EDR Insight Market Update:

For presentation at:

Boston Due Diligence at Dawn workshop

February 2013

Navigating In An Uncertain Market

Presented by:

Dianne P. Crocker, Principal Analyst

4 Keys to Navigating an Uncertain Market

1. MARKET METRICS

• 4Q12: the most active

quarter since 4Q07.

• Deal flow increased

37% for the year.

• Now well above „09

trough.

Bumpy Road for Commercial Real Estate

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

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.

Capital Remains Concentrated in Largest Metros

Reason #2 to Love Boston…

6th most active

market for

property deals in

the U.S.

Top 10 Markets for 2013 Investment

1. Colony

2. Invesco

3. The Davis Companies

4. Farley White Investors

5. Synergy Investments

6. Cole Real Estate Investments

7. JP Morgan

8. DivcoWest

9. Clarion

10.Albany Road Partners

Top 10 Buyers in Boston

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.”

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.

• Glacial deleveraging continues.

• More confidence, more borrowers.

• Competition for loans heating up.

• Certain large financial institutions are extremely

bullish about CRE lending.

Lending in 2013

Now 50% above

market’s Oct. 2009

low point

2012 volume:

16% above 2011

New England Phase I ESA Growth

MA Quarterly Phase I ESA Activity4Q12:

+10% over 3Q12

+26% over 4Q11

2. ATTITUDES TOWARD RISK

“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

Risk Aversion Is High Among Investors

• “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.”

Risk Management is Now “Everyone’s Business”

• “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.

Feedback from EPs

3. AREAS OF OPPORTUNITY

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

1. Focus on the Most Active Lenders

Focus On Who’s Lending:Top Originators

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

Watch for shifts toward other lending sources:

Focus On What Lenders Value Most

• 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.

Strongest SBA Lenders in the U.S.:

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

• Among REITs‟ top concerns are risks related to factors that

could devalue their properties, including environmental liability.

REITs (cont’d)

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

• 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

Robust Forecast for New Store Openings

• 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.

Foreign Investors and EB-5 Program

4. ADOPT WINNING STRATEGIES

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.

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.

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.

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.

• 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

Topics for Client Education Efforts

• How aware are you of the proposed revisions to the ASTM

Phase I ESA standard?

Challenge of Education: New E 1527 Standard

Very aware, 12

%

Somewhat,25%Not at

all, 63%

“I have NOT been

privy to the task

force or the

pending changes

and would greatly

appreciate any

information.”

~community

lender

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.

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.

• 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%

2013 Forecast

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

Forecast for Risk Management

• 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.

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!

Parting Thoughts

Dianne P. Crocker

Principal Analyst, EDR Insight

Research and Analytics:

www.edrnet.com/EDRInsight

Twitter:

@dpcrocker

Email:

dcrocker@edrnet.com