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EDR Insight DDD Minneapolis November 2012

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  • It’s great to be here.You might have heard that Mother Nature is giving us a run for our money in New England so it’s really nice to be here in such great weather.It’s been a pretty volatile year on the market front.I’m the principal analyst in EDR Insight and we track trends in the commercial real estate and EDD markets, and deliver our research in the form of webinars and biweekly emails.So what I’m presenting here is drawn from our recent research.In a nutshell, let me tell you what happened in the market this year:We all got used to the NEW NORMAL in the first two quarters….THEN THE summer came and the NEW NORMAL GOT WORSE!Now as we near the end of the year, there are a lot of reasons for optimism that I’ll share with you.And if you don’t already love Dallas, you will by the time I’m done. You have a long list of reasons why it’s a good time to be in the environmental due diligence market AND! why it’s a good time to be in Dallas specifically.
  • Not a day goes by without some new headline about the bad state of the economy or the fiscal cliff. But the headlines don’t tell the whole story.In my view, there are 4 KEYS TO UNDERSTANDING THE MARKET and that’s what I’m going to focus on here today:First thing is you need to understand what’s happening in your market so we’ll start there with a look at key market metrics. You will get my slides when I’m done.Then after I’ve made your heads spin w/ graphics, I want to talk to you a bit about how the state of the market is affecting how investors and lenders approach risk. Third, it’s a challenging market, so for all of you, you have to decide where to focus your resources, find opportunity and grow. I have 5 areas of opportunity to highlightLastly, in an uncertain market, what are some strategies for growth? I have a list of strategies that I’m seeing the firms who are growing embrace.
  • So let’s first talk about the state of each of these spheres: deal making and lending levels are strong drivers of environmental due diligenceI have metrics to share w/ you in these areas but will go fairly quickly thru them. Just remember you’ll receive copies of the slides over the next few days and can look at these on your own.
  • So let’s first talk about the state of each of these spheres: deal making and lending levels are strong drivers of environmental due diligenceI have metrics to share w/ you in these areas but will go fairly quickly thru them. Just remember you’ll receive copies of the slides over the next few days and can look at these on your own.
  • I want to start with CRE deals. Property transactions are the lifeblood of the Phase I market.This graph shows quarterly data on deal volume back to the start of 2007. The colors designate the four main property types.But what’s MOST IMPORTANT about it is that even though the general trends is up…activity is on the mend, it’s a pretty bumpy road.Very strong 4th quarter last year, slow first, then an even stronger 2nd then avery slow JULY and AUGUST that got everyone nervous again.What you see here is that while the growth rate has slowed, the investment transaction market is still markedly above the 2009 floor and transactions are still improving in the face of significant economic headwinds
  • Given the summer unrest, the focus is again on the safe investmentsIn terms of property type, recovery still bodes especially well for multi-family properties.On retail there’s been a great deal of activity and interest in bigger box stores in urban areas…SO MANY properties changing hands due to bankruptcies as well as a strategic shift on the part of big box to switch to smaller store. And some chains that are actively looking to expand.BUT still not much activity on smaller retail assets or strip malls in weaker markets. Development: consultants report that they’re hearing from developers again for the first time in a long time. Buying properties while prices are still low. Universities and home builders especially are expecting a “banner year”
  • For a lot of reasons, banks are in better shape right now that they were a few years ago.Debt capital is available for strong borrowers, low-risk propertiesRefis, loan sales strong drivers of environmental due diligenceMarked improvement over the last year in the volume of troubled assets (nonperforming loans and repossessed property) weighing down bank balance sheetsThe number of “problem banks” is falling (732)Lending up albeit moderatelyfor 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.
  • Lenders face added regulatory burdens, the need to minimize risk and compete for borrowers: It is not a unanimous movement back into CRE lending as several of the larger banks are still working through mounds of distressed assets and many are still in cost-cutting mode. However, a number of others have decided the markets are ripening and the time is either right to return to CRE lending, or is fast approaching to do so. Real estate is getting better so that adds to their confidence.Geographically much of the lending is concentrated in the bigger markets. In the safer markets.Nonperforming real estate loans will remain a burden on banks but more so for the smaller banks where obstacles to increasing their lending levels remain. Large national banks focused on safest loans.Smaller regional and community banks continue to struggle to work out existing bad commercial real estate debt.But the good news is that overall lending is up and that has been a LONG TIME coming! I’ll talk a bit more about lending in the opportunities section
  • The second week after the end of quarter is always a revealing time for commercial real estate. That's when many of the nation's largest bank holding companies go live to discuss their earnings, and how their CRE lending is faring.
  • The mix of positive and not-so-positive barometers emphasizes how fragile and spotty market recovery is. The struggling economy and its inability to sustain the necessary job growth, along with tight capital for refis, continue to pressure commercial real estate owners.Phase I ESA activity is growing, but at a declining rate of growthSurveys conducted by EDR Insight as well as sources in the commercial real estate space released over the past several weeks, reflect similar fears and uncertainty to mid-2011. In this, there are both good and bad signs in the outlook for property assessments. Market uncertainty as well as a summer lull, made for a slow 3rd quarter for most EPFor much of this, you can blame Romney and Obama. It’s an election year and everything has slowed down. There’s money to invest but they won’t do it until after the electionSo things are not necessarily bad in the market, but they could be better
  • But first here’s how that 18% growth last quarter looks in a trend lineThe TX trend line very closely mirrors the US market. A very healthy 2012 through midyearStill a strong 3Q but not as strong as 2QIt fared better in the 3rd quarter than many other areas of the country
  • Chicago and Minneapolis are top performers for the Midwest in 2013, but many cities in this region will continue to face economic and real estate challenges. “
  • What CRE needs more than anything is jobs.Dallas is expected to have added over230,000 jobs since 2007. Of the marketsincluded in the survey, it ranks behindonly its Texas neighbor, Houston, as ajob provider. A lot of corporate headquarters. I found out from Bryan Flanagan that there’s no state income tax here so that’s pretty appealing.
  • New York, for its part, attracted $1.01 billion from overseas investors in the second quarter. Washington, Miami, Chicago and Dallas attracted more than $500 million apiece. investors from Asia and Europe are increasingly going after real estate in gateway" markets—major cities with thriving economies, along with airports and ports that are hubs for international travelers—by institutions, wealthy individuals and sovereign-wealth funds.
  • Texas has some pretty strong drivers for your services so you’re in a better place than many other areas of the countryBut the road’s been a choppy one. The market’s uncertain What does an uncertain market mean to your clients?They’re nervousProperty prices aren’t rising as much as they were in 06 so they’re nervousThings aren’t great in Europe so they’re nervousFuture government policies are uncertain so they’re nervousMaybe their presidential candidate didn’t win so they’re nervousNo one wants to be the first one back in the water so they’re nervousThat has very real implications on how lenders and investors view risk so I want to take a few minutes here to talk about thatHere’s my section on why it’s a great time to be in this industry
  • For now, at least, the mindset of investors seems to be one of caution It’s not the mindset of 2006 where price appreciation was guaranteed. Now they’ve got to model the downside, think worst-case scenario and that puts your services in a different context.This mindset is not necessarily unexpected -- or a bad thing. “I think there is still a very strong risk-management culture, risk-controlled approach that investors are taking,” says Patrick Halter, CEO of Principal Real Estate Investors in Des Moines, Iowa. “Investors are applying those lessons learned in the last cycle, and at this stage in the recovery, they are not making mistakes,” he says.
  • Although risk aversion can be a deterrent, there’s a bright side as well.Here are some of the most positive findings from our latest industry outreach. [last one] mention the OCC just came out w/ sternly worded warning to banks to not ignore risk as they struggle to increase profits. A WARNING that reg pressure is not easing anytime soon.
  • No one can avoid risk. Risk is on everyone’s radar screen!Here’s how that risk aversion is manifesting itself in the market based on our recent survey of EPs
  • Although risk aversion can be a deterrent, there’s a bright side as well.More clients want detailed assessment of potential risk and recommendations for mitigation of known conditions. Here are some of the most positive findings from our latest industry outreach. [last one] mention the OCC just came out w/ sternly worded warning to banks to not ignore risk as they struggle to increase profits. A WARNING that reg pressure is not easing anytime soon.
