Vital Signs: 2015 Market Update (EBA)

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THE MARKET IN YOUR WORDS:

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THE MARKET IN YOUR WORDS:

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• LEADING MARKET INDICATORS

• CURRENT LENDING ENVIRONMENT

• TOP CHALLENGES

• THE NEAR-TERM FORECAST

TODAY’S THEMES

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LEADING MARKET INDICATORS

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DRIVERS FOR PROPERTY DEMAND TRENDING IN THE RIGHT

DIRECTION:

• PROPERTY INVESTMENT CONTINUES ITS SLOW CLIMB.

• HOUSING MARKETS RECOVERING NICELY.

• JOB GROWTH BACK TO PRIOR PEAK LEVELS.

• INTEREST RATES STILL EXTREMELY LOW.

• RECORD-HIGH NEW CONSTRUCTION/DEVELOPMENT.

• SECONDARY METROS RALLYING BACK.

POSITIVE TRENDS ACROSS THE BOARD

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SMALL CAP SALES:

• Up 30% in 1Q15

LARGE CAP SALES:

• Up 45% in 1Q15

THE HIGHLIGHT OF THIS RECOVERY:

PROPERTY TRANSACTIONS GROWTH

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• MAJOR BUYING CLASSES

• Real estate investment trusts (REITs)

• Foreign investors**

• Private equity funds

• Hedge funds

• Traditional developer/owner/operators

DEAL MAKING: WHO’S INVESTING?

2014 TOP BUYERS

ARCP

Blackstone

JP Morgan

Norges Bank Investment Mgt

Hines

OMERS

Starwood Capital Group

MetLife

Essex Property Trust

David Werner Real Estate

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EXPANDING UNIVERSE OF U.S. BUYERS

THREE TIMES AS MANY BUYERS TODAY THAN IN DEPTHS OF DOWNTURN

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• SMALLER SECONDARY METROS WITH STRONG GROWTH

PROFILES ARE SEEING INVESTOR INTEREST:

• Portland, Seattle, Denver, Austin, Nashville, Atlanta, Las Vegas, etc.

• COMMON DENOMINATORS:

• Strong job growth

• Growing technology sectors, healthcare and financial services

industries

• WHERE WE’RE NOT SEEING THIS TREND:

• CMBS

• Foreign investors

• Still prefer top markets

EXPANDING UNIVERSE OF METROS:

SMALLER MARKETS HEATING UP

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• CONSTRUCTION SPENDING

• 2014: HIGHEST LEVEL SINCE

DOWNTURN

• APRIL: FASTEST MONTHLY

PACE IN MORE THAN 6 YEARS

• POINTS TO MARKED INCREASE

IN U.S. DEVELOPMENT IN 2015

• EXPANDING TO SMALLER

METROS…

2015: THE YEAR FOR NEW DEVELOPMENT

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METRO MAGNETS:

1. Denver

2. Raleigh-Durham

3. Suburban VA

4. Oakland

5. Las Vegas

6. Austin

7. San Jose

8. Miami

9. Seattle

10.Portland

THE CONSTRUCTION/DEVELOPMENT OPPORTUNITY

MOST ACTIVE GROUPS

ACQUIRING SITES FOR

DEVELOPMENT

HFZ Capital Group

Greenland Group

Tishman Speyer

Carmel Partners

Oceanwide Real Estate Group

Crown Resorts

Oaktree

Mitsui Fudosan

Fortis Property Group

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THE STORY IN LENDING

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• FINANCING MARKET IS INCREASINGLY COMPETITIVE.

• BANKS HAVE $ TO LEND, UNDERWRITING STILL VERY CAUTIOUS.

• UPTICKS IN LENDING VOLUMES SUPPORT POSITIVE INVESTMENT

TRENDS.

• REGIONAL/MID-SIZED BANKS ARE GAINING MARKET SHARE...

LENDING TRENDS IN 2015

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• A POSITIVE TRAJECTORY IN LENDING

• 2014 VOLUMES:

• 6.5% ANNUAL GROWTH (FDIC)

• STILL 25% BELOW 2007 PEAK, EXCEPT MULTI-

FAMILY LENDING

• WIDE VARIABILITY IN GROWTH BY BANK SIZE…

PROPERTY LENDING:

SLOW PACE OF GROWTH IN ORIGINATIONS

“Banks are finally playing ‘offense’ again!”

