”
~Ryan Severino, REIS at PRISM ‘16

7. 3QYTD Most Active Metros: CRE Deals…
2016 Rank Metro Volume (M$) YonY Growth
1 NYC $31,217 -18%
2 LA $19,587 5%
3 Chicago $13,579 - 8%
4 Dallas $13,213 - 1%
5 Atlanta $11,370 - 6%
6 Boston $10,577 18%
7 Seattle $ 9,627 -16%
8 Denver $ 8,940 40%
9 San Francisco $ 8,643 -16%
10 NYC Boroughs $ 8,592 - 7%

8. Trends Working in Boston’s Favor
▸Top spot for foreign investment in the U.S.
▸Boston ranks 12th in the U.S. for investment/development in
2017
▹6th most promising office market
▹Ranked as most promising hotel market
▸“In a knowledge-based economy, investors
really like to stay in the brain hub markets
like Boston.”
▸Growing industries such as technology, financial, and health
care services are the key job creators in Boston.
▸Strong draw for corporate relocations

9. …in Boston’s Favor
▸Boston is ranked #1 for growth in New England region
▸Major port and metro distribution markets, including South
Bay/Los Angeles, the Inland Empire, Chicago/O’Hare, Boston,
the San Francisco Bay area, and northern New Jersey, are at
the top end of the industrial stack.
▸Properties in these markets are highly coveted, even in a
downturn.

10. Data Centers: A “New Class of CRE”
▸Up 14.6% over 2015
▸23 states now have incentives specifically to attract data
centers
▸Old properties are being retrofitted as data centers
▸Core markets:
▹Northern Virginia outside DC
▹Silicon Valley
▹Chicago
▹Outside Dallas

11. Warehouses-An “Explosive Asset Class”
▸Once-familiar stores have been closing at their fastest rate
since 2010
▸Triggered a major data/warehouse boom in CRE
▸Amazon is the heavyweight, accounts for over 50% of
fulfillment centers
▸Traditional retailers voraciously adding more warehouse
space to accommodate online business:
▹Home Depot
▹Walmart
▹Macy's
▹Will boost annual demand for industrial space by 20
percent in the next few years

12. “It’s at this stage of the cycle that we also see strong
loan growth combined with easing underwriting to
result in increased credit risk.”
~Thomas Curry, U.S. Comptroller of the Currency
▸Pullback in CMBS
▸Shifting sand in lending sources
▸Caution rules…
LENDING CLIMATE in 2016

13. “A significant net fraction of banks reported tightening
standards for construction and land development loans
and loans secured by multifamily residential properties."
~Federal Reserve Survey for 3rd quarter 2016
…Banks Tightening Standards

14. CMBS: Tough Market to Love
▸Mid-year issuance was $37B
▸CY2016 forecast: $70B (vs. $97B in ‘15)
▸Recover to $80B in 2017

15. 28%
19%
13%
12%
7%
10%
9%
18%
20%
21%
7%
13%
0%
5%
10%
15%
20%
25%
30%
CMBS Govt Agency National banks Regional/local banks Global Insurance
Other Lending Sources Fill the CMBS Gap
2014 2016

16. Top Lenders…
1. Wells Fargo
2. JP Morgan
3. Citigroup
4. CBRE
5. Deutsche Bank
6. Morgan Stanley
7. Bank of America
8. Met Life
9. Walker Dunlop
10. Goldman Sachs
…1H16
11. Berkadia
12. Key Corp.
13. PGM Real Estate
14. Capital One
15. Berkeley Point
16. PNC
17. US Bancorp
18. NY Community Bank
19. Signature Bank
20. Bank of China
Who Are the Top Lenders This Year?

17. NREI’s October
survey:
- 53 percent
expect
underwriting
standards to
tighten over the
next 12 months
- Only 7 percent
loosen
3.40
Risk aversion of your LENDER
clients?
1= very tolerant of “red flags”
5 = very risk averse
How risk-averse are your LENDER clients?

18. 2.93
How risk-averse are your INVESTOR clients?
Risk aversion of your INVESTOR
clients?
1= very tolerant of “red flags”
5 = very risk averse

19. 2.
The Phase I ESA Market
…in the
context of CRE
market trends

20. Progressing Along Long Top of Recovery

21. MASSACHUSETTS: Phase I ESA Trend Line…
…MA volume
up 5% in 2016

22. …Area Metros in U.S. Top 50

23. MORE TECHNOLOGY
MORE PRESSURE
THE ERA OF “NOW”
Efficiency Is
the Name of
the Game
3.

24. “Pressures on efficiency in the lending sector are all
moving in the same direction. How can you conduct
underwriting faster and cheaper, and yet better than in
the past?
“Technology and using data in new ways will be part of
the solution.”
~Michael Berman, former CEO of CW Capital and past
Chairman of the Mortgage Bankers Association

25. Your Top Challenges

26. Name the top 3 challenges you face in today's market.
INTENSE COMPETITION

27. Name the top 3 challenges you face in today's market:
INTENSE COMPETITION
FINDING NEW BUSINESS

28. Name the top 3 challenges you face in today's market:
INTENSE COMPETITION
FINDING NEW BUSINESS
PRICING PRESSURE

29. 1=NOT VERY,
OTHER
FACTORS
MATTER
MORE
5=PRICE IS
THE MOST
IMPORTANT
FACTOR?
How sensitive are your clients to price in
selecting a Phase I ESA provider?

30. How sensitive are your clients to price in
selecting a Phase I ESA provider?
1=NOT VERY,
OTHER
FACTORS
MATTER
MORE
5=PRICE IS
THE MOST
IMPORTANT
FACTOR
4.0
One out of
three
respondents
picked “5.”
“The Boston
market is
very cost-
driven.”

31. How sensitive are your clients to TAT in
selecting a Phase I ESA provider?
1=NOT VERY,
OTHER
FACTORS
MATTER
MORE
5=SPEED IS
THE MOST
IMPORTANT
FACTOR?

32. 1=NOT VERY,
OTHER
FACTORS
MATTER
MORE
5=SPEED IS
THE MOST
IMPORTANT
FACTOR
3.79
How sensitive are your clients to TAT in
selecting a Phase I ESA provider?

33. 4.
Market Forecast
…preparing for
the next phase

34. NEAR-TERM FORECAST:
Transactions to decline over next 2 years…

35. NEAR-TERM FORECAST
▸Foreign investment: what makes US markets attractive to
foreign investors also appeals to domestic investors.
▸Capital likely to be plentiful for real estate companies taking
on new projects.
▸High activity in growing secondary markets like Denver,
Seattle and Austin.
▸Interest rates will creep up slowly.
▸Modest CRE lending growth (3%), strong competition
▸Investors are recalibrating their expectations.
▸Property transactions market unlikely to suffer as long as
core fundamentals remain strong.

36. “Investors are growing cautious about the longevity of the
current expansion cycle and, as a result, are taking steps to
de-risk their portfolios.”

37. On a scale of 1-5, what is your
outlook for the Boston due
diligence market just one year
from now?
1 = Very pessimistic
5 = Very confident
2.8
MARKET OUTLOOK