The document summarizes 10 key trends in the commercial real estate market and forecasts for 2012. It finds that property transactions are on an upward trajectory, with multifamily attracting the most demand. Commercial mortgage-backed securities are recovering after a dry spell in 2011. Lending from banks, life insurers, and government-backed entities is thawing. Risk aversion increased in 2011 but commercial real estate investment trusts have large war chests for acquisitions. Phase I environmental site assessments increased 7% in 2011 but growth varied significantly by metro area. The forecast anticipates a busy year for commercial real estate with both positive and uncertain forces, including maturing loans, available equity, and gradual increases in lending originations.

1. State of the Market:
Ten Key Developments and Forecast
Due Diligence at Dawn Workshop
April 3, 2012
Dianne P. Crocker
Principal Analyst, EDR Insight
© 2011 Environmental Data Resources, Inc.

2. “After the market
gave us a rocky ride
in 2011, commercial
real estate is back in
the saddle for 2012.”
~John Levy, founder of John
B. Levy & Company
Page 2

3. • Ten Key Market Trends
• Phase I ESA Market Trend Lines
• What to Expect in 2012
Page 3

4. TREND 1. Property Transactions on
Upward Trajectory
Source: Real Capital Analytics Page 4

5. 1. CRE Transaction Volume
• 2011 volume increased 52% year-on-year.
• Jan/Feb 2012 up 20% year-on-year.
• Improvements expected to continue.
Page 5

6. TREND 2: Multifamily Attracting the Most
Demand…
• Fundamental shift away from home
ownership.
• Freddie Mac, Fannie Mae, lenders
showing more willingness
underwriting apartment buildings than
any other property type.
• Due diligence often involves vapor
migration screening, LBP, asbestos.

7. …Retail in Flux
• Major retail chains are downsizing.
• 6,000-9,000 store closings expected in 2012.
• More strategic acquisitions by retailers.
• More expansion by dollar stores, pharmacies.
Page 7

8. TREND 3. The Refi Heartache
Page 8

9. Maturities Bring Environmental Issues to
Surface
Page 9

10. Refi Heartache
• Prospects for refinancing all of these loans are pretty grim.
• Good news for distressed asset investors, bringing life to
“zombie properties.”
• Major re-evaluation of properties ahead.
• Driver for services that will inform the process of estimating
property value.
Page 10

11. TREND 4. CRE Property Prices: Erratic,
Stabilizing
Page 11

12. 4. CRE Property Prices
• Investors can no longer assume price appreciation.
• Every dollar counts.
• Buyers are risk averse.
Page 12

13. TREND 5: CMBS Coming Off Dry Spell
Page 13

14. CMBS: Down But Not Out
• 2012 forecast calls for moderate growth.
• Recent originations marked by more conservative
underwriting.
Page 14

15. TREND 6. Lending Thaw Underway
Status of CRE Lending by Source:
Commercial banks Improving
Government Active
(Fannie/Freddie)
Credit Unions Active
CMBS Improving
Life Insurance companies Robust
Page 15

16. Who‟s Lending? Life Insurers
Life insurance companies returned
in a big way in 2011.
Expected to account for 20% of the
lending market in 2012.
Page 16

17. Who‟s Lending?
• Originations expected to increase in 2012
• Stiff competition for underwriting small volume of viable, low-
risk loans
• Expect more underwriting on construction loans in 2012,
particularly resuscitated multifamily projects
Page 17

18. TREND 7. Loan Dispositions Are Up
• Banks‟ asset disposition
plans picked up momentum
in 2011.
• Unlike 2010 when FDIC was
the only seller in town:
• Sell-off of distressed
loans, properties involves
broader base of lenders
• Can involve large
portfolios in multiple
states
• Good news for investors
Page 18

19. Loan Dispositions Are Up
• Sales of nonperforming loans and REO offerings—
especially from community and regional banks—are up.
• In the early innings of banks clearing debt on their
balance sheets.
• Need for speed on due diligence—and caution.
Page 19

