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Insight DDD San Francisco October 2012
The commercial real estate market is recovering gradually with transaction volume up 25% in the second quarter of 2012 compared to the first quarter. However, lending remains cautious with banks focusing on top-quality assets in major markets. Investors are risk averse and concerned about potential issues that could negatively impact property values. Areas of opportunity include increased lending by government programs, REIT acquisitions, retail expansion, and energy benchmarking requirements. Consultants should focus on client education and differentiating themselves through technology to succeed in this uncertain market.
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Insight DDD San Francisco October 2012
- 1. EDR Insight MarketUpdate: Navigating In An Uncertain Market Presented by: Ashley Gowen, Research Analyst San Francisco October 10, 2012 © 2012 Environmental Data Resources, Inc.
- 2. © 2012 EnvironmentalData Resources, Inc.
- 3. 1. STATE OFTHE MARKET Commercial Real Estate Due Diligence Lending © 2012 Environmental Data Resources, Inc.
- 4. Bumpy Road forCRE 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. CRE Deals byProperty 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. The Pulse ofLending • Fewer troubled assets on their books • 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.
- 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. 2012 YTD: 8% above 2011 YTD Up 43% above market’s Oct. 2009 low point
- 9. Regional Phase IESA Activity: 3Q on 3Q -3% 7% 8% 9% 3% 7% 2% 6%
- 10. California & WestRegions: 3Q on 3Q Growth
- 11. California: Quarterly PhaseI ESA Growth
- 12. Top 10 U.S.Metros With Strongest Y-on-Y Phase I Growth (through 9/30)
- 13. Metro Activity: California Page 13
- 14. Why It’s Goodto be in San Francisco… The so-called "sexy six" markets - Boston, Chicago, Los Angeles, New York, San Francisco, and Washington, D.C. – are attracting the most © 2012 Environmental Data Resources, Inc. capital.
- 15. Why It’s Goodto be in San Francisco… There is quite a bit of foreign investor (Asian & European) interest… But why? • SF is a gateway city • SF real estate is relatively affordable with growth prospects • Opposite to Hong Kong, Singapore, Paris, London, Tokyo • SF offers investors transparency, legal system & liquidity of the U.S. w/ rent growth and capital appreciation prospects typically associated with emerging markets
- 16. Market Forecast: Where AreWe Headed?
- 17. Lenders’ Forecast: Originations • Majority of lenders (88%) expect increase in lending • Most (48%) only “slightly higher” • Yet: • only 6% expect decrease 17
- 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, we're going to live in a world that's slower growth and lower returns for quite awhile." CEO, retail REIT
- 19. 2. ATTITUDES TOWARDPROPERTY RISK © 2012 Environmental Data Resources, Inc.
- 20. “A negative, orrather 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
- 21. RISK is theNew 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.” © 2012 Environmental Data Resources, Inc.
- 22. 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.” • “Overall, price still remains king as opposed to real risk concerns.”
- 23. 3. AREAS OFOPPORTUNITY © 2012 Environmental Data Resources, Inc.
- 24. Areas of Opportunity 1. Lending Sources 2. U.S. SBA lending 3. REITs 4. Retailers 5. Benchmarking Requirements © 2012 Environmental Data Resources, Inc.
- 25. 1. Who’s Lendingon 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
- 26. Watch for shiftstoward other lending sources: Status of CRE Lending by Source: Commercial banks Flat/moderate growth Government (Fannie/Freddie) Active Watch out: Credit Unions Expanding There’s a shift Private Equity Expanding happening… Life Insurance companies Peaking CMBS Securitizations Recovering
- 27. 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 27
- 28. FY13 could bethe most robust year for 7(a) lending since FY10, excluding FY11
- 29. Strongest SBA Lendersin the U.S.: Are you supporting SBA lending? If so, these top 10 lenders should point you down the right path! Page 29
- 30. 3. REITs: AWin-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.
- 31. REITs Are RaisingCapital: Notable Private Funding Raisings in 1H2012 Firm Name Capital Raised Blackstone $6.6 billion UBS $1.8 billion Carlyle Group $1.4 billion Rockpoint Group $1.3 billion GEM Capital $1.3 billion McMorgan & Co. $977 million © 2012 Environmental Data Resources, Inc.
- 32. REITs • AmongREITs’ top concerns are risks related to factors that could devalue their properties, including environmental liability.
- 33. 4. Retail Retailer Category Planned Openings Dollar General Dollar 625 Family Dollar Dollar 450-500 Dollar Tree Dollar 315 CVS Drug 225-250 Walgreens Drug 150-175 Advance Auto Parts Auto 130-150 AutoZone Auto 125 RiteAid Drug 100
- 34. Retail Forecast: NewStore Openings • 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 Page 34
- 35. 5. Benchmarking Requirements •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. • Create opportunities for environmental consultants in contributing data and information to this and similar reporting in growing number of metros. Page 35
- 36. Implications for theMarket: • “The New York LL84 benchmarking law is part of a nationwide trend that we've 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.
- 37. What Investors PayAttention 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 -- it's 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.”
- 38. 4. STRATEGIES TOWIN © 2012 Environmental Data Resources, Inc.
- 39. Prevailing in TurbulentMarkets 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… NOTE: They cynics will say companies prevailing To have on your team through uncertainty in the market are growing because of lowered prices. To go after NOT NECESSARILY! © 2012 Environmental Data Resources, Inc.
- 40. Strategies to Win You get out there. You think beyond Phase Is. You connect the dots for clients. You embrace a “customer first” attitude. You have an active business development function. You’re investing in people. You have a key differentiator. You’re investing in technology. You can name the last CRE conference you went to. Page 40
- 41. Education Is KeyAs 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. © 2012 Environmental Data Resources, Inc.
- 42. Topics for ClientEducation 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 Page 42
- 43. The Challenges ofTime 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 competitive NOTE: In some cases, being able to deliver quickly matters MORE to clients than delivering cheaply!
- 44. Parting Thoughts • Thinkcritically about where you can compete most effectively! © 2012 Environmental Data Resources, Inc.
- 45. Ashley Gowen Research Analyst,EDR Insight Research and Analytics: www.edrnet.com/EDRInsight Twitter: @EDRInsight Email: agowen@edrnet.com © 2012 Environmental Data Resources, Inc.