CRE Market Update - Due Diligence at Dawn

1. “A centuryof miseryendswiththe
ChicagoCubswinningtheWorld
Series.”CNN

2. CRE MARKET
UPDATE
DDDChicago
By:
DianneCrocker,PrincipalAnalyst
EDRInsight
November3, 2016

3. US EconomyandCRE
2016 looks much like
it did in 2015—with
somewhatless
impressivenumbers

4. Howexcitedare youthattheCubsmade
it totheWorldSeries?
19%
14%
0%
67%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Hatebaseball.
My team didn't make it.
I'm an Indians fan.
Giddy! Go Cubs!!
“I'maWhiteSoxfan
buthappy thattheother
teamfromChicagois
doingwell.”
“THECUBSAREGOING
TO WINTHEWORLD
SERIES!!!!!!!!!!”
“I'llbesobbingin
my beerifit
happens.
GoCubsGo!”

5. 0%
10%
20%
30%
40%
50%
60%
Rising quickly Rising slowly Plateauing Declining
8%
50%
38%
4%
The Chicago duediligencemarketis:
SURVEY

6. Your commentaryontheChicago duediligencemarket:
▸“Saw-tooth,up anddownbutbetterthanlast
year”
▸ “Cautiouslygrowinginan electionyear.”
▸ “Slightlyincreasingbutstill slow”
▸ “Plenty of opportunities;clientsexpecttop-notch
service,wellwritten reports”
▸ “Seemssteady,notrisingquickly, nor shrinking.”
▸ “Theindustrialmarket is themostactive.”

7. CRETRANSACTIONS:SmallIs Big
▸Rate of growthis tapering off.
▸Fewer portfolioshurt large cap deals
but individual deals up 2% YonY.
▸Secondary metrosin vogue…
‘11 ‘12 ‘13 ‘14 ‘15 ‘16

8. …3QYTDFastest-GrowingMetros:PhaseI ESAs
2016
Rank
Metro Volume YonY Growth
1 SanAntonio, TX 1,430 19%
2 Nashville,TN 1,516 12%
3 Milwaukee,WI 1,025 12%
4 Austin,TX 1,146 10%
5 Raleigh,NC 1,638 10%
6 Portland,OR 2,365 8%
7 Oklahoma City,OK 857 8%
8 Denver,CO 2,207 5%
9 St. Louis,MO 1,535 5%
10 Boston,MA 5,758 3%
“Investorsarelooking tosmaller,
up-and-comingcitiesthatstilloffer
good values.Citieslike Austin,San
Antonio,RaleighandPortland.”
~RyanSeverino,REISatPRISM‘16

9. TrendsWorkinginChicago’sFavors
▸3rd most popularU.S destination for foreign investment
▸High interestby the next generation of tech firms
▸Corporate relocations like downtown Chicago
▸Cubs areWorld Series champs!
▸Chicagois a target for a new trend in CRE…

10. Data Centers: A “New ClassofCRE”
▸Up 14.6% over 2015
▸Most active data center REITs:

11. CoreData CenterMarkets
▸23 states now haveincentivesspecificallytoattract data
centers
▸Core markets:
▹Northern VirginiaoutsideDC
▹SiliconValley
▹Chicago
▹Outside Dallas
▸Site SelectionCriteria:
▹robust connectivity
▹significantregionaldemand

12. “TheAgeofAmazon”
▸Once-familiarstoreshave been closing attheir fastestrate
since2010
▸Triggered a major data/warehouseboom in CRE
▸Major players:
▸Amazonisthe heavyweight, accountsfor over 50% of
fulfillmentcenters
▸Traditionalretailersvoraciouslyadding more warehouse
space to accommodate online business:
▹Home Depot
▹Walmart
▹Macy's

13. Warehouses-An“ExplosiveAssetClass”
▸Will boost annualdemandfor industrialspace by 20 percentin the next
few years
▸$1B of e-commerce sales requires3x the spaceof traditionalretail
▸Site selectioncriteria:
▹Excess landfor auto/trailerparkinglots
▹Increasedpower loads
▹Stronger foundations/floorstosupport storage
▹Proximity to transportation, labor, UPS-FedEx hubs
▸Hot spots:
▹Central US-Memphis, Louisville
▹Chicago, Indianapolis
▹Alsosmaller, infillsites close to population centers

14. “It’s at this stage of the cycle that we also see strong
loan growth combined with easing underwriting to
result in increased credit risk.”
~Thomas Curry, U.S. Comptroller of the Currency
▸Pullback in CMBS
▸Shiftingsand in lending sources
▸Cautionrules
LENDINGCLIMATE in2016

