Annual Market Opportunity and CRE Trends Track
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Presentation by Dianne P. Crocker at the 2013 Client Summit
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Annual Market Opportunity and CRE Trends Track
- 1. STATE OF THE MARKET May 2013 Dianne Crocker, EDR Insight Tom Fink, Trepp
- 3. State of the Market “Baby stepping recovery. Intense pressure. Morphing. Agile and alert will thrive.”
- 4. State of the Market “Baby stepping recovery. Intense Pressure. Morphing. Agile and alert will thrive.”
- 5. View of Market: 50,000 Feet CRE Lending +24% -SBA Lending +13% Property transactions: -Large +28% -Small (<$5M) +18% -Portfolios +20% CMBS Issuance +48% • All debt spigots are open. • Growing investor confidence. • Invigorated dispositions by banks. • Improving property fundamentals. • Low interest rates. • Apartment still shining brightly. • Office/industrial also finding favorable conditions.
- 6. EDR ScoreKeeper Model: U.S. Phase I ESA Volume (trailing 12-month totals through Apr 2013) Phase I ESA Volume (Jan. ‘09-Present)
- 7. State of the Market “Baby stepping recovery. Intense pressure. Morphing. Agile and alert will thrive.”
- 10. Pricing Pressure for Phase I ESAs
- 11. Pricing Pressure for Phase I ESAs
- 12. Time Pressure for Phase I ESAs • 1 in 5 lenders agree: – Speed is more important than price in selecting EPs. • Time pressures on portfolios are compressed • Opportunity for differentiation – 42% of lenders say their EPs charge a premium if a faster TAT is required
- 13. “It’s a dog eat dog world. I say we just wait it out.”
- 14. State of the Market “Baby stepping recovery. Intense pressure. Morphing. Agile and alert will thrive.”
- 15. Pressure from regulators Internal education Pressure to stay competitive Pressure to cut costs Doing more with smaller staff Greater need for data management Lenders’ Risk Management Challenges
- 16. Benchmarks in Environmental Due Diligence 4Q11 1Q12 4Q12 1Q13 % of EDD for foreclosures 17% 13% 11% 7% Liquidating CRE loans (% of respondents) 51% 47% 38% 42% Selling REO (% of respondents) 77% 76% 69% 65% Phase Is proceeding to Phase IIs 6% 12% 10% 17%
- 17. Shifting Drivers for Property Assessments • Developers • Refi portfolios • Institutional investors • Energy assets changing hands (very risk averse) • Telecomm • Select expansion by retailers • Engineering/industrial work • SBA lending…
- 18. SBA Loan Funding Levels FY13 to Date • 25,000 SBA- funded loans this FY to date • Moderate increase over FY 12
- 19. Shifting Drivers for Property Assessments • Pension funds • Home builders • International investors • M&A work gaining traction… • Regional/community banks selling off loan portfolios…
- 20. 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
- 21. …Banks Unloading Problem Assets • Smaller banks are finally willing to aggressively unload problematic assets. • Strong driver for portfolio projects bulk sales on nonperforming loans • 1st two months of 2013, sales of nearly $2 billion were announced • 20%-40% jump in overall sales expected for the year
- 22. State of the Market “Baby stepping recovery. Morphing. Intense pressure. Agile and alert will thrive.”
