GFMI CRE 2016 NY presentation

Proprietary & Confidential Page 1EVALUATE • OPTIMIZE • MANAGEEVALUATE • OPTIMIZE • MANAGE

U.S. COMMERCIAL REAL ESTATE MARKETU.S. COMMERCIAL REAL ESTATE MARKETHigh Volatility Commercial Real EstateHigh Volatility Commercial Real Estate

April 2016

Proprietary & Confidential Page 2EVALUATE • OPTIMIZE • MANAGE

Since 1985, Situs is the premier third party real estate advisory firm supporting the financial markets in both the US & Europe.

An Introduction to Situs

• Rated Master, Primary and Special Commercial Loan Servicer

• Since 1985, Situs has reviewed and underwritten over $1 trillion of Commercial Real Estate related transactions

• Data Aggregation and Validation

• M&A Loan Due Diligence

• Loan Underwriting & Valuation

Key Products: Longevity: Prestige:

TechnologyProject

ConsultingDedicated Platforms

Loan Risk Advisory

Loan Servicing

CRE Advisory


FDIC Failed Banks• 64 banks have failed YTD in 2011 and the FDIC’s “Problem Bank” list declined during Q211 from

888 to 865 institutions. This was the first decline in the “Problem” list since 2006.

• The use of Loss Share Agreements has provided a vehicle to reduce the FDIC’s assets via sale during this downturn. Policies were revised following the downturn of the 1980’s and 90’s to allow more time for investor due‐diligence, resulting in a more robust market for these assets.

FDIC Failed Banks


The Progress of Problem Banks

0

100

200

300

400

500

600

700

800

900

1000

Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13 Jan‐14 Jan‐15

Problems, M&A and Failures

FDIC Institutions with Problems M&A Failures

From problems to M&A or Failure is a 2 year journey


Commercial Real Estate Maturity Risk

$1.3 Trillion of maturities over the next four years$0.5 Trillion of Bank maturities over the next four years$0.3 Trillion of CMBS maturities over the next four years


•Outstanding commercial/multifamily mortgage debt totaled $2.76T in Q32015.

6

*Source: Mortgage Bankers Association, Q32015 Quarterly Data Book

Market Size / Investors

More than $1 Trillion

~ $500 Billion

~ $450 Billion

Just under $400 Billion


Banks, Thrifts and CMBS are the only investors which had major CRE delinquency issues – GSEs and Life Insurance companies remained virtually unaffected.

Delinquency Rates by Investor

Banks CMBS

Insurance GSEs


Commercial Properties devalued by 45%‐60%

Commercial Real Estate Estimated Market Values Amount Borrowed

At Underwriting Current Change % Change LTV % LTV $Cap Rates increase by 2%NOI 1,000,000$ 1,000,000$ -$ 0%Cap Rates 6% 8% 2% 33%Estimated Market Value 16,666,667$ 12,500,000$ (4,166,667)$ -25% 85% 14,166,667$

NOI decreases by 25%NOI 1,000,000$ 750,000$ (250,000)$ -25%Cap Rates 6% 6% 0% 0%Estimated Market Value 16,666,667$ 12,500,000$ (4,166,667)$ -25%

Combined effectNOI 1,000,000$ 750,000$ (250,000)$ -25%Cap Rates 6% 8% 2% 33%Estimated Market Value 16,666,667$ 9,375,000$ (7,291,667)$ -44% 65% 6,093,750$ 43%

Net Equity Required to Refinance the Property = -57% (8,072,917)$

Commercial Real Estate Price Devaluation


• Cap Rates increased nearly 2‐3% from 2007 to 2010 (15‐33% property value deterioration)

• Cap Rates have now reverted to 2005‐2007 levels

Commercial Real Estate Devaluation Historic Mean Reversion

*Source: Real Capital Analytics, Mortgage Bankers Association, Q32015 Quarterly Data Book


Commercial Property types tend to decline and recover in reverse chronological order

Commercial Business CycleDecline Decline Decline Decline Decline Decline Trough Recovery Recovery Recovery Recovery Recovery Recovery

SFR PropertiesAD&C PropertiesRetail PropertiesIndustrial PropertiesOffice PropertiesMultifamily Properties

Decline Recovery 1. Single Family Housing 1. Multifamily Properties 2. Acquisition, Development &

Construction Properties 2. Single Family Housing

3. Retail Properties 3. Retail Properties 4. Industrial Properties 4. Industrial Loans 5. Office Loans 5. Office Properties 6. Multifamily Properties 6. Acquisition, Development &

Construction Properties

Commercial Real Estate Business Cycle


Data Element Validation & Calculation

Loan Portfolio Data Element Aggregation, Validation & Calculation Services:

• Data elements are aggregated, validated, updated and integrated into the data tape• Revised loan stratification analysis is performed• Results used to advise client on what risks are inherent in their loan products• Work with client to create and execute a risk mitigation plan

Data Element Validation

• Validation of risks inherent to each loan product• In‐depth review of each data element for accuracy• Primary and Secondary Source Documents are

identified and used• Data Elements are validated, retrieved and/

or calculated• Loan File and Document Review


Case Study – Regional Bank passes CCAR with an MRIA…

• CCAR Bank passed the Stress Test but was given an MRIA regarding Data integrity

• Called Situs for advice

• Situs was onsite the next week with the Lead Team to set up all KDEs for Project 1 ~200,000 loan files (SFR, HE, CRE, C&I)

• Project Started 10 days later with 109 onsite Underwriters

• 3 months later the rest of the bank was given a “Hall Pass” and took advantage

• More than 370,000 files completed by year end


Imaging and Uploading Challenges

• Imaging technology is notoperating at a rapid fire pace and still is not accurate

• Expert level uploading takes more than 2 minutes per data pointo 60 seconds to extract a data point

o 40 seconds for the 2 rounds of quality control

o 40 seconds to upload the data element

• CCAR requires 138 data points per loano Approx. 4.5 hours per loan


Since 1985, Situs is the premier third party real estate advisory firm supporting the financial markets in both the US & Europe.

What We Do

• Reviewed files and Data for 30 years• In 2014, aggregated data for 70% of the CMBS market

• Advised on countless bank M&A deals in past 10 years

• Data Aggregation and Validation• M&A Loan Due Diligence• Loan Underwriting & Valuation

Key Products: Data Quality is our DNA: