EDR Insight Update: Navigating in an Uncertain Market - Boston

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EDR Insight Update: Navigating in an Uncertain Market - Boston

  1. 1. EDR Insight Market Update:Navigating In An Uncertain MarketPresented by:Dianne P. Crocker, Principal Analyst For presentation at: Boston Due Diligence at Dawn workshop February 2013
  2. 2. 4 Keys to Navigating an Uncertain Market
  3. 3. 1. MARKET METRICS
  4. 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. 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. 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. 7. Capital Remains Concentrated inLargest Metros
  8. 8. Reason #2 to Love Boston…6th most activemarket forproperty deals inthe U.S.
  9. 9. Top 10 Markets for 2013 Investment
  10. 10. Top 10 Buyers in Boston1. Colony2. Invesco3. The Davis Companies4. Farley White Investors5. Synergy Investments6. Cole Real Estate Investments7. JP Morgan8. DivcoWest9. Clarion10. Albany Road Partners
  11. 11. LENDING: Positive Signs“By almost every observable metric, theAmerican banking system will enter 2013 withits strongest balance sheet position sincebefore the financial crisis.”
  12. 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. 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. 14. 2012 volume: 16% above 2011Now 50% abovemarket’s Oct. 2009low point
  15. 15. New England Phase I ESA Growth
  16. 16. MA Quarterly Phase I ESA Activity 4Q12: +10% over 3Q12 +26% over 4Q11
  17. 17. 2. ATTITUDES TOWARD RISK
  18. 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. 19. 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.”
  20. 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. 21. 3. AREAS OF OPPORTUNITY
  22. 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. 23. Focus On Who’s Lending:Top Originators
  24. 24. Watch for shifts toward other lendingsources: 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. 25. Focus On What Lenders Value Most
  26. 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. 27. Strongest SBA Lenders in the U.S.:
  28. 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. 29. REITs (cont’d) • Among REITs‟ top concerns are risks related to factors that could devalue their properties, including environmental liability.
  30. 30. Retailer Category Planned Openings through 2015Dollar General Dollar 1,300Family Dollar Dollar 1,000Dollar Tree Dollar 600CVS Drug 600Walgreens Drug 400Advance Auto Parts Auto 320AutoZone Auto 125
  31. 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. 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. 33. 4. ADOPT WINNING STRATEGIES
  34. 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. 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. 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. 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. 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. 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 taskforce or the Somewhat,pending changes Not at 25%and would greatly all, 63%appreciate anyinformation.” ~community lender
  40. 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. 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. 42. 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%
  43. 43. Forecast for Risk Management1. Continued focus on modeling the downside2. More emphasis on technology, streamlining3. Repurposing the oversupply of obsolescent properties4. More deferred maintenance issues arising on refis or neglected properties5. Property Condition Assessments growing in importance
  44. 44. 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.
  45. 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. Be strategic and grow!
  46. 46. Dianne P. CrockerPrincipal Analyst, EDR InsightResearch and Analytics:www.edrnet.com/EDRInsightTwitter:@dpcrockerEmail:dcrocker@edrnet.com

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