EDR Insight Update: Navigating in an Uncertain Market- Cincinnati
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Jane Smith jsmith@edrnet.com
EDR Insight Update: Navigating in an Uncertain Market- Cincinnati
- 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
- 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.
- 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
- 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
Editor's Notes
- #57: So that’s how things look from where I’m sitting…and that gives you a sense of the type of research we’re doing.Everything we publish is readily available here.And my contact info is there if you ever have any questions about the market or areas of opportunityIf you have an appetite for the types of information here, jot your email address on your evaluation and you’ll get our biweeklies With that, we have a few minutes for questions…Here during the break and after, so feel free to approach me or email me anytime.