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Dianne Crocker of EDR presention on the state of the Chicago Commercial Real Estate Marketing in April 2012.
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© 2011 Environmental Data Resources, Inc.
Due Diligence at Dawn WorkshopApril 3, 2012
State of the Market:Ten Key Developments and Forecast
Dianne P. Crocker
Principal Analyst, EDR Insight
“After the market gave us a rocky ride in 2011, commercial real estate is back in the saddle for 2012.”
~John Levy, founder of John B. Levy & Company
Page 2
• Ten Key Market Trends• Phase I ESA Market Trend Lines• What to Expect in 2012
Page 3
TREND 1. Property Transactions on Upward Trajectory
Page 4Source: Real Capital Analytics
• 2011 volume increased 52% year-on-year.
• Jan/Feb 2012 up 20% year-on-year.
• Improvements expected to continue.
1. CRE Transaction Volume
Page 5
TREND 2: Multifamily Attracting the Most Demand…
• Fundamental shift away from home ownership.
• Freddie Mac, Fannie Mae, lenders showing more willingness underwriting apartment buildings than any other property type.
• Due diligence often involves vapor migration screening, LBP, asbestos.
• Major retail chains are downsizing.
• 6,000-9,000 store closings expected in 2012.
• More strategic acquisitions by retailers.
• More expansion by dollar stores, pharmacies.
…Retail in Flux
Page 7
TREND 3. The Refi Heartache
Page 8
Maturities Bring Environmental Issues to Surface
Page 9
Refi Heartache
Page 10
• Prospects for refinancing all of these loans are pretty grim.
• Good news for distressed asset investors, bringing life to “zombie properties.”
• Major re-evaluation of properties ahead.
• Driver for services that will inform the process of estimating property value.
TREND 4. CRE Property Prices: Erratic, Stabilizing
Page 11
• Investors can no longer assume price appreciation.
• Every dollar counts.
• Buyers are risk averse.
4. CRE Property Prices
Page 12
TREND 5: CMBS Coming Off Dry Spell
Page 13
• 2012 forecast calls for moderate growth.
• Recent originations marked by more conservative underwriting.
CMBS: Down But Not Out
Page 14
TREND 6. Lending Thaw Underway
Page 15
Status of CRE Lending by Source:
Commercial banks Improving
Government (Fannie/Freddie)
Active
Credit Unions Active
CMBS Improving
Life Insurance companies Robust
Who’s Lending? Life Insurers
Page 16
Life insurance companies returned in a big way in 2011.Expected to account for 20% of the lending market in 2012.
• Originations expected to increase in 2012
• Stiff competition for underwriting small volume of viable, low-risk loans
• Expect more underwriting on construction loans in 2012, particularly resuscitated multifamily projects
Who’s Lending?
Page 17
TREND 7. Loan Dispositions Are Up
Page 18
• Banks’ asset disposition plans picked up momentum in 2011.
• Unlike 2010 when FDIC was the only seller in town:• Sell-off of distressed
loans, properties involves broader base of lenders
• Can involve large portfolios in multiple states
• Good news for investors
Loan Dispositions Are Up
Page 19
• Sales of nonperforming loans and REO offerings—especially from community and regional banks—are up.
• In the early innings of banks clearing debt on their balance sheets.
• Need for speed on due diligence—and caution.
2008
2009
2010
2011
0 50 100 150 200 250 300
25
250
157
92
TREND 8. Bank Failures Slowing
Page 20
• Trepp still has more than 200 banks categorized as high risk of failure:
• "Losses will pile up again in 2012. We estimate that banks are about 60% to 70% of the way through their loss recognition, with another $40 billion to $80 billion in losses to be written off going forward.“
• Shift toward FDIC having acquiring bank lined up or asset disposition via private firms, auctions.
8. Bank Failures to Continue
Page 21
TREND 9. The War Chests of REITs
Page 22
• Fundraising up 32% in 2011
• Very strong market position
• Skittishness giving way to confidence
Page 23
• Commercial real-estate acquisitions by REITs up 40% in 2011.
• Accounted for one-third of property deals in 2012.
• Expect REITs to be the big headline makers this year.
The War Chests of REITs
Page 24
© 2011 Environmental Data Resources, Inc.
TREND 10. Risk Aversion Index Up in ‘11
This time last year: the lowest reading in 4 years
Last year’s uptick: the result of market instability
Risk Aversion Up in ‘11
Page 26
• Last year’s “summer of discontent” continued the upward trend in the Risk Aversion Index.
• Expect “risk on-risk off” attitude as market instability continues.
© 2011 Environmental Data Resources, Inc.
Phase I ESA Market Metrics
Page 27
Slow Recovery in Phase I Volume
Page 28
2011 vs prior year: 7% growth
• Significant geographic disparity in Phase I volume.• Stand-outs in an otherwise struggling commercial
real estate market. • All “global gateways” outperformed average Phase I
ESA growth among top metros in 2010…
Location, Location, Location
Page 29
New York City SeattleLos Angeles San Diego
Washington, DC San FranciscoHouston San JoseBoston Austin
PricewaterhouseCoopersTop 10 Metros for CRE Investment
Metro Activity: Chicago and DC
Page 30
Metro Rank in Top 50 Metros
4Q on 4Q Growth
Jan/Feb 2012 vs prior year
Investment Prospects for
CRE (PwC)
Chicago 3rd -7% +29% Good (21st)
Washington, DC
10th -6% + 2% Good (1st)
ILLINOIS Phase I ESA Trend Line
Page 31
• Moderate 4Q decline • Jan-Feb up 24% over prior
year.
MARYLAND Phase I ESA Trend Line
Page 32
• Flat 4Q decline followed by Jan-Feb up 14% over prior year.
• Outperforming U.S. average.
VIRGINIA Phase I ESA Trend Line
Page 33
• Moderate 4Q decline followed by Jan-Feb flat over prior year.
© 2011 Environmental Data Resources, Inc.
Forecast for 2012
Page 34
2012: No Shortage of Uncertainty
Page 35
• Ingredients for a busy year.
• Market fragility will magnify setbacks.
• Stop and start activity likely.
• Environmental due diligence has important role to play.
Year of ‘Brake and Throttle’
Page 36
"As mortgage production ramps up, investors will see banks being more competitive, but with far more stringent underwriting standards." (Colliers)
• Property transactions forecast to increase by 50 percent “with a good chance for a surprise to the upside.”
• Maturing loans will drive deal volume. • Equity capital, led by REITs, will be more plentiful and
more motivated this year. • CMBS market gaining traction after ‘11 setback.• Environmental firms are hiring again.• Originations by lending institutions should increase
gradually…
Positive Forces in 2012
Page 37
Lenders’ Expectations for CRE Lending, 2012
Page 38
Source: EDR Insight. 4Q11 Quarterly Survey of Financial Institutions.
• 72% expect higher origination levels this year.
• Equity REITs• Foreign investors• Developers • Institutional capital and equity funds• Financial institutions, insurance, credit unions• M&A• Retail/big box• Transfer of oil/gas assets
Sectors Driving Phase I ESA Growth in 1Q:
Page 39
Page 40
• EDR Insight, a source of:
• Short, frequent research notes on strategic and technical topics
• Market metrics• Intell from outside subject matter experts• This month:
• 1Q12 capsule summaries of key Phase I markets
• Sign up for free biweekly emails at www.edrnet.com/edrinsight
41
Questions?