Dianne Crockers explains risk management trends in the 2nd half of 2014.

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Presented at RTM Conference,
Philadelphia, PA
October 7, 2014
Presented by:
Dianne P. Crocker, Principal Analyst
EDR Insight
RISK MANAGEMENT TRENDS IN THE
2nd ACT OF MARKET RECOVERY

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1. RECOVERY IS GAINING TRACTION.
2. RISK MANAGEMENT IS GETTING SMARTER.
3. OPPORTUNITIES ARE BEING CREATED FOR ALL OF US.
TODAY’S HIGHLIGHTS

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1. RECOVERY GAINING TRACTION

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RECOVERY IN REAL ESTATE: 2014
• Q1 WAS AN ANOMALY.
• ECONOMIC ACTIVITY LARGELY PICKED
BACK UP IN Q2 AND Q3.
• THE OVERRIDING MARKET THESIS IS
THAT THE ECONOMY IS IMPROVING.

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• THE JOBS MARKET IS GETTING BETTER.
• CORPORATE EARNINGS ARE GETTING BETTER.
• INVESTMENT ACTIVITY IS BACK IN VOGUE.
• MARKET FUNDAMENTALS ARE IMPROVING.
• INTEREST RATES ARE STILL LOW.
• ALLOCATIONS TO REAL ESTATE ARE GROWING.
BAROMETERS POINTING TO MOMENTUM

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• MAJOR BUYING CLASSES
• Real estate investment trusts (REITs)
• Foreign investors
• Private equity funds
• Hedge funds
• Traditional developer/owner/operators
DEAL MAKING: WHO’S INVESTING?

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• UPTICK IN NEW CONSTRUCTION MARKS START OF NEW
DEVELOPMENT CYCLE (FINALLY)
• STALLED PROJECTS ARE GETTING THE GREEN LIGHT
• BEYOND KEY METROS (NY, SAN FRAN, BOSTON)
• TOP 10 STATES:
1. Texas
2. Louisiana
3. New York
4. California
5. Iowa
6. Florida
7. Maryland
8. Georgia
9. West Virginia
10. Oregon
•
CONSTRUCTION IS BACK!

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ARCHITECTURAL BILLINGS INDEX:
• IN JULY, INDEX HIT ITS HIGHLIGHT POINT
SINCE BEFORE THE DOWNTURN
• SUGGESTS THAT CRANES WON’T BE
LEVELING OFF ANY TIME SOON
• POINTS TO MARKED INCREASE IN
U.S. DEVELOPMENT IN 2014
DESIGN SERVICES ARE UP, TOO

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• SMALL CAP PROPERTY SALES:
• $37B at mid-year
• Ahead of last year’s pace by impressive 33%
• 2013 was highest in 7 years
• LARGE SALES OF PRINCIPAL PROPERTIES:
• $186 billion at mid-year
• Up 23% over 2013
• Nearly rivaling the mid-year total in 2006
CRE DEAL FLOW STATS

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• MULTIFAMILY APARTMENT DEMAND STILL LEADS
• SELF-STORAGE
• REGIONAL MALLS
• OFFICE IS IMPROVING IN MAJOR URBAN MARKETS
• INTEREST PIVOTING TO INDUSTRIAL AND RETAIL ASSETS
PROPERTY TYPES ATTRACTING INTEREST

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• PROPERTY SALES CONTINUE TO TILT TOWARDS SECONDARY
MARKETS.
• HIGHER PRICING, MORE COMPETITION IN MAJOR MARKETS
• INVESTORS SEEKING HIGHER YIELDS, LESS INTENSE
COMPETITION
• MORE ACTIVITY IN SMALLER METROS…
DIFFERENT MIX OF PROPERTY DEALS IN ‘14

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Top 10 High-Growth Metros for Phase I ESA Volume
(2014, YonY)
Cincinnati, OH 40%
Austin, TX 23%
Oklahoma City, OK 19%
Pittsburgh, PA 16%
Dallas, TX 16%
Houston, TX 15%
Richmond, VA 12%
Portland, OR 12%
Seattle, WA 11%
Kansas City, MO 10%
METRO HOT SPOTS, 2014

