The commercial real estate market is recovering gradually with transaction volume up 25% in the second quarter of 2012 compared to the first quarter. However, lending remains cautious with banks focusing on top-quality assets in major markets. Investors are risk averse and concerned about potential issues that could negatively impact property values. Areas of opportunity include increased lending by government programs, REIT acquisitions, retail expansion, and energy benchmarking requirements. Consultants should focus on client education and differentiating themselves through technology to succeed in this uncertain market.

1. EDR Insight Market Update:
Navigating In An Uncertain Market
Presented by:
Ashley Gowen, Research Analyst
San Francisco
October 10, 2012
© 2012 Environmental Data Resources, Inc.

2. © 2012 Environmental Data Resources, Inc.

3. 1. STATE OF THE MARKET
Commercial
Real Estate
Due
Diligence Lending
© 2012 Environmental Data Resources, Inc.

4. Bumpy Road for CRE Transactions
• Transaction volume in
2Q12:
• Up 25% over 1Q
• Portfolio work drove
much of the gain
• Slow July and August
• Declining rate of growth

5. CRE Deals by Property Type
• Majority of gains driven by:
• Multifamily and Class A office:
• The “sweet spots”
• Largely viewed as low risk
• Retail:
• Recovering, but bifurcated
• Development:
• Accelerating
• More options to buy at cheaper prices
• Distressed asset deals bring contamination into
play
• Failed properties & projects returning to market

6. The Pulse of Lending
• Fewer troubled assets on their books
• The number of “problem banks” is falling (732)
• 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.

7. Disparity in Lending
• By bank size:
• 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 banks
struggling with distressed commercial real estate
assets.
• Still not a great deals of interest—or capital—yet
available
• in secondary and tertiary metros
• for average-quality assets

8. 2012 YTD:
8% above 2011 YTD
Up 43% above market’s
Oct. 2009 low point

9. Regional Phase I ESA Activity: 3Q on 3Q
-3%
7% 8%
9%
3%
7%
2%
6%

10. California & West Regions: 3Q on 3Q Growth

11. California: Quarterly Phase I ESA Growth

12. Top 10 U.S. Metros With Strongest Y-on-Y
Phase I Growth (through 9/30)

13. Metro Activity: California
Page 13

14. Why It’s Good to be in San Francisco…
The so-called "sexy six"
markets - Boston, Chicago, Los
Angeles, New York, San
Francisco, and Washington,
D.C. – are attracting the most
© 2012 Environmental Data Resources, Inc.
capital.

15. Why It’s Good to be in San Francisco…
There is quite a bit of foreign investor (Asian & European)
interest…
But why?
• SF is a gateway city
• SF real estate is relatively affordable with growth prospects
• Opposite to Hong Kong, Singapore, Paris, London, Tokyo
• SF offers investors transparency, legal system & liquidity of
the U.S. w/ rent growth and capital appreciation prospects
typically associated with emerging markets

16. Market Forecast:
Where Are We Headed?

17. Lenders’ Forecast: Originations
• Majority of
lenders (88%)
expect increase
in lending
• Most (48%) only
“slightly higher”
• Yet:
• only 6%
expect
decrease
17

18. Forecast
• Market hitting the “pause” button
• Gradual market improvements
• Spottiness will continue
• Long road to recovery, susceptible to set-backs
• Areas of uncertainty
"Ultimately, we're going to live in a world that's slower
growth and lower returns for quite awhile."
CEO, retail REIT

19. 2. ATTITUDES TOWARD PROPERTY RISK
© 2012 Environmental Data Resources, Inc.

20. “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

21. 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.”
© 2012 Environmental Data Resources, Inc.

22. Risk Aversion (cont’d)
• “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.”
• “Overall, price still remains king as opposed to real risk
concerns.”

23. 3. AREAS OF OPPORTUNITY
© 2012 Environmental Data Resources, Inc.

24. Areas of Opportunity
1. Lending Sources
2. U.S. SBA lending
3. REITs
4. Retailers
5. Benchmarking Requirements
© 2012 Environmental Data Resources, Inc.