- 23. Top 10 Markets for 2013 Investment Fastest- growing Phase I metros in 2012
- 24. • Efficiency is KEY to data management • Need for constant communication • Better collaboration • Reduced cost/time • More engagement with clients Technology
- 25. • Critical to have qualified staff on board • Retention: protect your staff • Recruiting: attract top talent • “As you know, I work only with Environmental and Engineering firms. Within the past 6 months alone, my firm as received over 40 new search assignments, and just under a quarter of them were totally unsolicited from companies that we had never worked with before, and were totally separate from our regular long term clients. ” ~Sean Rigsby, recruiter for top EP firms Talent War
Editor's Notes
- Let’s start here. The market is baby stepping. It’s a term I can relate to as can any of you who are raising young kids. They start to realize they can stand if they hold on, they let go, they put a foot in front of the other, they let go, they fall. Fun funFUN to watch it happen w/ your own kids. Not so fun to watch the market stumble, though.It’s been doing that for several years. A strong quarter a weak one. Fears that sent everyone to the sidelines then a gradual return. An election that gave an already nervous market an excuse to take a breather. Then back on trackAfter a few years of stumbling, the market today appears to be on more stable footing…
- Here’s the view right now from 50,000 feet. READ STATS. I don’t have to tell anyone here it’s been a slow unpredictable erratic recovery so far. It’s been a loong time since the numbers looked this good across the board. For the first time in years, all of the debt spigots are open. It's not a rush of capital, but definitely a big change from a couple of years ago. There’s also more diversity in terms of who’s lending but I’ll let Tom cover the money trail and who’s capitalizing deals.There’s growing investor confidence, property pricing is improving.This has invigorated dispositions by banks.Most of the work you’re doing is still on multifamily the favored asset class but office/industrial are getting more interest tooSo in general, the barometers are collectively looking pretty favorable, but a guy in retail I know in retail in San Diego said “it’s enough to start feeling optimistic but not sustainable enough that developers are lighting cigars with $100 bills.”
- In recent months, activity’s been up year on year on the 15-20% range. The other change is that you can see that from the market’s down point the rate of growth is changingRight after summit last year, The midyear slump during baseball season in transaction activity was erased during a fourth quarter deal frenzy You all feel it. You have a hot month, a cool one. You get nervous, call me to find out what’s going on. You get busy again, relax, think about hiring
- In the midst of a stumbling recovery, there is intense pressure in the market today…
- The expectations just keep going up.
- Part of this is the sign of a mature market. Part—a big part—is the competitive pressures that clients are underway to make $$ in a tough market, keep costs down, improve efficiency.That’s the world we live in. Things are moving quickly. Clients want more, and to meet their needs, we have to continuously raise the bar.
- Pricing pressure is clearly the biggest pain point in the industry right now.It’s the metric I’m asked the most about and I can see by the reactions that EPs are sorry they asked. $1800 - $2500 is a typical base pricing range, with higher prices on the East and West coastsThink these are too high? Remember they include Phase I pricing over all clients types and a sample size of about 300 EPs
- Hop over the fence and ask lenders what they pay for a Ph I and it’s a slightly different and lower picture. There’s about a $500 differential between the two.It’s intense, no doubt about itIt’s come up in every conservation I’ve had here, in so many of the emails I got back from you on the pre-summit exercise. One said he had a client quibbling over $50 on a $3.5million property deal. Makes no sense. But it’s today’s reality.
- Layer on top of the pricing pressure…the need for speed.1 in 5 lenders say speed is even MORE important than price in picking a consultant.Avg TAT for Ph Is is 2-3 weeks. On portfolios it can be as short as 8-10 daysThis is an example of the constant pressure we’re under in an ultra competitive market: …….”I know it is Thursday late evening, but we need your ESA and PCA Teams on site on Tuesday. However, I won’t know until Monday if it is definite. And by the way, do what you can to keep the fee down.” But this time pressure also gives firms an opportunity to differentiate, to be rewarded for efficiency with the abiliity to charge a premium for services.
- This just seemed like an appropriate time for some comic relief.
- It’s morphing. What do I mean by that? The needs of those who rely on all types of property assessment services…not just Phase Isis changing. And those who serve the market for property assessment services are being pressured to change too.