  • The impact of the downturn on risk management:Let me give you 1 good reason why it’s a good time to be in the business you’re in! Talk to lenders and here’s what you find out.One impact of the financial crisis is that the role of risk management in real estate deals has been shoved to center stage. The Risk Aversion Index reflects that environmental risk management has become very important given stresses in the real estate market and the potential likelihood that banks could become the unwilling owner of a commercial property. The Ernst & Young study reinforces this trend as well, and notes the long-term aspect of “making risk management everyone’s business.”  given banks reason to review their decisions. Maybe the policies you helped them develop withstood the testIt has brought increased regulator scrutiny to banks. It has brought more emphasis on compliance issues. Here are a few real world examplesTalk to lender DDD panel
  • I’ve covered market metrics and how the uncertain state of recovery impacts risk.Let’s talk about areas of growth, how that risk aversion is translating into work for youWhat’s driving Phase I market? The answer to this question is: a lotThe market is a mature one. There are so many different drivers for your servicesGrowth is happening but slowly…and it’s highly highly competitiveSo if you’re looking for what’s growing and where you should focus, consider some of the strongest prospects for your firm and work from there.What I’m going to do here is go through 5 areas that we’ve done recent research on and give you some things to think about in terms of biz dev in each.
  • Banks are starting to lend more. Other sources like credit unions, CMBS, life insur are getting more active and that generates opportunityThe liquidity squeeze is on so you have new players coming in to fill the gapLet’s talk about new originations for property dealsIn general, capital sources for commercial real estate investment are still in contraction mode. There are not a lot of properties to support new borrowing. SO there’s stiff competition among lenders for underwriting a small volume of viable low-risk loans. BUT this does not mean banks aren’t lending. A growing minority of large banks are starting to lend more. You know who you are! We’re starting to see more interest in borrowing from corporations that had been in lock-down mode. Both Fannie and Freddie are expecting very active years. Credit unions have been active but by far, the most growth has been with life insurance companies…So if you’re going after biz, focus on the lenders who are actively originating CRE loansThere are any of a # of lists you can getThis is MBA’s which shows THE biggest CRE lenders in the country right now
  • So if you’re going after biz, focus on the lenders who are actively originating CRE loansThere are any of a # of lists you can getThis is MBA’s which shows THE biggest CRE lenders in the country right now
  • We called it a tale of 2…because while the 7a program churns along, the 504 refi program expired last weekOn the 7a front, the good news is…
  • Excluding FY11’s record-high $18.3 billion, largely due to now-expired reductions in loan fees and higher guarantees, it would make FY13 the most robust year for 7(a) lending since FY10.
  • With lenders still working through the downturn in property values of recent years, the SBA guarantees under the 7(a) program present an attractive option, especially for smaller community banks that typically would not make such loans on their own without the SBA guarantee. In a time where competition for borrowed capital remains intense, 7(a) loans supply a much-needed source of small business real estate loans for restaurant owners, physicians and other business owners looking for commercial space in vacant strip malls and office buildings across the country. So if you’re supporting SBA lending, are you focused on the right banks? Here are the top 10 SBA lenders in the country but it’s very easy to find out who the most active lenders by region as well so you can make sure you’re going down the right path.
