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November 20, 2014

Presented by:Dianne P. Crocker, Principal Analyst

EDR Insight

SEATTLE DDD:RISK MANAGEMENT TRENDS IN THE

2ND ACT OF MARKET RECOVERY

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1. RECOVERY IS GAINING TRACTION.

2. RISK MANAGEMENT IS GETTING SMARTER.

3. OPPORTUNITIES ARE BEING CREATED FOR ALL OF US.

TODAY’S HIGHLIGHTS

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1. RECOVERY GAINING TRACTION

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RECOVERY IN REAL ESTATE: 2014

• Q1 WAS AN ANOMALY.

• ECONOMIC ACTIVITY LARGELY PICKED BACK UP IN Q2 AND Q3.

• IMPROVED OUR OUTLOOK FOR ALL MAJOR COMMERCIAL REAL ESTATE SECTORS…

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• THE JOBS MARKET IS GETTING BETTER.

• CORPORATE EARNINGS ARE GETTING BETTER.

• INVESTMENT ACTIVITY IS BACK IN VOGUE.

• MARKET FUNDAMENTALS ARE IMPROVING.

• INTEREST RATES ARE STILL LOW.

• ALLOCATIONS TO REAL ESTATE ARE GROWING.

BAROMETERS POINTING TO MOMENTUM

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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, All Core Property TypesARCP

Blackstone

JP Morgan

Norges Bank Investment Mgt

Hines

OMERS

Starwood Capital Group

MetLife

Essex Property Trust

David Werner Real Estate

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• UPTICK IN NEW CONSTRUCTION MARKS START OF NEW DEVELOPMENT CYCLE (FINALLY)

• STALLED PROJECTS ARE GETTING THE GREEN LIGHT• BEYOND KEY METROS (NY, SAN FRAN, BOSTON)• TOP 10 STATES:

1. Texas2. Louisiana3. New York4. California5. Iowa6. Florida7. Maryland8. Georgia9. West Virginia10. Oregon

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CONSTRUCTION IS BACK!

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Small cap property sales were up 31% through August, and are on pace to set record volume for the year.

Large property sales were up 33% for the 3rd quarter with sales accelerating across all sectors.

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• HIGHER PRICING, MORE COMPETITION IN MAJOR MARKETS• INVESTORS SEEKING HIGHER YIELDS, LESS INTENSE

COMPETITION• MORE ACTIVITY IN SMALLER METROS…

PROPERTY DEALS TILT TOWARD SMALLER METROS

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Top 10 Metro Leaders: Phase I ESA Growth in 2014

Cincinnati, OH 40%

Austin, TX 23%

Oklahoma City, OK 19%

Pittsburgh, PA 16%

Dallas, TX 16%

Houston, TX 15%

Richmond, VA 12%

Portland, OR 12%

Seattle, WA 11%

Kansas City, MO 10%

METRO HOT SPOTS, 2014

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• AVAILABILITY OF CAPITAL IS VITAL TO THE RECOVERY

• BANKS HAVE $ TO LEND, BUT STILL VERY CAUTIOUS

• EXTREMELY COMPETITIVE

• HEADING INTO NEW ROUND OF REFINANCING WITH $360B IN LOANS MATURING BY 2017

LENDING: SLOW PACE OF GROWTH IN ORIGINATIONS

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• BANKS’ NET INCOME IS RISING• BANKS SET ASIDE LESS MONEY TO COVER SOURED LOANS,

HELPING TO BOOST PROFITS.• LOAN LOSSES ARE FALLING

BOOSTS THEIR CASE FOR INCREASED LENDING ACTIVITY…

POINTS IN LENDERS’ FAVOR

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BANK LENDING HITS ITS STRIDE

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BANK LENDING HITS ITS STRIDE

CRE loans only: 7.3%

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NEAR-TERM LENDING FORECAST

Forecast calls for modest 5-6 percent growth in commercial/multifamily originations over next two years.

