EDR Insight
EDR Insight ®
Researching your top challenges
May 30, 2013
Survey Results for Commercial Real Estate Lenders Key Benchmarks Indicate Slow, Yet Steady March Forward At EDR’s Annual Client summit in Arizona earlier this month, EDR Insight’s Dianne Crocker summarized the property assessment market with these 11 words:
Client Sectors with Highest Scores for Strong Demand in 1Q13
“Baby stepping recovery. Intense pressure. Morphing. Agile and alert will thrive.” The results from EDR Insight’s 1Q13 Quarterly Benchmarking Survey of Financial Institutions supports the characterization that the recovery is marching slowly onward as lenders get more comfortable ramping up new originations and moving past the loan workouts and foreclosures that dominated the past few years. Although improvements in the commercial property assessment market have been slow and erratic thus far, a number of key barometers are now painting a brighter picture. Capital markets are in their best shape in years. Debt is no longer just available for the top Class A properties but also Class B and assets in secondary markets—and from a wider universe of lenders. Cash-flush investors—REITs, pension funds, institutions, private equity players—are out shopping assets. Confidence from investors is rising, and with it, property transaction volume. Commercial property sales in Q1 were up 35 percent from a year earlier—the second highest quarterly volume post-recession. CMBS, once a strong driver of Phase I ESA demand, is showing strong performance with 2013 YTD issuance approaching 2012’s calendar year total. Stronger property pricing has invigorated loan dispositions, particularly by small banks, which was a healthy driver of portfolio projects this past quarter. Banks are moving commercial loans off their balance sheets at a faster pace and at higher prices than at any time since the beginning of the financial crisis. Risk tolerance is holding fast to the high levels of the past few quarters. Smaller community banks are revising or upgrading their environmental policies—and even in some cases, adopting their first-ever guidelines. As one respondent noted: “In 1Q 2013, we aggressively implemented new guidelines for environmental due diligence for commercial loans with mortgages.” The regional and large national/international institutions are largely holding fast to existing requirements, with virtually no respondents indicating much relaxation in underwriting standards over the past quarter. Looking ahead to the reminder of 2013, the outlook for property investment and lending is brighter than it was six months ago. Notably, the Urban Land Institute just released a forecast that commercial real estate transaction volume would increase by 7% this year—and 10% more in 2014. Likewise, CMBS issuance is forecast to rise by a more robust 50 percent this year—and another 14% in 2014. These and other current forecasts combined point to continued stabilization in the market over the next few years. The same feelings of uncertainty still exist, but they have diminished. Barring some market upset, the general sentiment is one of increased activity in the remaining seven months of the year.
For the 7th straight quarter, developers are at the top of the list of client sectors driving demand for Phase I environmental site assessments. Builders need inventory and are looking to close deals before construction costs climb any further. Rounding out the top three users of Phase I ESAs driving strong demand were new originations from both regional/ community banks and large, national institutions. There has been a notable shift in quarterly survey results indicating a market in transition away from workouts and foreclosures and toward more new loan originations.
Average Turnaround Time for Phase I ESAs (number of business days)
The average turnaround time requested from outside consultants for completing a basic Phase I ESA is 15 business days. For a Phase I “plus,” the time to complete increases to 22 days. Fifty-six percent of respondents indicated that their environmental consultants typically charge the bank a premium if a faster Phase I ESA turnaround time is required.
EDR Insight ®
Researching your top challenges
May 30, 2013
CRE Originations Ticking Upward The bulk of environmental due diligence for financial institutions is on new originations and refis as well as support of loan dispositions. Very few respondents experienced a decline in loan originations this quarter (12%) and half of the survey sample experienced an increase (4% a “substantial” increase).
Nationally, the average price for a basic Phase I ESA in 1Q13 was $2,481, an increase of about nine percent over the previous quarter, bringing the average more in line with the $2,400 range that characterized the rest of 2012. Isolating pricing in the lender sector alone, the average price for a basic scope Phase I ESA (no non-scope issues) was $1,893 in the first quarter, a slight increase of four percent over the previous quarter and a decline of eight percent year on year.