15. CMBS:ToughMarket to Love
▸Mid-year issuancewas$37B
▸CY2016 forecast: $70B (vs. $97B in ‘15)
▸Recover to $80B in 2017

16. 28%
19%
13%
12%
7%
10%
9%
18%
20%
21%
7%
13%
0%
5%
10%
15%
20%
25%
30%
CMBS Govt Agency National banks Regional/local banks Global Insurance
OtherLendingSourcesFilltheCMBSGap
2014 2016

17. TopLenders…
1. Wells Fargo
2. JP Morgan
3. Citigroup
4. CBRE
5. Deutsche Bank
6. Morgan Stanley
7. Bank of America
8. Met Life
9. Walker Dunlop
10. Goldman Sachs
…1H16
11. Berkadia
12. KeyCorp.
13. PGM RealEstate
14. Capital One
15. BerkeleyPoint
16. PNC
17. USBancorp
18. NY CommunityBank
19. Signature Bank
20. Bank of China
Who Arethe TopLendersThisYear?

18. NREI’sOctober
survey:
- 53 percent
expect
underwriting
standards to
tighten overthe
next12 months
- Only 7 percent
loosen
3.42
Risk aversion of your LENDER
clients?
1= very tolerant of “red flags”
5 = very risk averse
Howrisk-averseareyour LENDERclients?

19. 2.96
Howrisk-averseareyour INVESTORclients?
Risk aversion of your INVESTOR
clients?
1= very tolerant of “red flags”
5 = very risk averse

20. 2.
The PhaseI ESAMarket
…in the
contextof CRE
market trends

21. ProgressingAlongLongTopof Recovery
?

22. ILLINOIS’sPhaseI ESA TrendLine…

23. …MirrorstheU.S.PhaseI ESA TrendLine

24. IL’sMetrosRankedinU.S.Top50

25. MORE TECHNOLOGY
MORE PRESSURE
THE ERA OF “NOW”
EfficiencyIs
theNameof
theGame
3.

26. “Pressures on efficiencyin thelending sector are all
moving in the same direction. How can you conduct
underwritingfaster and cheaper, and yet better than in
the past?
“Technology and using data in new ways willbe partof
thesolution.”
~Michael Berman, former CEOof CW Capital and past
Chairman of theMortgage Bankers Association

27. YourTopChallenges

28. Namethe top3 challenges youfaceintoday'smarket:
INTENSE COMPETITION
PRICING PRESSURE
FINDINGNEW BUSINESS

29. How sensitiveare your clientsto pricein
selectinga Phase I ESAprovider?
1=NOT VERY,
OTHER
FACTORS
MATTER
MORE
5=PRICEIS
THE MOST
IMPORTANT
FACTOR
3.82
“Commodity
pricing, too
many lowball
firms”

30. 1=NOT VERY,
OTHER
FACTORS
MATTER
MORE
5=SPEEDIS
THE MOST
IMPORTANT
FACTOR
3.79
“Everyoneis
making quick
deals, and
needs Phase Is
fast. “
How sensitiveare your clients to TAT in
selectinga Phase I ESAprovider?

31. 4.
MarketForecast
…preparing for
the nextphase

32. NEAR-TERMFORECAST:
Transactionsto declineovernext2 years…

33. NEAR-TERMFORECAST
▸Foreign investment: whatmakes US markets attractive to
foreign investors alsoappealsto domestic investors.
▸Capital likelyto be plentifulfor real estate companiestaking
on new projects.
▸High activity in growing secondarymarkets like Denver,
Seattle and Austin.
▸Interest rates willcreep up slowly.
▸Modest CRE lendinggrowth (3%), strong competition
▸Investors arerecalibratingtheir expectations.
▸Property transactions marketunlikelyto suffer aslongas core
fundamentalsremain strong.

34. “Investors are growing cautious about the longevityof the
current expansion cycle and, as a result, are taking steps to
de-risk theirportfolios.”

35. “On a scale of 1-5, whatis your
outlookfor the Chicago due
diligence marketjustone year
from now?
1 = Very pessimistic
5 = Very confident
3.2
Steady. However, no evidenceof significantgrowth
likelyin the next year.”
“Plentyof opportunities”
MARKETOUTLOOK

36. Dianne P. Crocker
Principal Analyst, EDR Insight
dcrocker@edrnet.com
ANY
QUESTIONS?