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WASHINGTON’S PHASE I ESA TREND LINE

Up 9% YoY

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SCOREKEEPER’S METRO FOCUS

METROS RANKED AMONG TOP 50 IN THE U.S.

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WHY IT’S GOOD TO BE IN SEATTLE

Seattle is the 8th

“Market to Watch” in the

U.S.

“The strength of Seattle’s technology-

focused local economy will continue

to support good investor demand.”

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• REGAINED FOOTING LOST IN DOWNTURN

• SEATTLE IS AMONG THE 3 METROS CAPITAL SEEKS WHEN INVESTORS BEGIN TO LOOK OUTSIDE CORE MARKETS (WITH ATLANTA, MIAMI)

• #2 INDUSTRIAL MARKET IN U.S.• #3 FOR HOTELS• #4 FOR OFFICE INVESTMENT

SEATTLE (CONT’D)

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2. RISK MANAGEMENT GETTING SMARTER

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IN GENERAL, HOW WOULD YOU RATE YOUR CLIENTS' RISK TOLERANCE IN 2014 VS. 2013?

Less aversion More aversion

SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK SURVEY OF EP’s, SEPTEMBER 2014

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TRUE/FALSE?Clients are demanding more thorough environmental due diligence on deals today than they were last year.

Less aversion More aversion

SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK SURVEY OF EP’s, SEPTEMBER 2014

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TRUE/FALSE?Clients are demanding more thorough environmental due diligence on deals today than they were last year.

“The biggest change we have seen is in volume of work. Although risk tolerance has not changed, banks are conducting more deals.”

SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK SURVEY OF EP’s, SEPTEMBER 2014

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SOURCE: EDR INSIGHT’S BENCHMARK SURVEY: LENDERS' SCOPES OF WORK FOR COMMERCIAL PROPERTY DUE DILIGENCE, SEPTEMBER 2014.

IN GENERAL, HOW WOULD YOU RATE THE LENDING SECTOR’S TOLERANCE OF ENVIRONMENTAL RISK IN 2014 VS. 2013?

HOW LENDERS VIEW RISK TOLERANCE

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• DUE DILIGENCE SCOPES ARE BEING MORE TAILORED TO THE DEAL. NOT ONE SIZE FITS ALL.

• GREATER SCRUTINY OF PHASE I ESA’S BY LENDERS• AN INCREASE IN PHASE II ESA’S IN 2014• INCREASE IN ASBESTOS SURVEYS• MORE PROPERTY CONDITION ASSESSMENTS…

OTHER SIGNS OF HIGH RISK AVERSION

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INTEGRATION OF DUE DILIGENCE

• NEGLECTED PROPERTIES ARE GETTING ATTENTION FOR THE FIRST TIME IN YEARS

• RISK AVERSION IS HIGH, SO POTENTIAL INVESTORS ARE TAKING A MORE THOROUGH LOOK—NOT ONLY AT CONTAMINATION BUT ALSO AT STRUCTURAL ISSUES.

“BY ADDING THE PCA TO THE DUE DILIGENCE PROCESS, THE GAPS OR ESTIMATES TYPICALLY FOUND IN THE APPRAISAL

CAN BE BETTER DEFINED IN THE FORM OF REAL DATA FROM THE SUBJECT PROPERTY.”

~DAVID DRUMMOND, NATIONAL CHIEF ENVIRONMENTAL RISK OFFICER AND NATIONAL CONSTRUCTION ENGINEERING

MANAGER, KEY BANK

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• A PCA IS MORE COMMONLY BEING BUNDLED WITH A PHASE I, ESPECIALLY ON MULTIFAMILY PROJECTS FOR FANNIE MAE, FREDDIE MAC AND HUD.

• AS OF JULY 2014, FREDDIE MAC IS NOW REQUIRING THAT THE APPRAISER BE GIVEN THE PROPERTY CONDITION ASSESSMENTS AND THE ENVIRONMENTAL REPORTS, AND THE APPRAISER MUST THEN OPINE TO THE IMPACT ON VALUE.