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• AVAILABILITY OF CAPITAL IS VITAL TO THE RECOVERY
• BANKS HAVE $ TO LEND, BUT STILL VERY CAUTIOUS
• HEADING INTO NEW ROUND OF REFINANCING WITH $360B IN
LOANS MATURING BY 2017
• EXTREMELY COMPETITIVE
LENDING: SLOW PACE OF GROWTH IN
ORIGINATIONS

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• BANKS’ NET INCOME IS RISING
• BANKS SET ASIDE LESS MONEY TO COVER SOURED LOANS,
HELPING TO BOOST PROFITS.
• LOAN LOSSES ARE FALLING
BOOSTS THEIR CASE FOR INCREASED LENDING ACTIVITY…
POINTS IN LENDERS’ FAVOR

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BANK LENDING HITS ITS STRIDE

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HOW WOULD YOU CHARACTERIZE THE LEVEL OF CURRENT
FINANCING CONDITIONS TODAY COMPARED TO CONDITIONS ONE
YEAR AGO?
• CREDIT AVAILABILITY HAS MEANINGFULLY IMPROVED: 45%
• CREDIT AVAILABILITY HAS ONLY MARGINALLY IMPROVED: 44%
• JUST AS TIGHT AS LAST YEAR: 10%
• CREDIT AVAILABLE HAS TURNED FOR THE WORSE: 1%
SOURCE: EDR INSIGHT’S BENCHMARK SURVEY: LENDERS'
SCOPES OF WORK FOR COMMERCIAL PROPERTY DUE DILIGENCE,
SEPTEMBER 2014.
CREDIT AVAILABILITY IMPROVING…

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COMPARED TO THIS TIME LAST YEAR, HOW WOULD YOU
CHARACTERIZE BORROWER INTEREST ON LOANS FOR
COMMERCIAL PROPERTIES?
• MORE SERIOUS INQUIRIES FROM BORROWERS: 46%
• ABOUT THE SAME: 43%
• FEWER SERIOUS INQUIRIES FROM BORROWERS: 11%
SOURCE: EDR INSIGHT’S BENCHMARK SURVEY: LENDERS'
SCOPES OF WORK FOR COMMERCIAL PROPERTY DUE DILIGENCE,
SEPTEMBER 2014.
…MORE SERIOUS BORROWER INTEREST

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2. RISK MANAGEMENT GETTING SMARTER

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IN GENERAL, HOW WOULD YOU RATE YOUR
CLIENTS' RISK TOLERANCE IN 2014 VS. 2013?
Less aversion More aversion
SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK SURVEY
OF EP’s, SEPTEMBER 2014

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TRUE/FALSE?
Clients are demanding more thorough environmental due
diligence on deals today than they were last year.
Less aversion More aversion
SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK SURVEY
OF EP’s, SEPTEMBER 2014

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TRUE/FALSE?
Clients are demanding more thorough environmental due
diligence on deals today than they were last year.
“The biggest change we have seen
is in volume of work. Although risk
tolerance has not changed, banks
are conducting more deals.”
SOURCE: EDR INSIGHT SURVEY: SCOPES OF WORK BENCHMARK
SURVEY OF EP’s, SEPTEMBER 2014

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SOURCE: EDR INSIGHT’S BENCHMARK SURVEY: LENDERS' SCOPES OF
WORK FOR COMMERCIAL PROPERTY DUE DILIGENCE, SEPTEMBER 2014.
IN GENERAL, HOW WOULD YOU RATE THE
LENDING SECTOR’S TOLERANCE OF
ENVIRONMENTAL RISK IN 2014 VS. 2013?
HOW LENDERS VIEW RISK TOLERANCE

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• DUE DILIGENCE SCOPES ARE BEING MORE TAILORED TO THE
DEAL. NOT ONE SIZE FITS ALL.
• GREATER SCRUTINY OF PHASE I ESA’S BY LENDERS
• AN INCREASE IN PHASE II ESA’S IN 2014
• MORE PROPERTY CONDITION ASSESSMENTS
• INCREASE IN ASBESTOS SURVEYS
• MORE INTEREST IN ENVIRONMENTAL INSURANCE TOOLS…
OTHER SIGNS OF HIGH RISK AVERSION

