edr insight market update: navigating in an uncertain market - orlando

© 2012 Environmental Data Resources, Inc.

EDR Insight Market Update:

Orlando, FL

December 4, 2012

Navigating In An Uncertain Market

Presented by:

Ashley Gowen, Research Analyst

4 Keys to Navigating an Uncertain Market

1. MARKET METRICS

Commercial Real Estate

LendingDue

Diligence

• Transactions in 3Q12:

• Up slightly from

3Q11

• Well above „09

• In recent quarters, rate

of growth has declined

Bumpy Road for Commercial Real Estate

Multifamily, Office Drive Property Deals

• Majority of gains driven by:

• Multifamily and Class A office

• The “sweet spots”

• Largely viewed as low risk

• Retail:

• Recovering, but bifurcated

• Development:

• Accelerating

• Distressed asset deals bringing contamination into play.

• Properties and projects that failed are coming back into

the market.

• “We are reviewing portfolios of distressed loans with

significant environmental conditions—including projects

that stalled years ago because the owners defaulted and

abandoned their development plans.”

Senior VP at a major consulting firm

Downturn, Distress, Contamination

• Fewer troubled assets on their books.

• The number of “problem banks” is falling.

• 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.

The Pulse of Lending on Properties

• Lenders face added regulatory burdens, the

need to minimize risk and compete for

borrowers:

• 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

community banks struggling with distressed

commercial real estate assets.

The Liquidity Squeeze is On

• Many have worked through their distressed assets

and are ready to start growing again.

• More confidence, more borrowers.

• There is pressure on pricing as competition for loans

heats up.

• However, lenders view CRE as still inherently risky

Tight underwriting

Positive Signs in Lending

Up 43% above

market’s Oct. 2009

low point

2012 YTD:

8% above 2011 YTD

-3%

9%3%

6%

7%

8%

2%

7%

Regional Phase I ESA Activity: 3Q on 3Q

Regional Phase I ESA Activity: 3Q on 3Q

Florida: Quarterly Phase I ESA Growth

METRO WATCH: Q on Q Growth (3Q12)

Active Florida Metros…

Southern FLA:

the 8th most

active market for

property deals in

the U.S.

Miami:

The 4th most active metro in terms of deals by foreign investors

Active Florida Metros…

…Orlando is in Top 30 US “Markets to Watch” for Property Investment, Development

• In Orlando‟s favor:

• Investment prospects are improving in 2013.

• Orlando has more development opportunities.

• Downside are the many economic issues Florida has faced.

• Orlando benefits from job situation that is not as harsh as other

FL metros, mainly due to the tourism industry.

• “We see it in Orlando . . . those markets are back.”

~PricewaterhouseCoopers

Emerging Trends in Real Estate 2013

Orlando on Investors’ Radar:

© 2012 Environmental Data Resources, Inc.

2. ATTITUDES TOWARD PROPERTY RISK

“A negative, or rather 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

Risk Aversion Is High Among Investors

• More lenders paying closer attention to findings and

recommendations, considering their risk if recommendations

are ignored.

• More clients want detailed assessment of potential risk and

recommendations for mitigation of known conditions.

• More community banks are attempting to develop more

current risk management policies.

Risk Aversion Is High Among Lenders

RISK is the New 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.”

• “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.”

Source: EDR Insight‟s Quarterly Survey of EPs.

Risk Aversion (cont’d)

• “What happens today that was not back in 2006 and 2007 is that

loan closings are being delayed for environmental issues, simply

because financial institutions are no longer willing to take on risk as

they once were.”

• “It has brought the opportunity—good or bad—to revisit decisions we

made during the good times….to rethink our approach to due

diligence.”

• “What has changed is the relationship with loan officers. Years back,

they tended to resist environmental due diligence. Now there is much

greater awareness.”

Risk Management is Now “Everyone’s Business”

3. AREAS OF OPPORTUNITY

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

1. Focus on the Most Active Lenders

Focus On Who’s Lending:Top Originators

Watch for shifts toward other lending sources:

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

• 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.

FY13 could be the most robust year for 7(a) lending

since FY10 (excluding FY11)

Strongest SBA Lenders in the U.S.:

REITs Are Raising Capital:

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

• Among REITs‟ top concerns are risks related to factors that

could devalue their properties, including environmental liability.

REITs (cont’d)

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

Advanced Auto Parts Auto 130 – 150

AutoZone Auto 125

RiteAid Drug 100

• U.S. retailer store-opening plans hit a four-year high

• 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

Robust Forecast for New Store Openings

• 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.

• Disclosure laws like NYC‟s create opportunities for

environmental consultants in contributing data and

information to this and similar reporting in growing

number of metros.

Strong Drivers for Energy Audits

• Rising energy costs

• Weak appreciation in property prices

• Metro disclosure laws

• Federal requirements

• HUD now has a requirement that all Physical Needs

Assessments (its PCA equivalent) be accompanied by

energy audits at all Public Housing Authority sites

"Green building is not a curiosity anymore -- it's a huge

market. The green building sector will be a $280 billion global

industry by the end of the decade.” Lux Research, Boston

• Old program gaining new interest as avenue to stimulate

capital investment by foreign investors.

• NYC is a top target of foreign investors

• In FY12, the number of EB-5 projects approved was triple

FY09 levels.

• “Typically as a condition of closing, the borrower will

need to provide a clean Phase I environmental site

assessment report along with other due diligence items.”

• EB-5 presents a way for EPs to connect with key players:

• 209 Regional Centers in 40 states.

Foreign Investors and EB-5 Program

4. ADOPT WINNING STRATEGIES

Strategies to Win

You get out there.

You stay on the cutting edge of technical knowledge.

You educate clients, connect the dots for them.

You embrace a “customer first” attitude.

You have an active business development function.

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.

• New E 1527 standard

• Vapor intrusion awareness

• Updates to policies like SBA, HUD, Fannie Mae

• Real-world examples/reminders of why environmental

due diligence is critical

Topics for Client Education Efforts

Strategies to Win

You get out there.

You stay on the cutting edge of technical knowledge.

You educate clients, connect the dots for them.

You embrace a “customer first” attitude.

You have an active business development function.

Parting Thoughts

• Improvements in both the cost and availability of

commercial mortgage capital are expected to propel

transaction volumes in Q4 and into 2013.

• Real estate remains attractive to lenders, investors.

• An improving picture in the jobs market is expected to

boost the commercial real estate recovery in 2013.

• Investors are willing to take on more risk in their portfolios

in 2013 to gain greater yields:

• more investment and interest in secondary and tertiary

markets outside of strongholds such as New York and

San Francisco.

Positive Forces in the Forecast

• The market is recovering.

• Market uncertainty creates aversion to risk.

• New players and new markets are emerging.

• Think critically about where and how you can

compete most effectively.

Parting Thoughts

• The market is recovering.

• Market uncertainty creates aversion to risk.

• New players and new markets are emerging.

• Think critically about where and how you can

compete most effectively.

Be strategic and grow!

Parting Thoughts

Ashley Gowen

Research Analyst, EDR Insight

Research and Analytics:

www.edrnet.com/EDRInsight

Twitter:

@EDRInsight

Email:

[email protected]

http://www.edrnet.com/EDRInsight

mailto:[email protected]

edr insight market update: navigating in an uncertain market - orlando

Documents