  • REITs are another very strong sector right now. Two factors bode well for opportunities in this client sector, particularly in major metro areas:REITs will dominate this year’s news on property acquisitions.This is a client sector that already recognizes the risk that environmental issues pose to property value and their own liability. his study just came out last week showing that REITs cited envlliabiity as the 7th highest risk they face. They’re particulary concerned about access to capital and refi needs. They don’t want anything that will make their loan to value ratio too high and SO are very worried about any envl condition that can impair the value of their asset. And this is a concern, not just of REITs but of any owners out there who will need to go to a bank to ask for refinancing for maturing loans. So seeing envl liability rank so high speaks to not just their fears about refi $$s but an awareness of what envl issues can do to property value.These factors are strong reasons why environmental professionals looking for new opportunities should pay attention to this important sector of the commercial real estate industry and identify key players to target in their area of operation
  • Research firm BDO USA just released its 2012 RiskFactor Report for REITs, based on a review of the risk factors cited in the most recent 10-K filings of the largely 100 publicly-traded REITs and a ranking by order of frequency cited Interestingly, environmental liability beat out other risks, Envl liability for REITs can lead to property devaluation, stigma, difficulty refinancing in a market when $$s are hard to come by Prices aren’t rising so they don’t want anything that will devalue their property.The concerns that surfaced in BDO’s study are not unlike the concerns that any clients who invest in real estate face today face: competition for prime real estate and concerns about any issues, including environmental conditions, that could adversely impact their holdings and impede their ability to refinance their maturing property loans. So, in REITs, environmental professionals have a win-win situation: (1) a target market for their services that will dominate this year’s news on property acquisitions, and (2) a sector that already recognizes the risk that environmental issues pose to property value and their own liability. REITs have also become more aggressive in selling properties, especially trophy properties in markets where values have appreciated, and then using proceeds to close property deals in other metros where they see stronger buying opportunities. These factors are strong reasons why environmental professionals looking for new opportunities should pay attention to this important sector of the commercial real estate industry and identify key players to target in their area of operation. These factors are strong reasons why environmental professionals looking for new opportunities should pay attention to this important sector of the commercial real estate industry and identify key players to target in their area of operation
  • Real estate investment trusts are not only the most active buyers of commercial properties this year, they also sit atop tens of billions of dollars earmarked for future property investment. That’s one area of opportunity…lending but be strategic about your targetsTwo, is REITSReal estate investment trusts are not only the most active buyers of commercial properties this year, they also sit atop tens of billions of dollars earmarked for future property investment.
  • “Retail, restaurants, and store chains have increased need for Phase I ESAs, by adding new locations or leasing empty spaces.” Some players that are cautiously expanding the fastest at a time when many other retailers are reducing their brick-and-mortar holdings. To find opportunities in this sector, you either want to align yourself w/ the investors targeting retail assets orLook to who’s expanding. Our latest Strategic Brief published fri contains a list of 50 retailers topping the list of most store openings this year.Those that are most active right now are drug stores, dollar stores, auto parts stores, select big boxAnd they’re being VERY risk averse in their site selection. #3 area of opportunity is retailRetail, restaurants, and store chains have increased need for Phase I ESAs, by adding new locations or leasing empty spaces.What does well in a downturn? Dollar stores! One just opened in EDR’s headquarters and one of our sales guy is worried about what it’ll do to his property valueDollar stores, pharmacies and auto parts stores all top the listTo find opportunities in this sector, you either want to align yourself w/ the investors targeting retail assets orLook to who’s expanding. Our latest Strategic Brief published fri contains a list of 50 retailers topping the list of most store openings this year. This is just an excerptThose that are most active right now are drug stores, dollar stores, auto parts stores, select big boxAnd they’re being VERY risk averse in their site selection. …
  • To be completed annuallyPart of the agency’s energy initiative
  • The market’s not bad but it could be better. The last key to navigating in an uncertain market is adopting winning strategies.One of the great things about working in such a large, fragmented industry such as the one we all work in, is that any one of the thousands of companies in it can grow and prosper.I’m convinced that today there are more opportunities than ever. And I’ve watched what firms have done in the downturn…which ones have done better than others and there are some definite trends in the things they’re doing, the culture they foster.They’re not better at predicting the market, they’re better at preparing for it.The market’s not great. I’m not going to lie to you. You can’t control it. But you can control your reaction to it. The market is different and it’s still changing so companies need to decide what they’ll do differently to achieve their goals 
  • YOU GET OUT THEREWhether it’s at conferences or social media, the top performers are doing everything they can to get out there in front of clients.Winning firms are hosting events in their local area, taking clients out to check in, Attending local lender conferencesmaking sure they have a strong web presence, That clients are finding their contentthey’re present at events…even speaking at them.They can name the last CRE conference you went to.
