Insight DDD Orange County October 2012

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Insight DDD Orange County October 2012

  1. 1. EDR Insight Market Update:Navigating In An Uncertain MarketPresented by:Ashley Gowen, Research Analyst Orange County October 11, 2012 © 2012 Environmental Data Resources, Inc.
  2. 2. © 2012 Environmental Data Resources, Inc.
  3. 3. 1. STATE OF THE MARKET Commercial Real Estate Due Diligence Lending © 2012 Environmental Data Resources, Inc.
  4. 4. 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
  5. 5. 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 • More options to buy at cheaper prices • Distressed asset deals bring contamination into play • Failed properties & projects returning to market
  6. 6. The Pulse of Lending • 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
  7. 7. 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 deals of interest—or capital—yet available • in secondary and tertiary metros • for average-quality assets
  8. 8. Up 43% above market’s 2012 YTD:Oct. 2009 low point 8% above 2011 YTD
  9. 9. Regional Phase I ESA Activity: 3Q on 3Q -3% 7% 8% 9% 3% 7% 2% 6%
  10. 10. California & West Regions: 3Q on 3Q Growth
  11. 11. California: Quarterly Phase I ESA Growth
  12. 12. Top 10 U.S. Metros With Strongest Y-on-YPhase I Growth (through 9/30)*Orange County – 22%*Inland Empire(Riverside) – 14%*Los Angeles – 4%
  13. 13. Metro Activity: California
  14. 14. Why It’s Good to be in Los Angeles… The so-called "sexy six" markets – Boston, Chicago, Los Angeles, New York, San Francisco, and Washington, D.C. – are attracting the most capital.
  15. 15. Why It’s Good to be in Los Angeles… The so-called "sexy six" markets – Boston, Chicago, Los Angeles, New York, San Francisco, and Washington, D.C. – are attracting the most capital.Los Angeles: Number two on both Real Capital Analytics’ and Jones Lang LaSalle’sranking based on first half 2012 volume, but it has remained flat as an investmentmarket. Prices are almost back to pre-recession levels.
  16. 16. Market Forecast:Where Are We Headed? © 2012 Environmental Data Resources, Inc.
  17. 17. Lenders’ Forecast: CRE Expectations • Majority of lenders (88%) expect increase in lending • Most (48%) only “slightly higher” • Yet, only 6% expect decrease 17
  18. 18. Forecast• Market hitting the “pause” button• Gradual market improvements• Spottiness will continue• Long road to recovery, susceptible to set-backs• Areas of uncertainty "Ultimately, were going to live in a world thats slower growth and lower returns for quite awhile." CEO, retail REIT
  19. 19. 2. ATTITUDES TOWARD PROPERTY RISK © 2012 Environmental Data Resources, Inc.
  20. 20. “A negative, or rather extremely conservative, mindsetis prevalent with the investors in the market. Manyinvestors are analyzing assets based on the what-could-go-wrong view versus spending time focusingon what-could-go-right and this has had an impacton pricing and deal velocity." Steve Timmel, senior vice president of Colliers International
  21. 21. RISK is the New 4-Letter WordFeedback 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.”
  22. 22. Risk• “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.” Source: EDR Insight’s 2Q12 Quarterly Survey of EPs.
  23. 23. 3. AREAS OF OPPORTUNITY © 2012 Environmental Data Resources, Inc.
  24. 24. Areas of Opportunity1. Lending Sources2. U.S. SBA lending3. REITs4. Retailers5. Benchmarking Requirements © 2012 Environmental Data Resources, Inc.
  25. 25. 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…
  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 © 2012 Environmental Data Resources, Inc.
  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 – 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.
  34. 34. A Look at California’s AB 1103• Signed into law by Governor Schwarzenegger in September 2007• Applies to certain nonresidential buildings in California and requires benchmarking of a building’s energy consumption using the EPA’s Portfolio Manager system and disclosure of the building’s energy usage to potential buyers, lessees, and lenders of the entire building• Originally, AB 1103 required implementation on January 1, 2010. • Thereafter, AB 531 became law and assigned the implementation and schedule of compliance for AB 1103 to the California Energy Commission (“CEC”).
  35. 35. A Look at California’s AB 1103• Was belief CEC would delay implementation by 12 months to January, 2011. • Ended up pushing implementation to 2012 • CRE community was bracing for July 2012 implementation date • End of March, the CEC issued proposed regulations that sets out the following phased implementation of AB 1103 in 2013 through 2014: • “(a) On or after January 1, 2013, for a building with total floor area measuring more than 50,000 square feet. • (b) On or after July 1, 2013, for a building with a total floor area measuring more than 10,000 square feet and up to 50,000 square feet. • (c) On or after January 1, 2014, for a building with a total floor area measuring at least 5,000 square feet and up to 10,000 square feet.”
  36. 36. 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 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.”
  37. 37. 4. STRATEGIES TO WIN © 2012 Environmental Data Resources, Inc.
  38. 38. Prevailing in Turbulent Markets• Companies that perform better aren’t better at predicting.• They have a better understanding that if you can’t predict, you have to prepare.Your best bet against in an uncertain market…consider… To have on your team NOTE: They cynics will say companies prevailing To go after through uncertainty in the market are growing because of lowered prices. NOT NECESSARILY! © 2012 Environmental Data Resources, Inc.
  39. 39. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  40. 40. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  41. 41. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  42. 42. 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.
  43. 43. 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
  44. 44. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  45. 45. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  46. 46. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  47. 47. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  48. 48. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  49. 49. The Challenges of Time Constraints• Technology becomes avenue for improving efficiency • Speed, efficiency are critical, especially on portfolios. • Firms are charging a premium for fast TAT.• Technology has helped a lot of high growth firms stay competitiveNOTE: In some cases, being able to deliver quickly matters MORE toclients than delivering cheaply!
  50. 50. Strategies to WinYou get out thereYou think beyond Phase IsYou connect the dots for clientsYou embrace a “customer first” attitudeYou have an active business development functionYou’re investing in peopleYou have a key differentiatorYou’re investing in technologyYou can name the last CRE conference you went to
  51. 51. Parting Thought• Think critically about where you can compete most effectively! © 2012 Environmental Data Resources, Inc.
  52. 52. © 2012 Environmental Data Resources, Inc.

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