© 2012 Environmental Data Resources, Inc.

EDR Insight Market Update:

Minneapolis, MN

November 8, 2012

Navigating In An Uncertain Market

Presented by:

Ashley Gowen, Research Analyst

4 Keys to Navigating an Uncertain Market

1. MARKET METRICS

Commercial Real Estate

Lending Due Diligence

• Transactions in 3Q12:

• Up slightly from 3Q11

• Well above ‘09 • In recent quarters,

rate of growth has declined.

Bumpy Road for Commercial Real Estate

Multifamily, Office Drive Property Deals

• Majority of gains driven by:• Multifamily and Class A office:

• The “sweet spots”• Largely viewed as low risk

• Retail: • Recovering, but bifurcated

• Development: • Accelerating• More options to buy at cheaper prices

• Distressed asset deals bring contamination into play

• Failed properties & projects returning to market

The Pulse of Lending on Properties

• Fewer troubled assets on their books compared to last year

• The number of “problem banks” is falling (732)• Lending up albeit moderately

• Mainly for top-quality borrowers, Class-A assets and in primary markets.

• Assets with any sort of risk profile and borrowers without a strong track record, however, remain more difficult to finance.

• Refis and loan sales are strong drivers for EDD

Disparity in Lending

• By bank size:• Large national banks focused on gateway

markets and institutional properties• Regional banks have slowly picked up their

commercial lending• Obstacles to lending remain for smaller

community banks struggling with distressed commercial real estate assets

• Still not a great deal of interest—or capital—yet available• in secondary and tertiary metros • for average-quality assets

• Many have worked through their distressed assets and are ready to start growing again

• More confidence, more borrowers• There is pressure on pricing as competition for loans

heats up• However, lenders view CRE as still inherently risky

Tight underwriting

Positive Signs in Lending

Up 43% above market’s Oct. 2009 low point

2012 YTD:8% above 2011 YTD

-3%

9%3%

6%

7%

8%

2%

7%

Regional Phase I ESA Activity: 3Q on 3Q

Midwest Region: Q on Q Growth (3Q)

21%

5% -9%

0%

-11%

19%

29%

14%

4%

2%

4%

12%

Minnesota: Quarterly Phase I ESA Growth

Metro Watch: Q on Q Growth (3Q12)

• Minneapolis• Ranked 18th out of Top 50 U.S. Metros• PwC Emerging Trends 2013

• Chicago and Minneapolis are top performers for the Midwest in 2013

• Provides well-educated and skilled labor in research and high technology

• Unemployment rate will be nearly 3 percentage points lower than the U.S. rate next year

• “Market to Watch” for Investment and Development: 23rd

Reasons to Love Minneapolis…

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Reasons to Love Minneapolis…

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2. ATTITUDES TOWARD PROPERTY 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 vice president of Colliers International

Risk Aversion Is High Among Investors

• More lenders paying closer attention to findings and recommendations, considering their risk if recommendations are ignored.

• More clients want detailed assessment of potential risk and recommendations for mitigation of known conditions.

• More community banks are attempting to develop more current risk management policies.

Risk Aversion Is High Among Lenders

RISK is the New 4-Letter Word

Feedback from EPs:

• “Banks continue to fight for no environmental conditions at a property, regardless of the findings.”

• “Lenders are definitely more risk averse.”• “Banks appear to be looking for reasons not to make

loans.”

Source: EDR Insight’s Quarterly Survey of 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

Risk Aversion (cont’d)

• “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”

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. Who’s Lending on Properties?

Watch out for shifts towards other lending sources…

Focus On Who’s Lending: Top Originators

• The U.S. SBA could be one of only a handful of federal agencies that winds up with a bigger budget next year than it had this year

• Current proposal:• As much as $16 billion

in loans through the popular 7(a) program

• 15 percent increase over $13.9 billion in 7(a) loans so far this year

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2. SBA Lending

FY13 could be the most robust year for 7(a) lending since FY10, excluding FY11

Strongest SBA Lenders in the U.S.:

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Are you supporting SBA lending?

If so, these top 10 lenders should point you down the right path!

1. REITs will dominate this year’s news on property acquisitions.

“REITs are aiming to capitalize on low interest rates and acquire assets in prime real estate locations.”

2. This is a client sector that already recognizes the risk that environmental issues pose to property value and their own liability, the 7th highest risk factor they face.

3. REITs: A Win-Win

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

4. Retail

• U.S. retailer store-opening plans hit a four-year high in July

• 78,000 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

• NYC’s 1st benchmarking report on Local Law 84 (LL84), which requires all privately-owned properties with individual buildings over 50,000 square feet to annually measure and report their energy and water usage.

• Creates opportunities for environmental consultants in contributing data and information to this and similar reporting in growing number of metros.

5. Benchmarking Requirements

• “The New York LL84 benchmarking law is part of a nationwide trend that we've seen for disclosure of energy use in buildings. The implication will be that energy efficient buildings will continue to become more valuable in the real estate market than their energy glutton counterparts."

Nate Gillette, Vice President and Director of Energy Finance Analytics

• “NYC is just the beginning. Other cities and states have similar benchmarking regulations. Clearly, building energy performance assessment due diligence is finding its way into the commercial real estate transaction as one more factor to evaluate.“

Brian Burstiner, Sustainable Real Estate Solutions, Inc.

Implications for the Market:

What Investors Pay Attention To:

"Green building is not a curiosity anymore -- it's a huge market," said Aditya Ranade, a senior analyst with Lux Research in Boston. "The green building sector will be a $280 billion global industry by the end of the decade.”

Green buildings:• Are easier to fill, especially with young, urban residents

who want that “lifestyle”• Hold their value• Are easier to sell when the time comes• Are CHEAPER to operate

• Old program gaining new interest as avenue to stimulate capital investment by foreign investors.

• Minneapolis 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.

6. 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

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.

Parting Thoughts

• Improvements in both the cost and availability of commercial mortgage capital are expected to propel transaction volumes in Q4 and into 2013.

• Real estate remains attractive to lenders, investors. • An improving picture in the jobs market is expected to

boost the commercial real estate recovery in 2013.• Investors are willing to take on more risk in their portfolios

in 2013 to gain greater yields:• More investment and interest in secondary and tertiary

markets outside of strongholds such as New York and San Francisco.

Positive Forces in the Forecast

• 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

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• 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

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