  • You’re only as good as your technical knowledge and standards driving your services are always changing. Staying on top of ASTM changes, HUD, Fannie/Freddie, SBA, new technologiesAND! you’re telling clients about itTraining, attending ASTM mtgs, being an active voice, a resourceThat’s a winning firm
  • You heard from me before that risk mgt is front and center. Clients are asking more questions about environmental risk and how to risk away RECsWinning firms are focused on connecting the dotsThey’re not delivering a report so they’re client can check the box. They’re putting things in context.More people are looking at reports so they’re making sure others not familiar with the property can understand the logicYou do this type of thing, you build trust, become a trusted advisor and the best part is that price then becomes less of an issue.“Help me manage expectations. I don’t want any surprises in the 11th hour about some environmental risk that’s going to hold up the loan.”“Connect the dots for me. Lay it all out on a platter and include conclusions that are clearly presented and logically substantiated.” “Give me detailed reports so that those who are not familiar with the property (e.g., underwriter, loan officer) can understand the logic behind the findings. One said beautifully, “Communication on key information is the money!”
  • Education is a key strategy of winning firmsIn anticipation of increases in lending or refis/foreclosures, some banks and investors replaced environmental staff that were laid off during the downturn.In some cases, this now means that the indiv’srequesting EDD are new to the business. So there’s a learning curve and an education that needs to happen.I’ve been hearing from many EPs whose firms are using the downturn to provide education to clients.It’s a great way to gain clients’ trust, “dev lasting relationships”, become more of a trusted advisor to them.From piece on content marketing:I'm bullish on content for EDD companies. In an industry plagued with client skepticism and reputation problems, a sound approach to content can help create authenticity and authority. It's a grueling path that, when taken, can lead to client trust, social sharing, and business.The obvious opportunity is uber local content and EDD101. Lenders want to be educated. They might know the value of EDD if they’ve been around awhile but they need to be reminded. How many of you have young children? They need constant reminders. I have 5 year old and he knows he’s supposed to brush his teeth…OFTEN…but if I’m not telling him every morning to do it, it’s not going to happen! For your clients, you have an opportunity to share your unique expertise and remind them why EDD is important.
  • New 1527 standardUpdating old Phase IsVapor intrusion a risk factor clients are paying more attn to in reviewing Ph I rptrecommendations’sAny update to SBA SOPI understand HUD changes are comingAll of these…or an interesting project…can be effective ways of staying in front of your clients On lending front, banks and Community banks, in particular, ask a lot fo questions about the value of EDD and ex’s of what can go wrong. It’s a great thing to focus on in building up trust, standing out from the crowd in a competitive marketLet me give you an example: A bank in Illinois foreclosed on a residential property adjacent to a former dry cleaner site. The bank had failed to perform a proper environmental site assessment (ESA) and therefore missed that the adjacent site was known to be a part of Illinois’ Voluntary Site Remediation Program. Post-foreclosure testing revealed that the plume of tetrachlorothylene (also known as perchloroethylene, or “perc”) and other contaminants from the dry cleaner’s 35 years of operations had migrated onto the property now owned by the bank. (Perc is known to be a potent carcinogen.) After much litigation, the dry cleaner was recently held responsible under CERCLA and RCRA for past response costs and for the declaratory judgment claim regarding future response costs, but it remains to be seen whether the decision will be upheld, and, if so, whether the bank will be able to collect. 
