Jane Smith jsmith@edrnet.com

1. EDR Insight Market Update:
Navigating In An Uncertain Market
Presented by:
Dianne P. Crocker, Principal Analyst
For presentation at:
Cincinnati Due Diligence at Dawn workshop
March 2013

2. 4 Keys to Navigating an Uncertain Market

3. 1. MARKET METRICS

4. Bumpy Road for Commercial Real Estate
• 4Q12: the most active
quarter since 4Q07.
• Deal flow increased
37% for the year.
• Now well above „09
trough.

5. Multifamily, Office Drive Property Deals
• Majority of gains driven by:
• Multifamily +47%
• Class A office +20%
• The “sweet spots”
• Largely viewed as low risk
• Retail: +19%
• Recovering, but bifurcated

6. Good News on the CMBS Front
• Post-recession high of $48B in 2012
• Robust start to 2013.
• January saw the highest monthly volume since
December 2007.

7. Capital Remains Concentrated in
Largest Metros

8. LENDING: Positive Signs
“By almost every observable metric, the
American banking system will enter 2013 with
its strongest balance sheet position since
before the financial crisis.”

9. Commercial Real Estate Loan Volume
• Commercial and
multifamily mortgage
originations hit their
highest levels since
2007 in 4Q12.
• Originations in 2012
increased 24 percent
over 2011.

10. Lending in 2013
• Glacial deleveraging continues.
• More confidence, more borrowers.
• Competition for loans heating up.
• Certain large financial institutions are extremely
bullish about CRE lending.

11. Environmental Due Diligence:
What‟s Up With Lenders?

12. Cincinnati Spotlight:
Commercial Real Estate, Lending, Phase I ESA Volume

13. Cincinnati Deal Flow
• 2012:
• Closely mirrored U.S.
• Highest sales since „07
• 3rd straight year of growth

14. Cincinnati: Top Property Types
• Multifamily 1st
• Industrial 2nd
• Office/Retail tied for 3rd

15. Spotlight: Cincinnati
• Slow recovery underway
• Developers:
• Starting to dust off plans which were created before
2008
• Looking toward underutilized properties as potential
opportunities for redevelopment into apartment uses.

16. Top Multifamily Buyers

17. Top Industrial Buyers

18. Top Buyers: Office

19. Cincinnati: Top CRE Deals in 2013

20. Cincinnati‟s Top Developers
• Industrial Development International:
• Ranked 1st with 17 million square feet.
• Miller-Valentine Group:
• Ranked 2nd with 11 million square feet
• Colliers International:
• Added 5 million square feet to its portfolio.
• Neyer Management/Neyer Commercial Real Estate:
• Added 18.2 million square feet to its portfolio

21. Cincinnati Lenders
• Greater Cincinnati and Northern Kentucky banks:
• Mostly profitable in 2012
• Nearly half outperformed national average
• 22 of the 46 institutions with operations based in the
region had year-over-year net income growth of 19% or
more.
• Top banks posting profits here:
• PNC Bank
• Huntington National Bank
• JPMorgan Chase Bank

22. 2013 Forecast
• The Cincinnati market, by all accounts is getting healthier.
• Job levels are nearly back to pre-recession levels
• Strong demand for rental properties will keep the multifamily
sector as the safest option for investment here.
• Office properties will continue to be looked at as possible
redevelopment opportunities for repurposing into apartment
uses.
• An increase in demand should occur in the second half of the
year. Construction will continue to perk up and rental rates
should remain relatively flat.

23. 2012 volume:
12% above 2011
Now 50% above
market‟s Oct. 2009
low point

24. OH Quarterly Phase I ESA Activity
4Q12:
24% over 3Q12
28% over 4Q11

25. OH Metro Performance

26. 2. ATTITUDES TOWARD RISK

27. Risk Aversion Is High Among Investors
“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 VP of Colliers International

28. Risk Management is Now “Everyone‟s
Business”
• “What happens today that was not back in 2006 and 2007 is that
loan closings are being delayed for environmental issues, simply
because financial institutions are no longer willing to take on risk as
they once were.”
• “It has brought the opportunity—good or bad—to revisit decisions
we made during the good times….to rethink our approach to due
diligence.”
• “What has changed is the relationship with loan officers. Years
back, they tended to resist environmental due diligence. Now there is
much greater awareness.”