Benchmarks in Environmental Due Diligence The latest benchmarks in environmental due diligence further highlight a market that has a reduced need for environmental due diligence on foreclosures, but is still undergoing the long process of moving underperforming loans off their balance sheets. Just in the past five quarters, the average percentage of the lending sector’s total environmental due diligence work devoted to foreclosures fell from 17 percent to 7 percent. Less pronounced declines can be seen in terms of loan liquidations and REO sales, which are falling slowly but still high. Smaller banks in particular are finally showing willingness to aggressively unloading their problematic assets. Reflective of the risk-averse mindset in the market, the percentage of Phase I ESAs going to Phase IIs increased from six percent at the end of 2011 to 17 percent in the latest quarter.
ASTM E 1527-13 Revisions
EDR Insight ®
Researching your top challenges
May 30, 2013
Forecast for Commercial Real Estate Lending Sixty-five percent of respondents expect more originations on commercial properties in 2013 over 2012 and virtually no respondents are expecting a decline this year. Roughly one-third of the survey sample expects to rely more on outside environmental support (and only 3 percent less). Less support is expected to be needed to support foreclosures and REOs with more focus on refi needs and building up loan originations again.
Thank you for completing our survey EDR Insight would like to thank everyone who participated in this quarterly survey effort. Your participation means that we are able to collect the most comprehensive data sample possible and to continue to provide you and the industry with benchmarks and insight. Congratulations to richards, the winner of this quarter's iPad Mini giveaway! Look for EDR Insight's 2Q13 Benchmarking Survey of Financial Institutions launch in early July.
Questions or comments? Dianne P. Crocker| Principal Analyst Email: [email protected] www.edrnet.com/edrinsight www.twitter.com/edrinsight www.edrnet.com Unauthorized reproduction, distribution or use of EDR Insight’s Strategic Briefs and Technical Briefs is strictly prohibited. © 2013 Environmental Data Resources Inc. All rights reserved.
Researching your top challenges
May 30, 2013
Survey Results for Commercial Real Estate Lenders Key Benchmarks Indicate Slow, Yet Steady March Forward At EDR’s Annual Client summit in Arizona earlier this month, EDR Insight’s Dianne Crocker summarized the property assessment market with these 11 words:
Client Sectors with Highest Scores for Strong Demand in 1Q13
“Baby stepping recovery. Intense pressure. Morphing. Agile and alert will thrive.” The results from EDR Insight’s 1Q13 Quarterly Benchmarking Survey of Financial Institutions supports the characterization that the recovery is marching slowly onward as lenders get more comfortable ramping up new originations and moving past the loan workouts and foreclosures that dominated the past few years. Although improvements in the commercial property assessment market have been slow and erratic thus far, a number of key barometers are now painting a brighter picture. Capital markets are in their best shape in years. Debt is no longer just available for the top Class A properties but also Class B and assets in secondary markets—and from a wider universe of lenders. Cash-flush investors—REITs, pension funds, institutions, private equity players—are out shopping assets. Confidence from investors is rising, and with it, property transaction volume. Commercial property sales in Q1 were up 35 percent from a year earlier—the second highest quarterly volume post-recession. CMBS, once a strong driver of Phase I ESA demand, is showing strong performance with 2013 YTD issuance approaching 2012’s calendar year total. Stronger property pricing has invigorated loan dispositions, particularly by small banks, which was a healthy driver of portfolio projects this past quarter. Banks are moving commercial loans off their balance sheets at a faster pace and at higher prices than at any time since the beginning of the financial crisis. Risk tolerance is holding fast to the high levels of the past few quarters. Smaller community banks are revising or upgrading their environmental policies—and even in some cases, adopting their first-ever guidelines. As one respondent noted: “In 1Q 2013, we aggressively implemented new guidelines for environmental due diligence for commercial loans with mortgages.” The regional and large national/international institutions are largely holding fast to existing requirements, with virtually no respondents indicating much relaxation in underwriting standards over the past quarter. Looking ahead to the reminder of 2013, the outlook for property investment and lending is brighter than it was six months ago. Notably, the Urban Land Institute just released a forecast that commercial real estate transaction volume would increase by 7% this year—and 10% more in 2014. Likewise, CMBS issuance is forecast to rise by a more robust 50 percent this year—and another 14% in 2014. These and other current forecasts combined point to continued stabilization in the market over the next few years. The same feelings of uncertainty still exist, but they have diminished. Barring some market upset, the general sentiment is one of increased activity in the remaining seven months of the year.