  • Repeat, pause, point FIRSTYour clients feel you understand their challenges, you have their best interest at heart, they feel special/unique, engagedYou provide a better level of service, tailored reports, 24-7 access
  • Compete in markets that aren’t saturatedYou have staff who are actively tasked with looking for new markets that are emerging. Compete in markets that aren’t saturatedHow aggressivley are you getting lists? Of firms buying? Raising $? Forming new funds? Top lenders in your area? Top buyers? Top buyers of loan portfolios?You’re harping that one key differentiator that separates you from the rest.You’re not sitting there aggressively waiting for the phone to ring.Staff is identifying new business opportunities. What’s the next big thing? The market’s changing but not so quickly that you can’t keep up. The future’s uncertain and you can’t control thatBut you can control these. You can master theseMaster a few of these, you’ll be better, you’ll see business improve. Master all five, and you’ll see it take off
  • Let me close w/ a look to where the market’s headed
  • Q4 has startedout strong and financing conditions have improvedMany don’t want to go too far out until we know what happens after the elections, fiscal cliff. We don't want to go too far out when there's too many variables. because you've got the near-term election uncertainty, you've got the fiscal cliff uncertainty, you've got the European recession, you've got the economy, and all those are not going to be solved imminently, but they are going to solved eventually. For the near term, the market will continue to “muddle through” its slow recovery. There’s a sense right now that the market has, in effect, hit the ‘pause’ button, partly due to the summer months but also do to scaled-back economic projections and fears that the situation in Europe could turn very ugly. CRE is stabilizing and that’s good news. It seems to be painting a slightly better picture. We’re in the midst of recovery, but a very gradual recovery. There are still good projects out there for those looking for financing. The costs just need to be justified and a lot of questions need to be answered…for as long as that Risk Aversion Index remains elevated, and for as long as we’re dealing with as much market uncertainty as we are. You all play an important role in helping investors and lenders and other stakeholders MODEL THE DOWNSIDE OF DEALS.
  • Market is recovering. CRE is stabilizing and that’s good news. It seems to be painting a slightly better picture. We’re in the midst of recovery, but a very gradual recovery. It took years to get into this mess and it’s taking years to get out. It means a lot of properties are changing hands. Dallas is a great place to be for growth opportunities! Risk management is front and center…and likely to stay there. Leverage it! You bring unique expertise to bear on helping your clients MODEL THE DOWNSIDE. You have an important role to playTrack the strongest areas of opportunity. New buyers, new sources of debt are coming into play. 4. Be strategic and grow! There is opportunity if you play it smart! new market participants. It is precisely in these conditions that experience, research, and local knowledge can identify opportunities to achieve growth
  • Market is recovering. CRE is stabilizing and that’s good news. It seems to be painting a slightly better picture. We’re in the midst of recovery, but a very gradual recovery. It took years to get into this mess and it’s taking years to get out. It means a lot of properties are changing hands. Dallas is a great place to be for growth opportunities! Risk management is front and center…and likely to stay there. Leverage it! You bring unique expertise to bear on helping your clients MODEL THE DOWNSIDE. You have an important role to playTrack the strongest areas of opportunity. New buyers, new sources of debt are coming into play. 4. Be strategic and grow! There is opportunity if you play it smart! new market participants. It is precisely in these conditions that experience, research, and local knowledge can identify opportunities to achieve growth
  • So that’s how things look from where I’m sitting…and that gives you a sense of the type of research we’re doing.We Everything we publish is readily available here.And my contact info is there if you ever have any questions about the market or areas of opportunityWith that, we have a few minutes for questions…Here during the break and after, so feel free to approach me or email me anytime.
  • Transcript

    • 1. EDR Insight Market Update:Navigating In An Uncertain MarketPresented by:Ashley Gowen, Research Analyst Minneapolis, MN November 8, 2012 © 2012 Environmental Data Resources, Inc.
    • 2. 4 Keys to Navigating an Uncertain Market
    • 3. 1. MARKET METRICS
    • 4. Commercial Real Estate Due LendingDiligence
    • 5. Bumpy Road for Commercial Real Estate• Transactions in 3Q12: • Up slightly from 3Q11 • Well above „09• In recent quarters, rate of growth has declined.