- One critical area of MORPHING or change has to do with the way that lender challenges are changing. That challenges the EPs who serve them to change too. Competition for loans is heating up. #1 is balancing risk mgt with pressure to stay competitive. They don’t want to be the only bank in town requiring a Ph I…or even a Phase II2nd is meeting fast TAT internally. Don’t want to hold up the loan process. They need to do thorough investigations, but efficiency is key. Lenders are very competitive with one another, so they don’t have the luxury of higher due diligence fees or longer due diligence periods.”3rd is that even at the largest institutions in the country, staffing cuts in risk management divisions mean doing more with less—and a greater reliance on outside environmental professionals to meet due diligence needs as commercial real estate lending begins to ramp up. They’re not building up staff yet but the volume of work is increasing. Regulatory pressures loom large.Compliance is a huge issueEducating internally on the value of envlrisk management is huge and lenders look to Eps for that. On “VI many are waiting to see what their Eps tell them to do.6th is pressure to cut costs which is key today. Small community banks are under a lot of pressure from investors to cut costs. Not that different at larger banks, As one lender from one of the largest institutions in the country told our DDD audience “If I can get our risk mgt done faster and cheaper, I’m going to look like a hero to my higher ups.”You heard about many of these challenges from Andy and AnneMarie yesterday the pressure that lenders are under. Be buttoned up about your risk management. Lenders are whittling down their lists of approved vendors. Greater need for data management: Certainly a lot of portfolio lenders are now documenting their deals in a manner that would allow them to securitize them in the future, to give them that optionality. Before it used to be kind of “documentation-light” that really didn’t have a home in the securitized marketplace. Now the standard of doc is should an institution decide to unencumber some of their balance sheet, create additional capacity on their bal sheet they could easily take a grouping of loans and bring them to mkt in the standardized format”So although the market’s improving, the challenges are significant: stay competitive, meet aggressive lending goals, do more with less staff And the EPs who are in tune w/ these needs and can help them meet them will be the ones with the greatest opportunity.
- Also on the topic of MORPHING, this is a summary of how some key metrics we track with our quarterly surveys of risk managers at financial institutions are changing.First is one foreclosures. The question asked for the %age of due diligence that is for foreclosures vs new orig’s or refis. That percentage for foreclosure-related due diligence has fallen about 10 percentage points in a year and a half. I should note that the range is wide…from no foreclosure work to as high as 60% of all due diligence so it is still a big part of operations at some banks but definitely down where the market was at this time last year. On the topic of liquidating loans, falling slightly but still high (and I’ll talk about that a bit more later)Selling REO a less pronounced decline from 77% to 65% (there is still a lot of asset unraveling happening, esp at the smaller scale of the banking sector so those opps will be aorund for awhile)Lastly the average percentage of Phase I ESAs going to Phase Iis is up—reflective of the risk-averse mindset. In late ’11, 6%of Phase Is were going to Phase Iis. Now it’s almost tripled to 17%.The drivers for property assessment services are shifting!...from foreclosures to originations/refis
- Let’s talk about changes in drivers for property assessments and how those are morphing.DEVELOPERS -- Builders need inventory, they want to move before construction costs go up any more. So they’re more active and what a NICE SIGN THAT IS! There are a lot of troubled suburban strip centers and offices everywhere. There has been a sea change in demand as those with $$ are finally ready to move and properties are coming up for sale.There are problems arising with these properties that haven’t been well maintained in the downturn and the structural or maintenance issues that that brings to bear on property value.You’ll hear later this AM about the growing role for PCAs in assessing buildings that suffer from neglect, a lack of investment for assessing property values in cases where there may not be much in the way of comparablesAlso hearing a lot specifically about the redevelopment of urban/suburban downtowns by private investorsSteady stream of REFI work coming inINSTITUTIONAL INVESTORS including private equity funds, hedge funds, life companies, REITs, endowments, sovereign wealth fundsENERGY ASSETS are a strong driver for assesments now and they are very risk averseTELECOMM/tower work continues to be a strong niche in the mkt and a recession proof oneMany of you are doing work for the RETAILERS who are expanding. Select expansion by retailers (tens of thousands out there doing site selection while the big headlines are that retailers are reducing brick/mortar.) Engineering/industrial work is upSBA
- Steady activity for SBA work continues to be a healthy driver for investigations, RSRAs, Ph Is and even Phase Iis…
