EDR Insight DDD Minneapolis November 2012

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EDR Insight DDD Minneapolis November 2012

  1. 1. EDR Insight Market Update:Navigating In An Uncertain MarketPresented by:Ashley Gowen, Research Analyst Minneapolis, MN November 8, 2012 © 2012 Environmental Data Resources, Inc.
  2. 2. 4 Keys to Navigating an Uncertain Market
  3. 3. 1. MARKET METRICS
  4. 4. Commercial Real Estate Due LendingDiligence
  5. 5. Bumpy Road for Commercial Real Estate• Transactions in 3Q12: • Up slightly from 3Q11 • Well above „09• In recent quarters, rate of growth has declined.
  6. 6. Multifamily, Office Drive Property Deals • Majority of gains driven by: • Multifamily and Class A office: • The “sweet spots” • Largely viewed as low risk • Retail: • Recovering, but bifurcated • Development: • Accelerating • More options to buy at cheaper prices • Distressed asset deals bring contamination into play • Failed properties & projects returning to market
  7. 7. The Pulse of Lending on Properties• Fewer troubled assets on their books compared to last year• 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. • Refis and loan sales are strong drivers for EDD
  8. 8. 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 community 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
  9. 9. Positive Signs in Lending • Many have worked through their distressed assets and are ready to start growing again • More confidence, more borrowers • There is pressure on pricing as competition for loans heats up • However, lenders view CRE as still inherently risky Tight underwriting
  10. 10. Up 43% above market’s 2012 YTD:Oct. 2009 low point 8% above 2011 YTD
  11. 11. Regional Phase I ESA Activity: 3Q on 3Q -3% 7% 8% 9% 3% 7% 2% 6%
  12. 12. Midwest Region: Q on Q Growth (3Q) 19% 4% 5% -9% 4% 21% -11% 12% 14% 2% 29% 0%
  13. 13. Minnesota: Quarterly Phase I ESA Growth
  14. 14. Metro Watch: Q on Q Growth (3Q12) • Minneapolis • Ranked 18th out of Top 50 U.S. Metros • PwC Emerging Trends 2013 • Chicago and Minneapolis are top performers for the Midwest in 2013 • Provides well-educated and skilled labor in research and high technology • Unemployment rate will be nearly 3 percentage points lower than the U.S. rate next year • “Market to Watch” for Investment and Development: 23rd
  15. 15. Reasons to Love Minneapolis… Page 15
  16. 16. Reasons to Love Minneapolis… Page 16
  17. 17. 2. ATTITUDES TOWARD PROPERTY 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 vice president of Colliers International
  19. 19. Risk Aversion Is High Among Lenders • More lenders paying closer attention to findings and recommendations, considering their risk if recommendations are ignored. • More clients want detailed assessment of potential risk and recommendations for mitigation of known conditions. • More community banks are attempting to develop more current risk management policies.
  20. 20. 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.” Source: EDR Insight‟s Quarterly Survey of EPs
  21. 21. 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.” Source: EDR Insight‟s Quarterly Survey of EPs
  22. 22. 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.”
  23. 23. 3. AREAS OF OPPORTUNITY
  24. 24. 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 Watch out for shifts towards other lending sources…
  25. 25. Focus On Who’s Lending: Top Originators
  26. 26. 2. SBA Lending• 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 26
  27. 27. FY13 could be the most robust year for 7(a) lendingsince FY10, excluding FY11
  28. 28. Strongest SBA Lenders in the U.S.:Are you supporting SBA lending?If so, these top 10 lenders should point you down the right path! Page 28
  29. 29. 3. 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.
  30. 30. REITs Are Raising Capital:Notable Private Funding Raisings in 1H2012Firm Name Capital RaisedBlackstone $6.6 billionUBS $1.8 billionCarlyle Group $1.4 billionRockpoint Group $1.3 billionGEM Capital $1.3 billionMcMorgan & Co. $977 million
  31. 31. 4. Retail• 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
  32. 32. 5. Benchmarking Requirements• NYC‟s 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.• Creates opportunities for environmental consultants in contributing data and information to this and similar reporting in growing number of metros.
  33. 33. Implications for the Market:• “The New York LL84 benchmarking law is part of a nationwide trend that weve 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. 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.
  34. 34. What Investors Pay Attention To:Green buildings:• Are easier to fill, especially with young, urban residents who want that “lifestyle”• Hold their value• Are easier to sell when the time comes• Are CHEAPER to operate"Green building is not a curiosity anymore -- its a hugemarket," said Aditya Ranade, a senior analyst with LuxResearch in Boston. "The green building sector will be a $280billion global industry by the end of the decade.”
  35. 35. 6. Foreign Investors and EB-5 Program• Old program gaining new interest as avenue to stimulate capital investment by foreign investors.• Minneapolis 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.
  36. 36. 4. ADOPT WINNING STRATEGIES
  37. 37. 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.
  38. 38. 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.
  39. 39. 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.
  40. 40. 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.
  41. 41. 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
  42. 42. 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.
  43. 43. 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.
  44. 44. Parting Thoughts
  45. 45. Positive Forces in the Forecast • Improvements in both the cost and availability of commercial mortgage capital are expected to propel transaction volumes in Q4 and into 2013. • Real estate remains attractive to lenders, investors. • An improving picture in the jobs market is expected to boost the commercial real estate recovery in 2013. • 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 such as New York and San Francisco.
  46. 46. 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. Page 47
  47. 47. 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! Page 48

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