For presentation at:
Pleasanton 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 +15%
-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.
•Stronger-than-expected 4Q transactions
•January traditionally slower than December
•…but up 32% versus Jan 2012
Large Commercial Real Estate Deals Up 13%
• The velocity of small-cap sales is more than
keeping pace with the larger deals.
• Forecast: Another double-digit year in 2014
• Source: Boxwood Means
Small Cap Transactions Are Up 17%
• Multifamily was the “belle of the ball”
• Up 31% Y-on-Y
• Industrial sector fast emerging as the new
favorite, particularly warehouse properties
• Office is getting more interest in some metros
• Retail:
• Sales of strip centers up 30% Y-on-Y
• More interest outside of Class-A malls,
institutional shopping centers
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
RETAIL: Properties in Flux
Good News on the CMBS Front
• 2012:
• Post-recession high of
$48B
• 2013:
• Easily surpassed year-end
2012 issuance
• 2014 forecast:
• Reach $100 billion for
1st time in six years
Banks’ Sell-off of Nonperforming Assets
• Higher property prices, better credit quality are driving
demand for lending again.
• 4Q13 originations were the highest quarterly volume since
2007.
• 2014: 7%
• 2015: 6%
• 2016: 5%
“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, December 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
More Metros Showing Promise
Source: PricewaterhouseCoopers’ Emerging Trends in Real Estate.
Reflects a
rising level of
confidence
in the
economics of
secondary
markets for
investment.
Metro Spotlight:
SAN FRANCISCO
#1 spot on the list
of U.S. metros to
watch for overall
real estate
prospects…
…for the 2nd year
in a row.
Other Area “Metros to Watch”
San Jose #3 in the U.S…
…for the 2nd year in a row.
• Tech-oriented market attracts young workers.
• Economic growth forecast to continue to thrive in 2014.
• Homebuilding prospects: 1st in the U.S.
• Development prospects: 1st in the U.S.
• Investment prospects: 2nd in the U.S.
• Solid “buy” recommendations for:
• Industrial properties: Ranked 7th
• Multifamily: Ranked 7th
• Retail properties: Ranked 8th
• Office properties: Ranked 10th
Points in SAN FRANCISCO’s Favor
• Homebuilding prospects: Ranked 3rd in the U.S.
• Investment prospects: Ranked 5th
• Development prospects: Ranked 5th
• San Jose’s technology industry attractive to investors.
• Strong job and income growth to support property
demand.
• Technology-focused economy
• Highly educated population
Points in SAN JOSE’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 - $2,400 is a typical basic
Phase I ESA pricing range
• Higher prices on the East and West coasts.
• Average turnaround:
• 2-3 weeks
• As short as 8-10 days on portfolio projects.
• Speed has become a differentiator…
Phase I ESA Pricing and Turnaround Time
• “Due to demands for fast turnaround and specialized service,
we have felt justified in charging more for our services.
Even with increased rates, we are still being awarded the
work. Might raise our prices a bit more next quarter.”
• “Based on large volume of work coming in the door and the
demand for quick turnaround times, we have increased our
prices and are choosing the clients we want to work with.”
Turnaround Time and Phase I Pricing
“It’s a dog eat dog world. I say we just wait it out.”
© 2014
2014 Strategic Playbook
© 2014
Strategic Plays for 2014
1. Pay attention to the drivers
2. Target the strongest opportunities
3. Leverage technology
4. Seize every opportunity to stand out
• Developers
• Equity REITs
• Foreign investors (Asia, Europe forming U.S. alliances)
• Institutional capital and equity funds
• Financial institutions, insurance, credit unions
• M&A
• Retail/big box
STRATEGY #1:Target the Strongest Drivers of Phase I ESA Growth
• The universe of buyers is growing rapidly:
The number of active buyers over the past twelve
months grew by 3,300 participants with the private
sector seeing the greatest growth.
• All are new opportunities for expanding your client base
Target Emerging Clients:
10 Most Active Buyers
Most Active Sellers of CRE
Top 10 Developers
• Wells Fargo
• 1st for 5th consecutive year ($ 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 49
• Refocuses attention on education and awareness
• Some new clarifications, 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
• 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…but slowly
• More $$, more players, more metros
• Risk:
• Fear, uncertainty, regulators breed risk aversion
• Your Challenges:
• Competition, efficiency, pressures on cost/TAT
• Forecast:
• There’s now a viability to the recovery that we haven’t
seen thus far since the market downturn began.
The Bottom Line for 2014
Dianne P. Crocker
Principal Analyst, EDR Insight
Research and Analytics:
www.edrnet.com/EDRInsight
Twitter:
@dpcrocker
Email: