For presentation at:

Charlotte Due Diligence at Dawn workshop

December 2013

Strategic Plays for the 2nd Half of Market Recovery Presented by:

Dianne P. Crocker, Principal Analyst

Survival Mode

True start of

market rehabilitation

Year of refocusing

and repositioning

Market in Transition

2008 2010 201220112009 2013 2014

© 2013

© 2013

Status of Commercial Real Estate

The year 2014 may well be the year that the real estate markets “recover from the recovery.”

PricewaterhouseCoopers Emerging Trends in Real Estate, November 2013

View of Market: 50,000 Feet

CRE Lending +14%

-SBA Lending +13%

Property transactions:

-Large +27%

-Small (<$5M) +18%

-Portfolios +20%

CMBS Issuance +46%

• All debt spigots are open.• Growing investor confidence.• More diversity in lenders,

investors.• Activity across broader spectrum

of properties.• Improving property fundamentals.

•4Q12: the most active quarter since 4Q07

•By 3Q13, deal flow up 27% in 3Q YTD

•Poised for healthy finish to the year

Large Commercial Real Estate Deals Up

• The velocity of small-cap sales is more than keeping pace with the larger CRE investment market.

• Up 17% YTD this year• Transactions continue to grow at a faster clip in

bigger cities than smaller ones.

Small Cap Transactions

• Multifamily is still the “belle of the ball” (up 31% Y-on-Y)

• Retail: sales of strip centers are up 30% • Office/industrial getting more interest• Warehouse activity, especially in port cities

Property Types in Favor

• U.S. Retail Store Closings in 2013:• Blockbuster (460)• Fashion Bug• GameStop• Barnes & Noble• The Gap• US Cellular• Sears/Kmart

Properties in Flux

Good News on the CMBS Front

• 2012: • Post-recession high

of $48B • 2013:

• Already surpassed year-end 2012 issuance

• 46% growth forecast for 2013

Banks’ Sell-off of Nonperforming Assets

• Lenders have returned to originating commercial real estate loans as values and credit quality improve and demand increases

• Commercial and multifamily real estate borrowing and lending continued at a moderate clip in the third quarter.

• Origination volumes:• 29% higher than in Q3 2012 • Flat compared to 2Q13• Up 14% year to date

Source: MBA’s Quarterly Index of Commercial/Multifamily Mortgage Bankers Originations, 3Q13.

Commercial Property Lending Volume

LENDING: A Positive Take

“More banks were lending on income-producing commercial real estate properties in more places in the 3rd quarter. The number of lenders who plan to increase property loans in next 12 months far outnumber those who plan to lower them.”

~ Sam Chandan, president and chief economist at Chandan Economics

• The comeback of commercial real estate lending is gaining momentum, especially credits backed by apartments and leased properties.

• CRE lending was a scourge for scores of community banks during the financial crisis, but more banks are warming up to it in their quest for higher returns. • However, CRE lending volumes remain well below the

highs of six years ago.

Bottom Line on Lending

• Supported more than $29B in loans in FY13—its third-highest year ever.

• More than 54,000 loans backed through its 7(a) and 504 programs

• The number of 7(a) loan increased to 46,399 in 2013, 4.6% over the number of loans in FY 2012.

• The 504 loans produced more than 7,700 loans in FY 2013, a slight decrease from FY 2012.

• 7(a) lending is picking up steam after being halted by the government shutdown.

SBA Lending: A Bright Spot

• Slow 2012 turned corner• Uncertainty giving way to

confidence• Firms turn to M&A for growth on

their own• 2nd half of 2013 expected to be

active

M&A Gaining Momentum

CHARLOTTESpotlight on:

16th in the US for “Top Markets to Watch: Overall Real Estate Prospects- Up 1 spot from 2012 ranking.

Other Regional “Metros to Watch”

Points in Charlotte’s Favor: • For 2014, investment and

development prospects in Charlotte are up slightly.

• In its favor: • Well above-average

population growth. • Bodes well for gains in

health care, consumer industries, and housing.

• Strong 2nd place projected growth in population of millennials…

© 2013

APPROACHES TO ENVIRONMENTAL RISK MANAGEMENT

• 94% of institution’s boards now devote more time to risk

management oversight than five years ago

• 80% percent of chief risk officers report directly to either

the board or the CEO

Source: Deloitte lender study

Banks and Risk Management

• “I know the banks’ Environmental Risk Reviewers would like to tighten the standards on a more consistent basis, but they get a lot of pressure from the loan officers to make the deals happen.”

• “I believe that clients are more aware of the potential environmental risks involved with real estate and are requiring more in-depth

research and diligence before purchasing property.”• “Our projects are much more likely to go to a Phase II investigation

than in past years.”

• Loan closings are being delayed for environmental issues-simply because financial institutions are no longer willing to take on risk as

they once were.”

