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Strategic Plays for the 2nd Half of Market Recovery: Chicago

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Presented by Dianne P. Crocker …

Presented by Dianne P. Crocker
Chicago DDD, November 6, 2013

In the grand scheme of market recovery, we now stand at the start of the second act. The past five years were all about survival. 2013 was the true start of market rehabilitation. And now as we prepare for 2014, optimism has finally taken root. Business confidence, profitability and investors’ forecasts are more positive than they have been in recent years. Despite the uncertain economic outlook, the prospects for property assessment firms are more encouraging than at any time since 2008. 2014 will be a year of refocusing and repositioning in a still-challenging market. Get the latest take on the market’s new normal:

-Pricing and turnaround time benchmarks
-The new clients, new lenders, new drivers
-Trends reshaping the market
-A look at what to expect in 2014

Published in: Business, Economy & Finance

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  • 1. Strategic Plays for the 2nd Half of Market Recovery Presented by: Dianne P. Crocker, Principal Analyst For presentation at: Chicago Due Diligence at Dawn workshop November 2013
  • 2. Market in Transition 2008 2009 2010 2011 2012 2013 2014 Survival Mode True start of market rehabilitation Year of refocusing and repositioning
  • 3. © 2013
  • 4. View of Market: 50,000 Feet CRE Lending -SBA Lending +14% +13% Property transactions: -Large +27% -Small (<$5M) +18% -Portfolios +20% CMBS Issuance +46% • All debt spigots are open. • Growing investor confidence. • More diversity in lenders, investors. • Activity across broader spectrum of properties. • Improving property fundamentals.
  • 5. Large Commercial Real Estate Deals Up • 4Q12: the most active quarter since 4Q07 • By 3Q13, deal flow up 27% in 3Q YTD • Poised for healthy finish to the year
  • 6. Small Cap Transactions • The velocity of small-cap sales is more than keeping pace with the larger CRE investment market. • Up 17% YTD this year • Transactions continue to grow at a faster clip in bigger cities than smaller ones.
  • 7. Property Types in Favor • • • • Multifamily is still the “belle of the ball” (up 31% Y-on-Y) Retail: sales of strip centers are up 30% Office/industrial getting more interest Warehouse activity, especially in port cities
  • 8. Good News on the CMBS Front • • 2012: Post-recession high of $48B 2013: • Already surpassed year-end 2012 issuance • 46% growth forecast for 2013
  • 9. Banks’ Sell-off of Nonperforming Assets
  • 10. Commercial Property Lending Volume • Lenders have returned to originating commercial real estate loans as values and credit quality improve and demand increases • Commercial and multifamily real estate borrowing and lending continued at a moderate clip in the third quarter. • Origination volumes: • 29% higher than in Q3 2012 • Flat compared to 2Q13 • Up 14% year to date Source: MBA’s Quarterly Index of Commercial/Multifamily Mortgage
  • 11. LENDING: A Positive Take “More banks were lending on incomeproducing commercial real estate properties in more places in the 3rd quarter. The number of lenders who plan to increase property loans in next 12 months far outnumber those who plan to lower them.” ~ Sam Chandan, president and chief economist at Chandan Economics
  • 12. Bottom Line on Lending • The comeback of commercial real estate lending is gaining momentum, especially credits backed by apartments and leased properties. • CRE lending was a scourge for scores of community banks during the financial crisis, but more banks are warming up to it in their quest for higher returns. • However, CRE lending volumes remain well below the highs of six years ago.
  • 13. SBA Lending: A Bright Spot • Supported more than $29B in loans in FY13—its third-highest year ever. • More than 54,000 loans backed through its 7(a) and 504 programs • The number of 7(a) loan increased to 46,399 in 2013, 4.6% over the number of loans in FY 2012. • The 504 loans produced more than 7,700 loans in FY 2013, a slight decrease from FY 2012. • 7(a) lending is picking up steam after being halted by the government shutdown.
  • 14. M&A Gaining Momentum • Slow 2012 turned corner • Uncertainty giving way to confidence • Firms turn to M&A for growth on their own • 2nd half of 2013 expected to be active
  • 15. Spotlight on: CHICAGO © 2013
  • 16. Spotlight: Chicago • • • • Faster recovery than most metro One of the “sexy six” metros 3Q13 property sales volume rose 11% year-on-year. Chicago ranked as the fifth-strongest office market in terms of demand • Developers: • Starting to dust off plans which were created before 2008 • Looking toward underutilized properties as potential opportunities for redevelopment into apartment uses...
  • 17. Chicago: Hot Spot for Construction Loans • Financial institutions are treading back into the waters of lending on construction and development projects in metros like Miami, San Francisco, Chicago and Manhattan.
  • 18. Chicago • 5th most active market for property deals in 2013 • Behind NY, LA San Fran and DC
  • 19. APPROACHES TO ENVIRONMENTAL RISK MANAGEMENT © 2013
  • 20. Banks and Risk Management • 94% of institution’s boards now devote more time to risk management oversight than five years ago • 80% percent of chief risk officers report directly to either the board or the CEO Source: Deloitte lender study
  • 21. Attitudes Toward Environmental Risk • “I know the banks’ Environmental Risk Reviewers would like to tighten the standards on a more consistent basis, but they get a lot of pressure from the loan officers to make the deals happen.” • “I believe that clients are more aware of the potential environmental risks involved with real estate and are requiring more in-depth research and diligence before purchasing property.” • “Our projects are much more likely to go to a Phase II investigation than in past years.” • Loan closings are being delayed for environmental issues-simply because financial institutions are no longer willing to take on risk as they once were.”
