State of the Commercial Real Estate Market Chicago April 2012
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© 2011 Environmental Data Resources, Inc. Due Diligence at Dawn Workshop April 3, 2012 State of the Market: Ten Key Developments and Forecast Dianne P. Crocker Principal Analyst, EDR Insight
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Dianne Crocker of EDR presention on the state of the Chicago Commercial Real Estate Marketing in April 2012.
Transcript of State of the Commercial Real Estate Market Chicago April 2012
© 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
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• Ten Key Market Trends• Phase I ESA Market Trend Lines• What to Expect in 2012
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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
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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
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TREND 3. The Refi Heartache
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Maturities Bring Environmental Issues to Surface
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Refi Heartache
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• 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
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• Investors can no longer assume price appreciation.
• Every dollar counts.
• Buyers are risk averse.
4. CRE Property Prices
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TREND 5: CMBS Coming Off Dry Spell
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• 2012 forecast calls for moderate growth.
• Recent originations marked by more conservative underwriting.
CMBS: Down But Not Out
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TREND 6. Lending Thaw Underway
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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
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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?
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TREND 7. Loan Dispositions Are Up
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• 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
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• 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.
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TREND 8. Bank Failures Slowing
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• 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
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TREND 9. The War Chests of REITs
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• Fundraising up 32% in 2011
• Very strong market position
• Skittishness giving way to confidence
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• 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
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© 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
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• 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
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Slow Recovery in Phase I Volume
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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
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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
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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
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• Moderate 4Q decline • Jan-Feb up 24% over prior
year.
MARYLAND Phase I ESA Trend Line
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• Flat 4Q decline followed by Jan-Feb up 14% over prior year.
• Outperforming U.S. average.
VIRGINIA Phase I ESA Trend Line
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• Moderate 4Q decline followed by Jan-Feb flat over prior year.
© 2011 Environmental Data Resources, Inc.
Forecast for 2012
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2012: No Shortage of Uncertainty
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• 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’
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"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
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Lenders’ Expectations for CRE Lending, 2012
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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:
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• 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
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Questions?
