For presentation at:

Irvine Due Diligence at Dawn workshop

March 2014

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

© 2014

© 2014

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

View of Market: 50,000 Feet

Y-on-Y Growth

CRE lending +14%

-SBA Lending +13%

Property prices: +15%

Property transactions:

-Large +19%

-Small (<$5M) +17%

-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.

•Deal flow up 19% in ’13•Stronger-than-expected 4Q transactions•January traditionally slower than December

•…but up 32% vs. Jan 2012

Large Commercial Real Estate Deals Up

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

• Up 17% in 2013• Forecast for another double-digit year in 2014

(Boxwood Means)

Small Cap Transactions

• Multifamily was the “belle of the ball”• up 31% Y-on-Y

• Industrial sector fast emerging as the new favorite • especially warehouse

• Office getting more interest in some metros• Retail: sales of strip centers are up 30%

Property Types in Favor

• U.S. Retail Store Closings in 2013:• Blockbuster (460)• Fashion Bug• GameStop

• Store Expansions in 2014:• Walmart (just doubled its forecast)• Dollar General• Family Dollar

Properties in Flux

Good News on the CMBS Front

• 2012: • Post-recession high of

$48B • 2013:

• Easily surpassed year-end 2012 issuance

• 2014:• Forecast to reach $100

billion for 1st time in six years

Banks’ Sell-off of Nonperforming Assets

• 2013 was a “come-back year for lending”• Lenders have returned to originating commercial real

estate loans as values and credit quality improve and demand increases

• 4Q13 originations were the highest since 2007• Apartment lending back to 2007 volumes• Growth forecast:

• 2014: 7%• 2015: 6%• 2016: 5%

Source: MBA CREF, February 2014

Come-Back Year for Property Lending

LENDING: A Positive Take

“More banks were lending on income-producing commercial real estate properties in more places by year-end 2013. 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

• A lot of optimism out of MBA CREF show last month

“All of a sudden, the banks are comfortable with real estate, which scared the daylights out of them from 2007 to 2009, and they are looking for opportunities.”

• 91% of the top firms expect originations to increase in 2014• Almost two-thirds (64 percent) expect their own firm’s originations

to increase by 5 percent or more.• More aggressive lending, strong borrower appetite, intense

competition among lenders expected.

Source: 2014 MBA CREF Outlook Survey, conducted between December 11 and December 20, 2013.

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

• 4.6% growth in 7(a) loans in FY 2013.• 7(a) lending is picking up steam after being halted by the

government shutdown in 4Q.

SBA Lending: A Bright Spot

Metro Spotlight

Source: PricewaterhouseCoopers

Metro Spotlight: Southern CA

Orange County: Ranked 10th in the US for “Top Markets to Watch: Overall Real Estate Prospects”

LA: Ranked 13th

Other Area “Metros to Watch”

• Investment prospects still considered strong.• Development and homebuilding up significantly from

2012. • A lot of multifamily under construction.• Office sector: the Fashion Island area is active.

Points in Irvine-Orange County’s Favor

© 2014

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

• 55% of respondents agree: • My clients are demanding more thorough environmental

due diligence on deals today than in past quarters.• 51% agree:

• Lenders tightened their environmental due diligence standards in 4Q13 and are more demanding in terms of having thorough environmental due diligence conducted.

• 42% of EPs agree: • My clients are more willing to discuss Phase II

sampling and other forms of additional investigation than they have been in past quarters.

Source: EDR Insight’s 4Q13 Quarterly Survey of EPs

Attitudes Toward Environmental Risk

Benchmarks in Environmental Due Diligence

4Q11 4Q12 4Q13

% of EDD for foreclosures 17% 11% 5%

Liquidating CRE loans (% of respondents)

51% 38% 32%

Selling REO (% of respondents)

77% 69% 60%

Phase Is proceeding to Phase IIs

6% 10% 16%

Phase I ESA Market Benchmarks

California Phase I ESA Trend

• Quarterly volatility• 8,457 Phase I ESAs in 4Q13• 2% growth vs. prior year

Source: EDR ScoreKeeper Model, State Profile Report 4Q13

California Metro Performance

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.”

© 2014

2014 Strategic Playbook

© 2014

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 (Asia, Europe)• Institutional capital and equity funds• Financial institutions, insurance, credit unions• M&A• Retail/big box

STRATEGY #1: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.

• Foreign investors forming U.S. alliances

= new opportunities for expanding client base

New Clients Emerging:

10 Most Active Buyers

Most Active Sellers of CRE

Top 10 Developers

• Wells Fargo • 1st for 5th consecutive year ($ volume)• Approved 18% more 7(a) loans in ’13 over prior year

• Chase • 1st for 4th consecutive year (# of loans)• Approved 4,104 7(a) loans in FY13

• Other institutions that dominate SBA lending include: • Key Corp., Regions Financial, Huntington

Bancshares, M&T Bank, Citizens Financial Group, Citigroup, Bank of America, TD Bank, US Bank, PNC Bank and SunTrust 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?

• Efficiency is KEY to data management

• Need for constant communication

• Better collaboration• Reduced cost/time• More engagement with clients• 29% of EPs believe that the

adoption of new technologies is "extremely important, gives us an edge“ (4Q13 Survey)

STRATEGY #2: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 #3:Seize Opportunities to Educate

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

Page 48

• 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 49

• 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

1. Watch the market barometers.

2. Be strategic in your business targets.

3. Leverage technology.

4. Get your name out there as a technical expert.

Playbook Strategy Summary

• Property markets: • Improving slowly• More $$s, more players, broader geographic reach

• Risk:• Fear, uncertainty, regulator pressure breed aversion

• Your Challenges: • Competition, efficiency, pricing, speed

• Forecast: • There’s now a viability to the recovery that we haven’t

seen thus far since the market downturn began.

2014 Forecast

Dianne P. CrockerPrincipal Analyst, EDR Insight

Research and Analytics:www.edrnet.com/EDRInsight

Twitter: @dpcrocker Email: dcrocker@edrnet.com