Attitudes Toward Environmental Risk

Benchmarks in Environmental Due Diligence

4Q11 4Q12 1Q13 2Q13

% of EDD for foreclosures 17% 11% 7% 5%

Liquidating CRE loans (% of respondents)

51% 38% 42% 36%

Selling REO (% of respondents)

77% 69% 65% 63%

Phase Is proceeding to Phase IIs

6% 10% 17% 16%

Phase I ESA Market Benchmarks

NORTH CAROLINA Phase I ESA Trend

• Steady growth trend in 2013

• 14% growth in 2Q13• 24% growth in 3Q

NORTH CAROLINA: Metro Focus

Intense Pressure

Intense Pressure

• Intense pressure on price and turnaround time continues. • Latest results show that $1,800 - $2,400 is a typical basic Phase

I ESA pricing range• Higher prices on the East and West coasts.

• Average turnaround:• 2-3 weeks• As short as 8-10 days on portfolio projects. • Speed has become a differentiator…

Phase I ESA Pricing and Turnaround Time

• “Due to demands for fast turnaround and specialized service, we have felt justified in charging more for our services. Even with increased rates, we are still being awarded the work. Might raise our prices a bit more next quarter.”

• “Based on large volume of work coming in the door and the demand for quick turnaround times, we have increased our prices and are choosing the clients we want to work with.”

Turnaround Time and Phase I Pricing

“It’s a dog eat dog world. I say we just wait it out.”

© 2013

2014 Strategic Playbook

© 2013

Strategic Plays for 2014

1. Pay attention to the drivers2. Target the strongest opportunities3. Leverage technology4. Seize every opportunity to stand out

• Developers • Equity REITs• Foreign investors• Institutional capital and equity funds• Financial institutions, insurance, credit unions• M&A• Retail/big box

STRATEGY:Target Drivers of Phase I ESA Growth:

• The universe of buyers is growing rapidly • The number of active buyers over the past twelve months

grew by 3,300 participants with the private sector seeing the greatest growth.

• A number of new investors from Asia and Europe are also growing in influence.

= new opportunities for expanding client base

Recent Trend:

10 Most Active Buyers

Most Active Sellers of CRE

Top 10 Developers

• Wells Fargo • 1st for 5th consecutive year ($ volume)• 2nd largest in 7(a) loan units (3,481 loans in FY13)• Approved 18% more 7(a) loans over prior year• 504 loan dollars up by 38 percent in 2013

• Chase • 1st for 4th consecutive year (# of loans)• Approved 4,104 7(a) loans in FY13• At state level: top in Arizona, Illinois, Louisiana, New Jersey and

New York.• Huntington, TD, US Bank

Top SBA Lenders

• “We've recently seen lenders aggressively come back to this business who retreated during the crisis," said Philip B. Flynn, CEO of Associated Banc-Corp.

• SunTrust Banks: • “We’ve put our distress problems behind us and are back

to focus on growth." • Growing its retail, office, multifamily and industrial CRE

relationships. • Also building out its REIT business

• GE Capital Real Estate is increasing lending by 40% this year

Which Lenders Are Growing Originations?

• PNC Financial Services Group (PNC), U.S. Bancorp (USB) and KeyCorp (KEY) all reported loan growth of at least 5% in the third quarter

• Loan growth for the regional banks is outpacing the growth of the industry overall

Regional Banks 3Q13 Loan Growth

• Efficiency is KEY to data management

• Need for constant communication

• Better collaboration• Reduced cost/time• More engagement with clients

STRATEGY:Leverage Technology

One EP’s Take on Technology

How has technology changed the way that you conduct Phase I environmental site assessments? 

“Now I can go on a site visit, take photos on my smartphone or tablet, record my notes in real time, go to a coffee shop, upload everything to my computer and write my report. I can do all of this in between site visits, especially if I’m on the road or out of town. I used to carry around too much clutter to a site visit. Each time I performed a new function, I would have to put down one object to use another, distracting me from my greater purpose. Going into the field with just a smartphone or tablet is one of the most enlightening experiences for me.”

Duncan Anderson, Odic

Most Used Apps by EPs

• NYC technology conference:“More data. More transparency. If we can all get data into people’s hands faster, it’s a win-win for everyone. And these apps need to be rapidly deployed. They can’t take users even one second longer to use.”

• Xceligent has a mobile app, eXplore™ iPad App, that gives commercial real estate professionals real-time access to over 50 fields of data by using a set radius or by drawing a polygon around a customized search area.  

CRE and Tech Intersect

STRATEGY:Seize Opportunities to Educate

Out in Front on Education Related to ASTM E 1527-13:

Page 50

• Refocuses attention on education and awareness• Some new requirements to consider• Valuable reminders on certain areas of EDD (e.g., user

responsibilities) that risk managers may not have given much thought to in the past eight years

Impact of a New ASTM Standard

Page 51

• Vapor intrusion awareness• New SBA SOP 50 10 5(f) as of Jan. 1st • OCC Guidance, August 2013• Real-world examples/reminders of why environmental

due diligence is critical

Other Opportunities to Educate

• Watch the market barometers• Be strategic in your business targets• Leverage technology• Get your name out there as a technical expert

Playbook Strategy Summary

Dianne P. CrockerPrincipal Analyst, EDR Insight

Research and Analytics:www.edrnet.com/EDRInsight

Twitter: @dpcrocker Email: dcrocker@edrnet.com