EBA Jan 2013 Risk Management In An Uncertain Market


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EBA Jan 2013 Risk Management In An Uncertain Market

  1. 1. EDR Insight Market Update:Risk Management In An Uncertain MarketPresented by:Dianne P. Crocker, Principal AnalystFor presentation at:EBA, New OrleansJanuary 2013 © 2012 Environmental Data Resources, Inc.
  2. 2. Commercial Real EstateEnvironmentalDue Diligence Challenges Forecast
  3. 3. Bumpy Road for Property Deals • Transaction volume uneven in 2013. • Slower rate of growth Q1-Q3. • Year ended strong.
  4. 4. Good News on the CMBS Front• Strong 4Q, robust start to 2013.• Major deal in January involving 100+ properties.• As much as $8 billion in deals for January: • the highest monthly volume since December 2007.• Issuance poised to climb 50 percent to $60 billion in 2013.
  5. 5. CMBS Forecast
  6. 6. Office, Apt’s Lead Price Recovery
  7. 7. Capital Remains Concentrated inLargest Metros
  8. 8. Top 10 Markets for 2013 Investment Fastest- growing Phase I metros in 2012
  9. 9. LENDING: Positive Signs“By almost every observable metric, theAmerican banking system will enter 2013 withits strongest balance sheet position sincebefore the financial crisis.”
  10. 10. 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.
  11. 11. Lenders’ Approach to Due Diligence • 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.” • “The definition of Business Environmental Risk is different at our bank. Historically, these were covered under Phase I Plus scopes of work. Now, these expanded-scope items are an everyday expectation.”
  12. 12. Benchmarks in Environmental DueDiligence 4Q11 4Q12 % of EDD for 16.7% 10.6% foreclosures Liquidating CRE loans 51.1% 37.5% (% of respondents) Selling REO 77.2% 69.2% (% of respondents) Phase Is to Phase IIs 5.7% 9.6%
  13. 13. Weighted Avg Score (1=not challenging to 5=extremely challenging)Balancing risk management with pressure to staycompetitive 3.3Meeting fast turnaround time pressures internally 3.0Doing more with smaller risk management staff 2.9Complying with changing environmental regulations 2.8Lack of education on environmental risk internally inthe context of overall lending process 2.8Pressure to cut costs 2.7Stringent pressure from bank regulators 2.6
  14. 14. 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 beenprivy to the task Somewhat,force or the Not at all, 25%pending changes 63%and would greatlyappreciate anyinformation.”
  15. 15. 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 20
  16. 16. Positive Forces in the Forecast• Real estate remains attractive to lenders, investors.• Improvements in both the cost and availability of commercial mortgage capital will drive transactions.• Future consolidation in lending sector is likely.• 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.
  17. 17. Forecast for Risk Management• Continued focus on modeling the downside• More emphasis on technology, streamlining• Repurposing the oversupply of obsolescent properties• More deferred maintenance issues arising on refis or neglected properties• Property Condition Assessments growing in importance
  18. 18. Commercial Real EstateEnvironmentalDue Diligence Challenges Forecast
  19. 19. Dianne P. CrockerPrincipal Analyst, EDR InsightResearch and Analytics:www.edrnet.com/EDRInsightTwitter:@dpcrockerEmail:dcrocker@edrnet.com