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• SIGNIFICANT GROWTH IN THE USE OF INSURANCE IN PAST 12-18
MONTHS
• IMPACT OF THE GREAT RECESSION ON LENDERS:
• A substantial increase in claims from loans in default that had
contamination on site. Some lenders chose to clean it up to sell it at
a higher price.
• More awareness about environmental risk, lessons learned from
downturn.
• Banks are balancing need to make more loans, but remain
disciplined.
Source: Comments made by presenter Debra Hausser, Zurich VP, EDR Insight
webinar on environmental insurance, October 1, 2014.
INSURANCE USE ON THE RISE

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• YESTERDAY U.S. EPA ISSUED FINAL RULE TO REMOVE
REFERENCE TO THE HISTORIC E 1527-05 STANDARD FROM THE
AAI RULE
• INTENT WAS TO “…REDUCE ANY CONFUSION ASSOCIATED WITH
THE REGULATORY REFERENCE TO A HISTORICAL STANDARD
THAT IS NO LONGER RECOGNIZED BY ITS ORIGINATING
ORGANIZATION AS MEETING ITS STANDARDS FOR GOOD
CUSTOMARY BUSINESS PRACTICE.”

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3. OPPORTUNITIES BEING CREATED

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INTEREST IN CONTAMINATED PROPERTIES

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• MUNICIPALITIES HAVE REASSESSED THE POTENTIAL FOR
REDEVELOPING INDIVIDUAL PROPERTIES, AND ARE MAKING
DEVELOPMENT ON THESE PROPERTIES EASIER IN AN EFFORT
TO LURE DEVELOPERS.
• EXAMPLE:
• CT has invested more than $62 million in cleaning up brownfield
sites across the state in the last two years, almost six times the
amount spent in the previous seven years.
• OWNERS, DEVELOPERS AND LOCAL GOVERNMENTS ARE IN
POSITION TO RESTART PREVIOUSLY-STALLED PROJECTS.
• MANY INVOLVE SITES WITH CONTAMINATION DEEMED TOO
COSTLY FOR REDEVELOPMENT.
• MORE DEMAND FOR URBAN LOCATIONS BRINGS
CONTAMINATED SITES INTO PLAY.
FORCES CONVERGING

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“ WITH THE COMEBACK ECONOMY DEVELOPERS EXPECT THEIR
CONSULTANTS TO UNDERSTAND AND PROCURE ECONOMIC
INCENTIVES. WE HAVE COUNTLESS REDEVELOPMENT PROJECTS
RELYING UPON A NUMBER OF INCENTIVES FROM EPA SITE
ASSESSMENT GRANTS, FEDERAL, STATE AND LOCAL TAX
INCREMENT FINANCING OPTIONS, STATE GRANTS, LAND BANKS,
ETC.”
~MIKE KULKA, CEO, PM ENVIRONMENTAL
SAMPLE BROWNFIELD PROJECT:
LOCAL INCENTIVES ARE CRITICAL

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WHAT’S NEXT?

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• TECHNOLOGY IS MOVING BY LEAPS/BOUNDS TO BRING
BUYERS/SELLERS TOGETHER TO FACILITATE DEAL MAKING
• Auctions
• Crowdfunding
• E-tailing
• Mobile offices
• THE CROWDFUNDING MARKET IS AT $10B NOW, COULD REACH
ABOUT $96 BILLION BY 2025
DISRUPTIVE TRENDS

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MARKET HEALTH:
• Back on track after slow start to ‘14
• More $$s, more players, broader geographic reach
• Loan origination volumes should increase over time
RISK:
• Still a general sense of risk aversion
YOUR CHALLENGES:
• Competition, efficiency, speed
FORECAST:
• Sanguine about the growth outlook
• Viability to the recovery that we haven’t seen thus far
4Q AND 2015 FORECAST

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Q&A