For the 7th straight quarter, developers are at the top of the list of client sectors driving demand for Phase I environmental site assessments. Builders need inventory and are looking to close deals before construction costs climb any further. Rounding out the top three users of Phase I ESAs driving strong demand were new originations from both regional/ community banks and large, national institutions. There has been a notable shift in quarterly survey results indicating a market in transition away from workouts and foreclosures and toward more new loan originations.
Average Turnaround Time for Phase I ESAs (number of business days)
The average turnaround time requested from outside consultants for completing a basic Phase I ESA is 15 business days. For a Phase I “plus,” the time to complete increases to 22 days. Fifty-six percent of respondents indicated that their environmental consultants typically charge the bank a premium if a faster Phase I ESA turnaround time is required.
EDR Insight ®
Researching your top challenges
May 30, 2013
CRE Originations Ticking Upward The bulk of environmental due diligence for financial institutions is on new originations and refis as well as support of loan dispositions. Very few respondents experienced a decline in loan originations this quarter (12%) and half of the survey sample experienced an increase (4% a “substantial” increase).
Nationally, the average price for a basic Phase I ESA in 1Q13 was $2,481, an increase of about nine percent over the previous quarter, bringing the average more in line with the $2,400 range that characterized the rest of 2012. Isolating pricing in the lender sector alone, the average price for a basic scope Phase I ESA (no non-scope issues) was $1,893 in the first quarter, a slight increase of four percent over the previous quarter and a decline of eight percent year on year.
Benchmarks in Environmental Due Diligence The latest benchmarks in environmental due diligence further highlight a market that has a reduced need for environmental due diligence on foreclosures, but is still undergoing the long process of moving underperforming loans off their balance sheets. Just in the past five quarters, the average percentage of the lending sector’s total environmental due diligence work devoted to foreclosures fell from 17 percent to 7 percent. Less pronounced declines can be seen in terms of loan liquidations and REO sales, which are falling slowly but still high. Smaller banks in particular are finally showing willingness to aggressively unloading their problematic assets. Reflective of the risk-averse mindset in the market, the percentage of Phase I ESAs going to Phase IIs increased from six percent at the end of 2011 to 17 percent in the latest quarter.
ASTM E 1527-13 Revisions
EDR Insight ®
Researching your top challenges
May 30, 2013
Forecast for Commercial Real Estate Lending Sixty-five percent of respondents expect more originations on commercial properties in 2013 over 2012 and virtually no respondents are expecting a decline this year. Roughly one-third of the survey sample expects to rely more on outside environmental support (and only 3 percent less). Less support is expected to be needed to support foreclosures and REOs with more focus on refi needs and building up loan originations again.
Thank you for completing our survey EDR Insight would like to thank everyone who participated in this quarterly survey effort. Your participation means that we are able to collect the most comprehensive data sample possible and to continue to provide you and the industry with benchmarks and insight. Congratulations to richards, the winner of this quarter's iPad Mini giveaway! Look for EDR Insight's 2Q13 Benchmarking Survey of Financial Institutions launch in early July.
Questions or comments? Dianne P. Crocker| Principal Analyst Email: [email protected] www.edrnet.com/edrinsight www.twitter.com/edrinsight www.edrnet.com Unauthorized reproduction, distribution or use of EDR Insight’s Strategic Briefs and Technical Briefs is strictly prohibited. © 2013 Environmental Data Resources Inc. All rights reserved.
