The document provides an overview of the commercial real estate market and environmental due diligence industry. It notes that transaction volume increased in the second quarter of 2012 but slowed in July and August. Lending has also increased moderately mainly for top-quality assets. Distressed properties are bringing more contamination issues to light. The industry faces challenges from lender risk aversion and time constraints but also opportunities from new lending sources, property acquisitions by REITs, and energy audits required by new regulations. Strategies for success include business development, client education, and leveraging technology.

1. EDR Insight Market Update:
Navigating In An Uncertain Market
Presented by:
Dianne P. Crocker, Principal Analyst
Chicago, IL
October 9, 2012
© 2012 Environmental Data Resources, Inc.

2. © 2012 Environmental Data Resources, Inc.

3. © 2012 Environmental Data Resources, Inc.

4. 1. STATE OF THE MARKET
Commercial
Real Estate
Due
Diligence Lending
© 2012 Environmental Data Resources, Inc.

5. Bumpy Road for CRE Transactions
• Transaction volume in
2Q12:
• Up 25% over 1Q
• Portfolio work drove
much of the gain
• Slow July and August
• Declining rate of growth

6. CRE Deals by Property Type
• Majority of gains driven by:
• Multifamily and Class A office
• The “sweet spots”
• Largely viewed as low risk
• Retail:
• Recovering, but bifurcated
• Development:
• Accelerating

7. Downturn, Distress, Contamination
• Distressed asset deals bringing contamination into play.
• Properties and projects that failed are coming back into
the market.
• “We are reviewing portfolios of distressed loans with
significant environmental conditions, some of which
include brownfields that stalled years ago because the
owners defaulted and abandoned their development
plans.”
Senior VP at a major consulting firm

8. The Pulse of Lending
• Fewer troubled assets on their books
• 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.

9. 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 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

10. Restructuring, Divesting
• Loan restructurings continue, past restructurings being
revisited
• Discounted loan pools continue to be offered,
abundantly
• Respondents currently liquidating commercial real
estate loans and REO is still high:
• Liquidating commercial real estate loans (51% of
respondents)
• Liquidating REO (78%)
• Early innings of this process.
Source: EDR Insight’s 2Q12 Survey of Financial Institutions.

11. 2012 YTD:
8% above 2011 YTD
Up 43% above market’s
Oct. 2009 low point

12. Regional Phase I ESA Activity: 3Q on 3Q
7% 8% -3%
9%
3%
7%
2%
6%

13. Midwest Region: Q on Q Growth (3Q)
19%
4%
5% -9%
4%
21%
-11%
12%
14% 2%
29% 0%

14. Illinois: Quarterly Phase I ESA Growth

15. Top 10 U.S. Metros With Strongest Y-on-Y
Phase I Growth (through 9/30)

16. Page 16

17. Why It’s Good to be in Chicago…
© 2012 Environmental Data Resources, Inc.

18. Why It’s Good to be in Chicago…PART 2
The so-called "sexy six"
markets - Boston, Chicago, Los
Angeles, New York, San
Francisco, and Washington,
D.C. – are attracting the most
capital.

19. Market Forecast:
Where Are We Headed?

20. Lenders’ Forecast: Originations
• Majority of
lenders (88%)
expect increase
in lending
• Most (48%) only
“slightly higher”
• Yet:
• only 6%
expect
decrease
20

21. Forecast
• Market hitting the “pause” button
• Gradual market improvements
• Spottiness will continue
• Long road to recovery, susceptible to set-backs
• Areas of uncertainty
"Ultimately, we're going to live in a world that's slower
growth and lower returns for quite awhile."
CEO, retail REIT

22. 2. ATTITUDES TOWARD PROPERTY RISK
© 2012 Environmental Data Resources, Inc.

23. “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

24. 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.”
© 2012 Environmental Data Resources, Inc.

25. 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.”
• “Overall, price still remains king as opposed to real risk
concerns.”

26. 3. AREAS OF OPPORTUNITY
© 2012 Environmental Data Resources, Inc.

27. Areas of Opportunity
• New sources of debt
• U.S. SBA lending
• REITs
• Retailers
• Energy audits
© 2012 Environmental Data Resources, Inc.

28. 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

29. Focus On Who’s Lending:
Top Originators

30. Watch for shifts toward other lending
sources:
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

31. • 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 31

32. FY13 could be the most robust year for 7(a) lending
since FY10, excluding FY11

33. Strongest SBA Lenders in the U.S.:
Page 33

34. 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
© 2012 Environmental Data Resources, Inc.

35. REITs (cont’d)
• Among REITs’ top concerns are risks related to factors that
could devalue their properties, including environmental liability.

36. 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.

37. Retailer Category Planned
Openings
Dollar General Dollar 625
Family Dollar Dollar 450-500
Dollar Tree Dollar 315
CVS Drug 225-250
Walgreens Drug 150-175
Advance Auto Parts Auto 130-150
AutoZone Auto 125
RiteAid Drug 100

38. Forecast for New Store Openings
• 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
Page 38

39. • 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.
• Create opportunities for environmental consultants in
contributing data and information to this and similar
reporting in growing number of metros.
Page 39

40. Implications for the Market:
• “The New York LL84 benchmarking law is part of a nationwide
trend that we've 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 – like California’s AB 1103. 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.

41. Energy Audits
• Drivers
• Rising energy costs
• Metro disclosure laws
• Federal requirements
• HUD now has a requirement that all Physical Needs
Assessments (its PCA equivalent) be accompanied by
energy audits at all Public Housing Authority sites
• Environmental firms already getting onboard
"Green building is not a curiosity anymore -- it's a huge
market," said Aditya Ranade, a senior analyst with Lux
Research in Boston. "The green building sector will be a $280
billion global industry by the end of the decade.”

42. 4. STRATEGIES TO WIN
© 2012 Environmental Data Resources, Inc.

43. Prevailing in Turbulent Markets
Those who perform better aren’t better at
predicting.
They have a better understanding that if you can’t
predict, you have to prepare.
© 2012 Environmental Data Resources, Inc.

44. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 44

45. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 45

46. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 46

47. 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.
© 2012 Environmental Data Resources, Inc.

48. Topics for Client Education Efforts
• New E 1527 standard
• Vapor intrusion awareness
• Updates to policies like SBA and HUD
• Interesting projects
• Fannie Mae’s new scope
• Cases involving owner or lender liability for
contamination
Page 48

49. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 49

50. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 50

51. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 51

52. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 52

53. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 53

54. The Challenges of Time Constraints
• Speed, efficiency are critical, especially on portfolios.
• Firms are charging a premium for fast TAT.
• Technology becomes avenue for improving efficiency.

55. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
tie in w/ markets drying up as others emerge
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 55

56. Parting Thoughts
• A steady supply of overleveraged assets will
continue to come to market.
• Mispriced risk creates attractive investment
opportunities for new buyers.
• As traditional debt capital remains limited,
new sources are forming.
• Think critically about where you can compete
most effectively!
© 2012 Environmental Data Resources, Inc.

57. Dianne P. Crocker
Principal Analyst, EDR Insight
Research and Analytics:
www.edrnet.com/EDRInsight
Twitter:
@dpcrocker
Email:
dcrocker@edrnet.com © 2012 Environmental Data Resources, Inc.