On June 16, 2015, EDR Insight’s Dianne Crocker delivered the lunch presentation at the Environmental Bankers Association’s Summer 2015 meeting in Denver. The focus of the presentation was on the current state of the commercial real estate and lending market in this long, protracted recovery period. The good news is that despite a disappointing start to the year, leading market indicators that include job growth, construction activity and the housing market continue to point to moderate and sustainable growth in lending and transactions. In the lending environment, healthier balance sheets and more opportunities are driving moderate growth. Yet the recovery is not without its challenges. Pressures on environmental consultants for fast turnaround time and pricing are intense. Competitive pressures in the lending sector are likewise intense. Despite these challenges, there is a growing number of reasons why we can be reasonably optimistic over the near-term forecast.

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THE MARKET IN YOUR WORDS:

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THE MARKET IN YOUR WORDS:

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• LEADING MARKET INDICATORS
• CURRENT LENDING ENVIRONMENT
• TOP CHALLENGES
• THE NEAR-TERM FORECAST
TODAY’S THEMES

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LEADING MARKET INDICATORS

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DRIVERS FOR PROPERTY DEMAND TRENDING IN THE RIGHT
DIRECTION:
• PROPERTY INVESTMENT CONTINUES ITS SLOW CLIMB.
• HOUSING MARKETS RECOVERING NICELY.
• JOB GROWTH BACK TO PRIOR PEAK LEVELS.
• INTEREST RATES STILL EXTREMELY LOW.
• RECORD-HIGH NEW CONSTRUCTION/DEVELOPMENT.
• SECONDARY METROS RALLYING BACK.
POSITIVE TRENDS ACROSS THE BOARD

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SMALL CAP SALES:
• Up 30% in 1Q15
LARGE CAP SALES:
• Up 45% in 1Q15
THE HIGHLIGHT OF THIS RECOVERY:
PROPERTY TRANSACTIONS GROWTH

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• MAJOR BUYING CLASSES
• Real estate investment trusts (REITs)
• Foreign investors**
• Private equity funds
• Hedge funds
• Traditional developer/owner/operators
DEAL MAKING: WHO’S INVESTING?
2014 TOP BUYERS
ARCP
Blackstone
JP Morgan
Norges Bank Investment Mgt
Hines
OMERS
Starwood Capital Group
MetLife
Essex Property Trust
David Werner Real Estate

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EXPANDING UNIVERSE OF U.S. BUYERS
THREE TIMES AS MANY BUYERS TODAY THAN IN DEPTHS OF DOWNTURN

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• SMALLER SECONDARY METROS WITH STRONG GROWTH
PROFILES ARE SEEING INVESTOR INTEREST:
• Portland, Seattle, Denver, Austin, Nashville, Atlanta, Las Vegas, etc.
• COMMON DENOMINATORS:
• Strong job growth
• Growing technology sectors, healthcare and financial services
industries
• WHERE WE’RE NOT SEEING THIS TREND:
• CMBS
• Foreign investors
• Still prefer top markets
EXPANDING UNIVERSE OF METROS:
SMALLER MARKETS HEATING UP

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• CONSTRUCTION SPENDING
• 2014: HIGHEST LEVEL SINCE
DOWNTURN
• APRIL: FASTEST MONTHLY
PACE IN MORE THAN 6 YEARS
• POINTS TO MARKED INCREASE
IN U.S. DEVELOPMENT IN 2015
• EXPANDING TO SMALLER
METROS…
2015: THE YEAR FOR NEW DEVELOPMENT

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METRO MAGNETS:
1. Denver
2. Raleigh-Durham
3. Suburban VA
4. Oakland
5. Las Vegas
6. Austin
7. San Jose
8. Miami
9. Seattle
10.Portland
THE CONSTRUCTION/DEVELOPMENT OPPORTUNITY
MOST ACTIVE GROUPS
ACQUIRING SITES FOR
DEVELOPMENT
HFZ Capital Group
Greenland Group
Tishman Speyer
Carmel Partners
Oceanwide Real Estate Group
Crown Resorts
Oaktree
Mitsui Fudosan
Fortis Property Group

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THE STORY IN LENDING

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• FINANCING MARKET IS INCREASINGLY COMPETITIVE.
• BANKS HAVE $ TO LEND, UNDERWRITING STILL VERY CAUTIOUS.
• UPTICKS IN LENDING VOLUMES SUPPORT POSITIVE INVESTMENT
TRENDS.
• REGIONAL/MID-SIZED BANKS ARE GAINING MARKET SHARE...
LENDING TRENDS IN 2015

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• A POSITIVE TRAJECTORY IN LENDING
• 2014 VOLUMES:
• 6.5% ANNUAL GROWTH (FDIC)
• STILL 25% BELOW 2007 PEAK, EXCEPT MULTI-
FAMILY LENDING
• WIDE VARIABILITY IN GROWTH BY BANK SIZE…
PROPERTY LENDING:
SLOW PACE OF GROWTH IN ORIGINATIONS
“Banks are finally playing ‘offense’ again!”

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• U.S. AVERAGE GROWTH IN LOAN PORTFOLIOS: 6.5%
• STRONGEST GROWTH:
• LARGEST REGIONAL BANKS
• MID-SIZED BANKS
• PARTICULARLY STRONG GROWTH IN:
• CONSTRUCTION/DEVELOPMENT LOANS GROWING THE
FASTEST
• MULTIFAMILY STILL STRONG
VARIANCE IN GROWTH BY BANK SIZE
Growth in CRE
Loan Portfolios
(2014 vs. 2013)
All banks 6.5%
Assets >$50B 4.1%
$10B-$50B 16.8%
$1B-$10B 10.5%
<$1B -1%

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CMBS 2.0 PRIMARY MARKET ACTIVITY
2012
• $45.8 billion in
Conduit,
SASB, & Large
Loans
• 57 deals
• $21.2 billion in
Freddie Mac
• 17 deals
2013
• $83.1 billion in
Conduit,
SASB, & Large
Loans
• 102 deals
• $28.0 billion in
Freddie Mac
• 19 deals
2014
• $93.1 billion in
Conduit,
SASB, & Large
Loans
• 120 deals
• $21.3 billion in
Freddie Mac
• 17 deals
2015 - YTD
• $42.40 billion
in Conduit,
SASB, & Large
Loans
• 55 Deals
• $11.14 billion
in Freddie Mac
• 9 deals

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• HEADING INTO NEW ROUND OF REFINANCING, PEAKING IN 2017
• LENDERS VIEW AS OPPORTUNITY TO INCREASE VOLUMES.
• EXCESS CAPITAL LOOKING TO FINANCE SOLID REAL ESTATE.
• SURGE IN REFINANCING ACTIVITY FROM NOW THROUGH 2017.
LENDING OPPORTUNITY:
NEW ROUND OF REFI’S

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• TRADITIONAL LENDERS, COMMERCIAL BANKS
• LIFE INSURANCE COMPANIES
• CMBS (SECURITIZATION)
• CONDUITS
• PRIVATE EQUITY
• REITS AND DEBT FUNDS
• GOVERNMENT
SOURCES OF COMMERCIAL REAL ESTATE DEBT

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GROWING COMPETITION AMONG LENDERS

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SCOREKEEPER BENCHMARKS

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Region 1Q Growth YonY
Northeast 2%
West 14%
MidAtlantic -4%
South 1%
Midwest 1%
California 6%
North Atlantic 8%
South Atlantic -1%
U.S. AVERAGE 4%
SCOREKEEPER: REGIONAL GROWTH 1Q2015

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SCOREKEEPER: GROUND-TRUTHING THE
MIGRATION TO SECONDARY METROS
Hard hit metros like Vegas, Miami, Detroit
and Phoenix are the current comeback
kids. Still way below previous peak levels
from before downturn but double digit
growth and still room to improve.

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TOP CHALLENGES

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NO PREDICTABILITY
• “WE LAID OFF STAFF LAST YEAR, AND NOW HAVE MORE WORK
THAN WE CAN HANDLE.”
• “CRAZY ROLLER COASTER. FAMINE TO FEAST IN A MATTER OF
DAYS. GRATEFUL BUT HARD TO PLAN!”
• "WE KNEW WE HAD TO HIRE WHEN WE HAD OUR BEST Q1 IN 15
YEARS"

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“WE NEED IT FAST.”
“…NO FASTER!”
“AGGRESSIVE MARKET. CLIENTS FAVOR SPEED
AND QUALITY OVER COST.”
“BIGGER, BADDER, FASTER LOANS!”
“GOOD, FAST, CHEAP-- PICK ANY TWO.”
"DUE DILIGENCE TIMEFRAMES ARE AT THEIR ALL-
TIME SHORTEST DURATION”
“2 WEEKS OR IT'S FREE!"
NEED FOR SPEED

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MIXED BAG ON UNDERWRITING
“THE RISK PENDULUM HAS OFFICIALLY SWUNG BACK TO WHERE
IT WAS IN 2005…FOR BUYERS AND BORROWERS, IT’S BLOW AND
GO.”
“IT’S 2007 ALL OVER AGAIN- CAUTION THROWN TO THE WIND AND
WILD WEST ATTITUDES PREVAIL.”
“I DON’T THINK WE’RE BACK TO THE BAD OLD DAYS OF LAX RISK
MANAGEMENT.”

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• UNDERWRITING STANDARDS ARE TIGHTER TODAY THAN THEY
WERE IN 2007.
• LOAN-TO-VALUE RATIOS ON COMMERCIAL LOANS HOVERED
CLOSE TO 70% IN THE RUN UP TO 2007.
• IN THE LAST TWO QUARTERS, CLOSER TO 65%.
TIGHTER UNDERWRITING

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NEAR-TERM FORECAST

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• STILL A LOT OF ROAD TO RUN IN THIS RECOVERY.
• TRANSACTION VOLUME REMAINS ON THE MEND.
• MODERATE GROWTH IN NEW ORIGINATIONS.
• CONTINUED MIGRATION TO SECONDARY AND TERTIARY METROS.
• FAVORABLE LOW INTEREST RATE ENVIRONMENT.
• PHASE I ESA FORECAST: 4 TO 8% RANGE NEXT 2 YEARS.
“2015 WILL BE ONE OF THE STRONGEST YEARS WE’VE SEEN IN
COMMERCIAL REAL ESTATE SINCE THE CREDIT CRISIS AND IT’S FOR
ALL THE RIGHT REASONS.”
~KEN RIGGS, RERC
“OPTIMISM IS THE HIGHEST IT’S BEEN SINCE THE DOWNTURN.”
~RYAN SEVERINO, REIS
THE NEAR-TERM MARKET FORECAST

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• RISK MANAGEMENT IS NOW EVERYONE’S BUSINESS.
• PAST “DEAL KILLERS” ARE NOW BEING MANAGED.
• FAILED PROPERTIES/PROJECTS ARE MOVING BACK INTO PLAY.
• EFFICIENCY IN DUE DILIGENCE IS PARAMOUNT.
“MAKE HAY WHILE THE SUN SHINES.”
THE FORECAST FOR RISK MANAGEMENT

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