25. 1. Who’s Lending on Properties?
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

26. Watch for shifts toward other lending
sources:
Status of CRE Lending by Source:
Commercial banks Flat/moderate growth
Government (Fannie/Freddie) Active
Watch out:
Credit Unions Expanding
There’s a
shift Private Equity Expanding
happening…
Life Insurance companies Peaking
CMBS Securitizations Recovering

27. 2. SBA Lending
• 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
Page 27

28. FY13 could be the most robust year for 7(a) lending
since FY10, excluding FY11

29. Strongest SBA Lenders in the U.S.:
Are you supporting SBA lending? If so, these top 10 lenders should point you
down the right path!
Page 29

30. 3. REITs: A Win-Win
1. REITs will dominate this year’s news on property
acquisitions.
“REITs are aiming to capitalize on low interest rates and
acquire assets in prime real estate locations.”
2. This is a client sector that already recognizes the risk
that environmental issues pose to property value and
their own liability, the 7th highest risk factor they face.

31. 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
© 2012 Environmental Data Resources, Inc.

32. REITs
• Among REITs’ top concerns are risks related to factors that
could devalue their properties, including environmental liability.

33. 4. Retail
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
Advance Auto Parts Auto 130-150
AutoZone Auto 125
RiteAid Drug 100

34. Retail Forecast: New Store Openings
• U.S. retailer store-opening plans hit a four-year high in
July
• 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
Page 34

35. 5. Benchmarking Requirements
• 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.
• Create opportunities for environmental consultants in
contributing data and information to this and similar
reporting in growing number of metros.
Page 35

36. Implications for the Market:
• “The New York LL84 benchmarking law is part of a nationwide
trend that we've seen for disclosure of energy use in buildings.
The implication will be that energy efficient buildings will
continue to become more valuable in the real estate market
than their energy glutton counterparts."
Nate Gillette, Vice President and Director of Energy Finance
Analytics
• “NYC is just the beginning. Other cities and states have similar
benchmarking regulations – like California’s AB 1103. Clearly,
building energy performance assessment due diligence is
finding its way into the commercial real estate transaction as
one more factor to evaluate.“
Brian Burstiner, Sustainable Real Estate Solutions, Inc.

37. What Investors Pay Attention To:
Green buildings:
• Are easier to fill, especially with young, urban residents
who want that “lifestyle”
• Hold their value
• Are easier to sell when the time comes
• Are CHEAPER to operate
"Green building is not a curiosity anymore -- it's a huge
market," said Aditya Ranade, a senior analyst with Lux
Research in Boston. "The green building sector will be a $280
billion global industry by the end of the decade.”

38. 4. STRATEGIES TO WIN
© 2012 Environmental Data Resources, Inc.

39. Prevailing in Turbulent Markets
Companies that perform better aren’t better at predicting.
They have a better understanding that if you can’t predict, you
have to prepare.
Your best bet against in an uncertain market…consider…
NOTE: They cynics will say
companies prevailing
To have on your team through uncertainty in the
market are growing
because of lowered prices.
To go after NOT NECESSARILY!
© 2012 Environmental Data Resources, Inc.

40. Strategies to Win
You get out there.
You think beyond Phase Is.
You connect the dots for clients.
You embrace a “customer first” attitude.
You have an active business development function.
You’re investing in people.
You have a key differentiator.
You’re investing in technology.
You can name the last CRE conference you went to.
Page 40

41. 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.
© 2012 Environmental Data Resources, Inc.

42. Topics for Client Education Efforts
• New E 1527 standard
• Vapor intrusion awareness
• Updates to policies like SBA and HUD
• Interesting projects
• Fannie Mae’s new scope
• Cases involving owner or lender liability for
contamination
Page 42

43. The Challenges of Time Constraints
• Technology becomes avenue for improving efficiency
• Speed, efficiency are critical, especially on portfolios.
• Firms are charging a premium for fast TAT.
• Technology has helped a lot of high growth firms stay
competitive
NOTE: In some cases, being able to deliver quickly
matters MORE to clients than delivering cheaply!

44. Parting Thoughts
• Think critically about where you can compete most
effectively!
© 2012 Environmental Data Resources, Inc.

45. Ashley Gowen
Research Analyst, EDR Insight
Research and Analytics:
www.edrnet.com/EDRInsight
Twitter:
@EDRInsight
Email:
agowen@edrnet.com © 2012 Environmental Data Resources, Inc.