- Pension funds: I wanted to list these specifically Pension funds are once again making bets on commercial real estate.CalPERS Teachers are both on list of THE most active CRE buyers. The allocations to CRE of pension funds and other types of instituional investors are currently below target levels so it’s a pretty safe bet that investment in CRE by these groups will continue provided interest rates don’t rise. HOME BUILDERSome builders: the EP doing work for builders like KB have a steady stream of demand for property due diligence. is again ramping up construction and investing in land and development. Whoever’s doing due diligence for KB Homes should have a good year. Residential is back in northern CA and there’s a scramble to buy land that’s already entitled.There are also institutuional investors actively buying up thousands of homes at a clip in anticipation of housing recovery. Unfortunatley I’m not hearing that they’re doing much in the way of EDD certainly not what you’d see on the CRE sideInternational investors:the past couple of years on top-tier U.S. markets (NY, San Fran, LA), making substantial investments in secondary markets such as Denver, Portland (OR), Tampa and the Inland Empire region in California. Some US investors like Teachers are forming alliances with Eur investors that want a piece of the action hereA little more on each of these last 2…
- M&A gaining tractionThe M&A sector is one that has been really struggling esp last yearThere was SO much uncertainty, not enough confidence. The European economic problems, our own prez electionCompanies need to grow revenue and in a struggling economy, they can’t do that on their own so that’s spurring more to shop around for acquisition deals Reflective of low risk tolerance one EP had M&A portfolio, 90% of sites with RECs moved right to Phase IIs and cleanups so good work if you can get it!! The 2nd ½ of this year is supposed to be very active, a lot of smaller deals $1-3B
- Regional/community banks involved in a huge sell off of troubled assets which is driving a fair amt of demandWhere we’re seeing a lot of portfolio work right now is in loan portfolios expect gas station and retail center loans.The smaller community banks that had a hard time digesting the enormity of the capl shortfalls b/c of the decline of asset values. They are starting to sell their props and that speaks to the overall health of the banking industry. For ages, brokers and inv’s were waiting for the smaller banks to start to unwind their portfolios and it didn’t happen for the longest time. Now it is“the larger banks and regl banks have worked thru the distress. Special asset groups are shrinking dramatic and that’s an indication of distress portfolios being dramatically reduced. Most have sold REO assets, notes already and are looking to growing originations this year. Talk to the larger banks like many who spoke at our DDDs and they talk about skeletal special assets groups or ones that have been completely disbanded, lower foreclosures. But at the smaller banks they still have a lot of distress to deal with and pricing is the best it has been since the onset of the financial crisis. The hit that banks are expected to take from a bulk sale is smaller than it would have been a couple of years ago.Banks are moving both residential and commercial loans off their balance sheets at a faster pace and at higher prices than at any time since the beginning of the financial crisis.So if you’re involved in work here, you’ve got an active sector for the rest of this year and even for the next few.
- With all this MORPHING, the companies that stay alert to the changes of clients and markets and are agile enough to respond to those changes will thrive
- Agile and alert refers to watching geographic trends. These 10 metros are expected to be THE TOP 10 markets for Property Investment this year. (PwC)The ones marked with arrows were among the fastest growing metros for Ph I volume last year already so these aren’t new players to the action. I would argue that they’re already leaders since the EDD happens before deals close and they’re already at the top in terms of Phase I growth. It’s a sign that investors were getting there in a big way in ‘12 and likely to remain there this year. What the hot spots have in common is job growth, technology or energy: San Fran, San Jose and Seattle are all driven by a strong jobs outlook led by technology. In top ranked San Fran, continued infill development is supported by one of the best transit systems in the country and its high level of walkabilty is second only to New York City.Austin is up there in 4th by virtue of the fastest population growth in the country, Houston energy, Dallas a lot of planned community work corp headquarters driving demandAnd in 2013, as values for multi-family, industrial, and office developments rise in and around major cities, investor interest is likely to move to the secondary and tertiary markets where pricing is more favorable and demand is strong. These include markets such as Charlotte and Raleigh-Durham in North Carolina, San Antonio in Texas, and Seattle. So next year this list could look very different. So you want to pay attn to these geographic trends
- And also on the topic of being agile and alert is technology.Technology is playing a HUGE role in helping EPs be more efficient and helping their clients be more efficient.There’s more scrutiny on ever before and as David said yesterday, you need to be “whiter than white.” Companies are outsourcing their entire site selection or due diligence function in the name of efficiency or adopting technology platforms that allow them to centralize data management in one place => many banks and brokerages are looking for systems that will give them access to loan-origination status and a comprehensive view of the entire loan process from the point of origination to the closing table. These companies are leveraging technology to capture assist with compliance, using checklists and creating an easy-to-follow audit trail. Ease, recordkeeping, compliance. A sense that risk management is everyone’s business.so it needs to be reportable and accessible to more peopleTechnology is also changing the way we do business. Our society is cultivating a need for constant communication. Social media.internal ways to chat. Social media to leverage your expertise using the types of tools Debbie just talked about. Looking at a piece of real estate on your phone and seeing real-time stats plotted on a map. Flying hovercraft through a building and beaming back data in real time. There’s that quLife is moving fast and if you don’t stop and look around once in awhile, you might miss something. I believe it will matter to your competitive profile if you don’t leverage technology in myriad ways to be AS client-focused as you can possibly be. A way to engage your employees, build a strong brand to quality, engage with your customers, better internal collaboration, efficiencies, better client relationship management and engagement.And it’s not just in lending. One of THE fastest growing retailers right now is Family Dollar.Family Dollar’s real estate management team uses a platform for site selection that allows better collaboration among internal teams, and reduced site evaluation times 67 percent.one-stop shop for everything they need as a company to make the best real estate decisions,So technology is an important part of being alert and agile in our market
- Lastly on the topic of being agile and alert.As if there wasn’t enough pressure over price, turnaround time and business opportunities, there’s a battle over talent too“Clients don’t want to have to go to several different vendors,” he explains. “They want to get all their services in one place.” The move toward fewer preferred vendors makes the competitive landscape even fiercer. “That’s why it’s absolutely critical to have the very best people in the market working for your firm,” “If a client knows you have the best people, it creates ‘stickiness’—they’ll have a high degree of trust that your firm can perform across multiple markets and multiple service lines, and they’ll stick with you.”.The challenge for every firm is to find their niche. We’re going to be the best in the M&A or telcom market or some other sector and then make sure that they’re good enough to servie the needs of that sector in the best possible way using some of the methods Bryan Flanagan talked about yesterday. As the focus is on using shorter vendor lists OR just standing out from the crowd, the people you have on staff have got to be the best.One of the top biz challenges comin out of a recent survey was finding new staff w/ a solid Phase I background.more quick/reliable answers from qualified folks. Today, there is a value-add, not just a “check the box” attitude. The value add is I need to get a good answer fast because I have fewer people and more work to get done in a shorter timeframe so getting junk cheaply isn’t going to help me. So if using centralized systems to simplify the process…Quicker, faster, better. There’s more confidence in the market. There are stronger drivers. Nothing yells confidence like hiring. You’re going to EBA, MBA to find good people. Maybe here because you have a position to fill though we hope it’s for the solid content, the sun and the company we keep. I’m not going to this multifamily conference for panels. We’re looking for a new PCA guy in Atlanta. What are you doing to keep your best people? What are you doing to find the best of the best? 15% of respondents in 1Q are at firms hiring and Sean RigsbyAs you know, I work only with Environmental and Engineering firms. Within the past 6 months alone, my firm as received over 40 new search assignments, and just under a quarter of them were totally unsolicited from companies that we had never worked with before, and were totally separate from our regular long term clients. I also have friends of mine that work as recruiters within the manufacturing sector, and they have been seeing increases in the number there search assignments as well. If the manufacturing sector is getting busier, I believe that is another good indicator that other industries are going to follow suit as well.
- So I am optimistic. The market is growing not shrinking. The opportunities for you are growing not shrinking but the challenges are intensifying too.strong drivers, strong competitive pressures and need for greater sophistication. Differentiators: Personalized service, expertise, trust, fast TATThere’s a new ASTM standard coming out so that creates a need for education and reminders about the role of environmental due diligence in liability protection. Technology is changing how we all communicate and receive/process/manage data and use it in our decision-making.It’s a very exciting time for our market. I believe opps are expanding and I hope that you can all see that.After a prolonged period of uncertainty, we’re seeing a revival of investor confidence as the economy continues to recover.So much has improved in terms of market confidence even from where we were last fall leading up to the election. The dog days, I believe, are over. And with that, I will turn you over to the capable hands of friend and colleague, Tom Fink.