    • 6. 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 • More options to buy at cheaper prices • Distressed asset deals bring contamination into play • Failed properties & projects returning to market
    • 7. The Pulse of Lending on Properties• Fewer troubled assets on their books compared to last year• The number of “problem banks” is falling (732)• 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. • Refis and loan sales are strong drivers for EDD
    • 8. Disparity in Lending • By bank size: • 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 • Still not a great deal of interest—or capital—yet available • in secondary and tertiary metros • for average-quality 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. Up 43% above market’s 2012 YTD:Oct. 2009 low point 8% above 2011 YTD
    • 11. Regional Phase I ESA Activity: 3Q on 3Q -3% 7% 8% 9% 3% 7% 2% 6%
    • 12. Midwest Region: Q on Q Growth (3Q) 19% 4% 5% -9% 4% 21% -11% 12% 14% 2% 29% 0%
    • 13. Minnesota: Quarterly Phase I ESA Growth
    • 14. Metro Watch: Q on Q Growth (3Q12) • Minneapolis • Ranked 18th out of Top 50 U.S. Metros • PwC Emerging Trends 2013 • Chicago and Minneapolis are top performers for the Midwest in 2013 • Provides well-educated and skilled labor in research and high technology • Unemployment rate will be nearly 3 percentage points lower than the U.S. rate next year • “Market to Watch” for Investment and Development: 23rd
    • 15. Reasons to Love Minneapolis… Page 15
    • 16. Reasons to Love Minneapolis… Page 16
    • 17. 2. ATTITUDES TOWARD PROPERTY 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 vice president of Colliers International
    • 19. 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.
    • 20. 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.” Source: EDR Insight‟s Quarterly Survey of EPs
    • 21. 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
    • 22. Risk Management is Now “Everyone’sBusiness” • “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.”
    • 23. 3. AREAS OF OPPORTUNITY
    • 24. 1. Who’s Lending on Properties? 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 Watch out for shifts towards other lending sources…
    • 25. Focus On Who’s Lending: Top Originators
    • 26. 2. SBA Lending• 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 Page 26
    • 27. FY13 could be the most robust year for 7(a) lendingsince FY10, excluding FY11
    • 28. Strongest SBA Lenders in the U.S.:Are you supporting SBA lending?If so, these top 10 lenders should point you down the right path! Page 28
    • 29. 3. REITs: A Win-Win 1. REITs will dominate this year‟s news on property acquisitions. “REITs are aiming to capitalize on low interest rates and acquire assets in prime real estate locations.” 2. This is a client sector that already recognizes the risk that environmental issues pose to property value and their own liability, the 7th highest risk factor they face.
    • 30. REITs Are Raising Capital:Notable Private Funding Raisings in 1H2012Firm Name Capital RaisedBlackstone $6.6 billionUBS $1.8 billionCarlyle Group $1.4 billionRockpoint Group $1.3 billionGEM Capital $1.3 billionMcMorgan & Co. $977 million
    • 31. 4. Retail• U.S. retailer store- opening plans hit a four-year high in July• 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
    • 32. 5. Benchmarking Requirements• NYC‟s 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.• Creates opportunities for environmental consultants in contributing data and information to this and similar reporting in growing number of metros.
    • 33. Implications for the Market:• “The New York LL84 benchmarking law is part of a nationwide trend that weve seen for disclosure of energy use in buildings. The implication will be that energy efficient buildings will continue to become more valuable in the real estate market than their energy glutton counterparts." Nate Gillette, Vice President and Director of Energy Finance Analytics• “NYC is just the beginning. Other cities and states have similar benchmarking regulations. Clearly, building energy performance assessment due diligence is finding its way into the commercial real estate transaction as one more factor to evaluate.“ Brian Burstiner, Sustainable Real Estate Solutions, Inc.
    • 34. What Investors Pay Attention To:Green buildings:• Are easier to fill, especially with young, urban residents who want that “lifestyle”• Hold their value• Are easier to sell when the time comes• Are CHEAPER to operate"Green building is not a curiosity anymore -- its a hugemarket," said Aditya Ranade, a senior analyst with LuxResearch in Boston. "The green building sector will be a $280billion global industry by the end of the decade.”
    • 35. 6. Foreign Investors and EB-5 Program• Old program gaining new interest as avenue to stimulate capital investment by foreign investors.• Minneapolis 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.
    • 36. 4. ADOPT WINNING STRATEGIES
    • 37. 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.
    • 38. 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.
    • 39. 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.
    • 40. 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.
    • 41. 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
    • 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. 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.
    • 44. Parting Thoughts
    • 45. 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.
    • 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. Page 47
    • 47. 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 48

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