  • 22. Benchmarks in Environmental Due Diligence 4Q11 4Q12 1Q13 2Q13 17% 11% 7% 5% Liquidating CRE loans (% of respondents) 51% 38% 42% 36% Selling REO (% of respondents) 77% 69% 65% 63% Phase Is proceeding to Phase IIs 6% 10% 17% 16% % of EDD for foreclosures
  • 23. Phase I ESA Market Stats
  • 24. ILLINOIS Phase I ESA Trend • Very strong 2Q • Slight 3Q decline but up 15% over 1Q
  • 25. IL Metro Performance
  • 26. Intense Pressure
  • 27. Intense Pressure
  • 28. Phase I ESA Pricing and Turnaround Time • Intense pressure on price and turnaround time continues. • Latest results show that $1,800 - $2,400 is a typical basic Phase I ESA pricing range • Higher prices on the East and West coasts. • Average turnaround: • 2-3 weeks • As short as 8-10 days on portfolio projects. • Speed has become a differentiator…
  • 29. Turnaround Time and Phase I Pricing • “Due to demands for fast turnaround and specialized service, we have felt justified in charging more for our services. Even with increased rates, we are still being awarded the work. Might raise our prices a bit more next quarter.” • “Based on large volume of work coming in the door and the demand for quick turnaround times, we have increased our prices and are choosing the clients we want to work with.”
  • 30. “It’s a dog eat dog world. I say we just wait it out.”
  • 31. 2014 Strategic Playbook © 2013
  • 32. Strategic Plays for 2014 1. 2. 3. 4. Pay attention to the drivers Target the strongest opportunities Leverage technology Seize every opportunity to stand out © 2013
  • 33. STRATEGY: Target Drivers of Phase I ESA Growth: • • • • • • • Developers Equity REITs Foreign investors Institutional capital and equity funds Financial institutions, insurance, credit unions M&A Retail/big box
  • 34. Recent Trend: • The universe of buyers is growing rapidly • The number of active buyers over the past twelve months grew by 3,300 participants with the private sector seeing the greatest growth. • A number of new investors from Asia and Europe are also growing in influence. = new opportunities for expanding client base
  • 35. 10 Most Active Buyers
  • 36. Most Active Sellers of CRE
  • 37. Top 10 Developers
  • 38. Top SBA Lenders • Wells Fargo • • • • 1st for 5th consecutive year ($ volume) 2nd largest in 7(a) loan units (3,481 loans in FY13) Approved 18% more 7(a) loans over prior year 504 loan dollars up by 38 percent in 2013 • Chase • 1st for 4th consecutive year (# of loans) • Approved 4,104 7(a) loans in FY13 • At state level: top in Arizona, Illinois, Louisiana, New Jersey and New York. • Huntington, TD, US Bank
  • 39. Which Lenders Are Growing Originations? • “We've recently seen lenders aggressively come back to this business who retreated during the crisis," said Philip B. Flynn, CEO of Associated Banc-Corp. • SunTrust Banks: • “We’ve put our distress problems behind us and are back to focus on growth." • Growing its retail, office, multifamily and industrial CRE relationships. • Also building out its REIT business • GE Capital Real Estate is increasing lending by 40% this year
  • 40. Regional Banks 3Q13 Loan Growth • PNC Financial Services Group (PNC), U.S. Bancorp (USB) and KeyCorp (KEY) all reported loan growth of at least 5% in the third quarter • Loan growth for the regional banks is outpacing the growth of the industry overall
  • 41. STRATEGY: Leverage Technology • Efficiency is KEY to data management • Need for constant communication • Better collaboration • Reduced cost/time • More engagement with clients
  • 42. One EP’s Take on Technology How has technology changed the way that you conduct Phase I environmental site assessments? “Now I can go on a site visit, take photos on my smartphone or tablet, record my notes in real time, go to a coffee shop, upload everything to my computer and write my report. I can do all of this in between site visits, especially if I’m on the road or out of town. I used to carry around too much clutter to a site visit. Each time I performed a new function, I would have to put down one object to use another, distracting me from my greater purpose. Going into the field with just a smartphone or tablet is one of the most enlightening experiences for me.” Duncan Anderson, Odic
  • 43. Most Used Apps by EPs
  • 44. CRE and Tech Intersect • NYC technology conference: “More data. More transparency. If we can all get data into people’s hands faster, it’s a win-win for everyone. And these apps need to be rapidly deployed. They can’t take users even one second longer to use.” • Xceligent has a mobile app, eXplore™ iPad App, that gives commercial real estate professionals real-time access to over 50 fields of data by using a set radius or by drawing a polygon around a customized search area.
  • 45. STRATEGY: Seize Opportunities to Educate • “I'm bullish on content for environmental due diligence 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.” ~Debra Andrews, Founder and CEO of Marketri
  • 46. Out in Front on Education Related to ASTM E 1527-13:
  • 47. Terracon
  • 48. EMG
  • 49. Impact of a New ASTM Standard • Refocuses attention on education and awareness • Some new requirements to consider • Valuable reminders on certain areas of EDD (e.g., user responsibilities) that risk managers may not have given much thought to in the past eight years Page 55
  • 50. Other Opportunities to Educate • • • • • Vapor intrusion awareness New SBA SOP 50 10 5(f) as of Jan. 1st OCC Guidance, August 2013 Real-world examples/reminders of why environmental due diligence is critical
  • 51. Playbook Strategy Summary • • • • Watch the market barometers Be strategic in your business targets Leverage technology Get your name out there as a technical expert
  • 52. Dianne P. Crocker Principal Analyst, EDR Insight Research and Analytics: www.edrnet.com/EDRInsight Twitter: @dpcrocker Email: dcrocker@edrnet.com