• FIRMS THAT CAN OFFER EXPERTISE IN BOTH PCAS AND PHASE I ESAS COULD HAVE A DISTINCT ADVANTAGE.

PCA’S AND PHASE I ESA’S

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3. OPPORTUNITIES BEING CREATED

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• MUNICIPALITIES HAVE REASSESSED THE POTENTIAL FOR REDEVELOPING INDIVIDUAL PROPERTIES, AND ARE MAKING DEVELOPMENT ON THESE PROPERTIES EASIER IN AN EFFORT TO LURE DEVELOPERS.

• OWNERS, DEVELOPERS AND LOCAL GOVERNMENTS ARE IN POSITION TO RESTART PREVIOUSLY-STALLED PROJECTS.

• MANY INVOLVE SITES WITH CONTAMINATION DEEMED TOO COSTLY FOR REDEVELOPMENT.

• MORE DEMAND FOR URBAN LOCATIONS BRINGS CONTAMINATED SITES INTO PLAY.

MORE INTEREST IN REDEVELOPMENT

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LOCAL INCENTIVES ARE CRITICAL

“WITH THE COMEBACK ECONOMY, DEVELOPERS EXPECT THEIR CONSULTANTS TO UNDERSTAND AND PROCURE ECONOMIC INCENTIVES. WE HAVE COUNTLESS REDEVELOPMENT PROJECTS RELYING UPON A NUMBER OF INCENTIVES FROM EPA SITE ASSESSMENT GRANTS, FEDERAL, STATE AND LOCAL TAX INCREMENT FINANCING OPTIONS, STATE GRANTS, LAND BANKS, ETC.”

~MIKE KULKA, CEO, PM ENVIRONMENTAL

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TECHNOLOGY: LEAPS AND BOUNDS

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“I AM ALL ABOUT MULTI-PLATFORM TECH THESE DAYS, I’VE GOT MY LAPTOP, PHONE AND TABLET CONFIGURED TO SYNC ALL MY CRITICAL FILES AND PRODUCTIVITY APPS AS MUCH AS POSSIBLE AND (FINALLY) IT IS HELPING ME BE MORE PRODUCTIVE. SOME PEOPLE ARE GREAT AT BEING PRODUCTIVE IN FIELD BUT AWFUL WHEN THEY GET BACK TO OFFICE AND VICE VERSA. SO INTEGRATING EMAILS, TO-DOS TASK MANAGEMENT, TRAVEL/EXPENSES, PHOTOS STORAGE EDITING, REPORT WRITING NEED TO BE INTEGRATED.”

~EP IN ATLANTA

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The FAA predicts that as many as 10,000 commercial drones will be licensed by 2018.

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“The Phase I ESA industry is so uber-competitive right now that the firms that are succeeding are the ones open to adopting new technologies, taking them past the 'wow!' factor and putting them into practice. The ability to cheaply fly over a property and get data especially on sites that are inaccessible by foot can be a major selling point on some projects. Only a handful of firms have embraced it thus far, so the field is wide open, keeping an eye out for what the FAA does to regulate, of course.”

~Bloomberg BNA Daily Environment Report

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WHAT’S NEXT?

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• MARKET HEALTH: • Back on track after slow start to ‘14• More $$s, more players, broader geographic reach

• LENDERS ARE GETTING MORE COMFORTABLE RAMPING UP NEW ORIGINATIONS, AND MOVING PAST THE LOAN WORKOUTS AND FORECLOSURES THAT DOMINATED THE PAST FEW YEARS.

• RISK • Still a general sense of risk aversion

• YOUR CHALLENGES: • Competition, efficiency, speed

2015 FORECAST: • Modest but steady growth • Viability to the recovery that we haven’t seen thus far

2015 FORECAST

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Baby stepping our way back

RISK MANAGEMENT TRENDS IN THE 2ND ACT OF MARKET

RECOVERY