29. Feedback from EPs
• “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.”
Source: EDR Insight‟s Quarterly Survey of EPs.

30. 3. AREAS OF OPPORTUNITY

31. 1. Focus on the Most Active Lenders
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

32. Focus On Who‟s Lending:
CoStar Analysis on Loan Growth by Bank
Size
% Change in Property
CRE Lending for the 5 Loans
Largest Banks in U.S. (>$50B) (2012 vs. 2011) Largest banks:
PNC Bank 15% Down 0.4%
JPMorgan Chase 13%
Bank of America 9%
U.S. Bank 2%
Branch Banking and Trust 2% Mid-size banks:
Wells Fargo 1% Up 7%

33. Watch for shifts toward other lending
sources:
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

34. Focus On What Lenders Value Most

35. • The U.S. SBA is one of only a handful of federal
agencies with a bigger budget in FY13 than in FY12:
• As much as $16 billion in loans through the popular
7(a) program
• 15 percent increase over FY12.

36. Strongest SBA Lenders in the U.S.:

37. 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

38. REITs (cont‟d)
• Among REITs‟ top concerns are risks related to factors that
could devalue their properties, including environmental liability.

39. Retailer Category Planned Openings
through 2015
Dollar General Dollar 1,300
Family Dollar Dollar 1,000
Dollar Tree Dollar 600
CVS Drug 600
Walgreens Drug 400
Advance Auto Parts Auto 320
AutoZone Auto 125

40. Robust Forecast for New Store Openings
• U.S. retailer store-openings in 2012 reached 5-year high
• 81,990 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

41. Foreign Investors and EB-5 Program
• Old program gaining new interest as avenue to stimulate
capital investment by foreign investors.
• Boston is a top target of foreign investors
• In FY12, the number of EB-5 projects approved was triple
FY09 levels.
• “Typically as a condition of closing, the borrower will
need to provide a clean Phase I environmental site
assessment report along with other due diligence items.”
• EB-5 presents a way for EPs to connect with key players:
• 209 Regional Centers in 40 states.

42. 4. ADOPT WINNING STRATEGIES

43. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.

44. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.

45. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.

46. 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.

47. Topics for Client Education Efforts
• New E 1527 standard
• Vapor intrusion awareness
• Updates to policies like SBA, HUD, Fannie Mae
• Real-world examples/reminders of why environmental
due diligence is critical

48. Challenge of Education:
New E 1527 Standard
• How aware are you of the proposed revisions to the ASTM
Phase I ESA standard?
Very
aware, 12
“I have NOT been %
privy to the task
force or the
Somewhat,
pending changes Not at 25%
and would greatly all, 63%
appreciate any
information.”
~community
lender

49. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.

50. Strategies to Win
You get out there.
You stay on the cutting edge of technical knowledge.
You educate clients, connect the dots for them.
You embrace a “customer first” attitude.
You have an active business development function.

52. 2013 Forecast
• Improvements in both the cost and availability of
commercial mortgage capital are expected to drive
increases in 2013:
• Total investment transaction volume? +10 to 20%
• CMBS issuance? +50%
• CRE loan originations? +11%

53. Forecast for Risk Management
1. Continued focus on modeling the downside
2. More emphasis on technology, streamlining
3. Repurposing the oversupply of obsolescent properties
4. More deferred maintenance issues arising on refis or
neglected properties
5. Property Condition Assessments growing in importance

54. Parting Thoughts
• The market is recovering.
• Market uncertainty creates aversion to risk.
• New players and new markets are emerging.
• Think critically about where and how you can
compete most effectively.

55. Parting Thoughts
• The market is recovering.
• Market uncertainty creates aversion to risk.
• New players and new markets are emerging.
• Think critically about where and how you can
compete most effectively.
Be strategic and grow!

56. Dianne P. Crocker
Principal Analyst, EDR Insight
Research and Analytics:
www.edrnet.com/EDRInsight
Twitter:
@dpcrocker
Email:
dcrocker@edrnet.com