20. TREND 8. Bank Failures Slowing
2011 92
2010 157
2009 250
2008 25
0 50 100 150 200 250 300
Page 20

21. 8. Bank Failures to Continue
• Trepp still has more than 200 banks categorized as high
risk of failure:
• "Losses will pile up again in 2012. We estimate that banks
are about 60% to 70% of the way through their loss
recognition, with another $40 billion to $80 billion in losses
to be written off going forward.“
• Shift toward FDIC having acquiring bank lined up or asset
disposition via private firms, auctions.
Page 21

22. TREND 9. The War Chests of REITs
• Fundraising up 32%
in 2011
• Very strong market
position
• Skittishness giving
way to confidence
Page 22

23. Page 23

24. The War Chests of REITs
• Commercial real-estate acquisitions by REITs up 40% in
2011.
• Accounted for one-third of property deals in 2012.
• Expect REITs to be the big headline makers this year.
Page 24

25. TREND 10. Risk Aversion Index Up in „11
Last year‟s
uptick:
the result of
market instability
This time last year:
the lowest reading
in 4 years
© 2011 Environmental Data Resources, Inc.

26. Risk Aversion Up in „11
• Last year‟s “summer of discontent” continued the upward
trend in the Risk Aversion Index.
• Expect “risk on-risk off” attitude as market instability
continues.
Page 26

27. Phase I ESA Market Metrics
© 2011 Environmental Data Resources, Inc.
Page 27

28. Slow Recovery in Phase I Volume
2011 vs prior year: 7% growth
Page 28

29. Location, Location, Location
• Significant geographic disparity in Phase I volume.
• Stand-outs in an otherwise struggling commercial
real estate market.
• All “global gateways” outperformed average Phase I
ESA growth among top metros in 2010…
PricewaterhouseCoopers
Top 10 Metros for CRE Investment
New York City Seattle
Los Angeles San Diego
Washington, DC San Francisco
Houston San Jose
Boston Austin
Page 29

30. Metro Activity: Chicago and DC
Metro Rank in Top 4Q on 4Q Jan/Feb 2012 Investment
50 Metros Growth vs prior year Prospects for
CRE (PwC)
Chicago 3rd -7% +29% Good (21st)
Washington, 10th -6% + 2% Good (1st)
DC
Page 30

31. ILLINOIS Phase I ESA Trend Line
• Moderate 4Q decline
• Jan-Feb up 24% over prior
year.
Page 31

32. MARYLAND Phase I ESA Trend Line
• Flat 4Q decline followed by
Jan-Feb up 14% over prior
year.
• Outperforming U.S. average.
Page 32

33. VIRGINIA Phase I ESA Trend Line
• Moderate 4Q decline followed
by Jan-Feb flat over prior year.
Page 33

34. Forecast for 2012
© 2011 Environmental Data Resources, Inc.
Page 34

35. 2012: No Shortage of Uncertainty
Page 35

36. Year of „Brake and Throttle‟
• Ingredients for a busy year.
• Market fragility will magnify setbacks.
• Stop and start activity likely.
• Environmental due diligence has important role to play.
"As mortgage production ramps up,
investors will see banks being more
competitive, but with far more stringent
underwriting standards." (Colliers)
Page 36

37. Positive Forces in 2012
• Property transactions forecast to increase by 50 percent
“with a good chance for a surprise to the upside.”
• Maturing loans will drive deal volume.
• Equity capital, led by REITs, will be more plentiful and
more motivated this year.
• CMBS market gaining traction after „11 setback.
• Environmental firms are hiring again.
• Originations by lending institutions should increase
gradually…
Page 37

38. Lenders‟ Expectations for CRE
Lending, 2012
• 72% expect higher origination levels this year.
Source: EDR Insight. 4Q11 Quarterly Survey of Financial Institutions.
Page 38

39. Sectors Driving Phase I ESA Growth in 1Q:
• Equity REITs
• Foreign investors
• Developers
• Institutional capital and equity funds
• Financial institutions, insurance, credit unions
• M&A
• Retail/big box
• Transfer of oil/gas assets
Page 39

40. • EDR Insight, a source of:
• Short, frequent research notes on strategic
and technical topics
• Market metrics
• Intell from outside subject matter experts
• This month:
• 1Q12 capsule summaries of key Phase I
markets
• Sign up for free biweekly emails at
www.edrnet.com/edrinsight
Page 40

41. Questions?
41