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• U.S. AVERAGE GROWTH IN LOAN PORTFOLIOS: 6.5%

• STRONGEST GROWTH:

• LARGEST REGIONAL BANKS

• MID-SIZED BANKS

• PARTICULARLY STRONG GROWTH IN:

• CONSTRUCTION/DEVELOPMENT LOANS GROWING THE

FASTEST

• MULTIFAMILY STILL STRONG

VARIANCE IN GROWTH BY BANK SIZE

Growth in CRE

Loan Portfolios

(2014 vs. 2013)

All banks 6.5%

Assets >$50B 4.1%

$10B-$50B 16.8%

$1B-$10B 10.5%

<$1B -1%

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CMBS 2.0 PRIMARY MARKET ACTIVITY

2012

• $45.8 billion in Conduit, SASB, & Large Loans

• 57 deals

• $21.2 billion in Freddie Mac

• 17 deals

2013


• 102 deals


• 19 deals

2014


• 120 deals


• 17 deals

2015 - YTD


• 55 Deals


• 9 deals

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• HEADING INTO NEW ROUND OF REFINANCING, PEAKING IN 2017

• LENDERS VIEW AS OPPORTUNITY TO INCREASE VOLUMES.

• EXCESS CAPITAL LOOKING TO FINANCE SOLID REAL ESTATE.

• SURGE IN REFINANCING ACTIVITY FROM NOW THROUGH 2017.

LENDING OPPORTUNITY:

NEW ROUND OF REFI’S

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• TRADITIONAL LENDERS, COMMERCIAL BANKS

• LIFE INSURANCE COMPANIES

• CMBS (SECURITIZATION)

• CONDUITS

• PRIVATE EQUITY

• REITS AND DEBT FUNDS

• GOVERNMENT

SOURCES OF COMMERCIAL REAL ESTATE DEBT

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GROWING COMPETITION AMONG LENDERS

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SCOREKEEPER BENCHMARKS

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Region 1Q Growth YonY

Northeast 2%

West 14%

MidAtlantic -4%

South 1%

Midwest 1%

California 6%

North Atlantic 8%

South Atlantic -1%

U.S. AVERAGE 4%

SCOREKEEPER: REGIONAL GROWTH 1Q2015

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SCOREKEEPER: GROUND-TRUTHING THE

MIGRATION TO SECONDARY METROS

Hard hit metros like Vegas, Miami, Detroit

and Phoenix are the current comeback

kids. Still way below previous peak levels

from before downturn but double digit

growth and still room to improve.

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TOP CHALLENGES

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NO PREDICTABILITY

• “WE LAID OFF STAFF LAST YEAR, AND NOW HAVE MORE WORK

THAN WE CAN HANDLE.”

• “CRAZY ROLLER COASTER. FAMINE TO FEAST IN A MATTER OF

DAYS. GRATEFUL BUT HARD TO PLAN!”

• "WE KNEW WE HAD TO HIRE WHEN WE HAD OUR BEST Q1 IN 15

YEARS"

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“WE NEED IT FAST.”

“…NO FASTER!”

“AGGRESSIVE MARKET. CLIENTS FAVOR SPEED

AND QUALITY OVER COST.”

“BIGGER, BADDER, FASTER LOANS!”

“GOOD, FAST, CHEAP-- PICK ANY TWO.”

"DUE DILIGENCE TIMEFRAMES ARE AT THEIR ALL-

TIME SHORTEST DURATION”

“2 WEEKS OR IT'S FREE!"

NEED FOR SPEED

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MIXED BAG ON UNDERWRITING

“THE RISK PENDULUM HAS OFFICIALLY SWUNG BACK TO WHERE

IT WAS IN 2005…FOR BUYERS AND BORROWERS, IT’S BLOW AND

GO.”

“IT’S 2007 ALL OVER AGAIN- CAUTION THROWN TO THE WIND AND

WILD WEST ATTITUDES PREVAIL.”

“I DON’T THINK WE’RE BACK TO THE BAD OLD DAYS OF LAX RISK

MANAGEMENT.”

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• UNDERWRITING STANDARDS ARE TIGHTER TODAY THAN THEY

WERE IN 2007.

• LOAN-TO-VALUE RATIOS ON COMMERCIAL LOANS HOVERED

CLOSE TO 70% IN THE RUN UP TO 2007.

• IN THE LAST TWO QUARTERS, CLOSER TO 65%.

TIGHTER UNDERWRITING

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NEAR-TERM FORECAST

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• STILL A LOT OF ROAD TO RUN IN THIS RECOVERY.

• TRANSACTION VOLUME REMAINS ON THE MEND.

• MODERATE GROWTH IN NEW ORIGINATIONS.

• CONTINUED MIGRATION TO SECONDARY AND TERTIARY METROS.

• FAVORABLE LOW INTEREST RATE ENVIRONMENT.

• PHASE I ESA FORECAST: 4 TO 8% RANGE NEXT 2 YEARS.

“2015 WILL BE ONE OF THE STRONGEST YEARS WE’VE SEEN IN

COMMERCIAL REAL ESTATE SINCE THE CREDIT CRISIS AND IT’S FOR

ALL THE RIGHT REASONS.”

~KEN RIGGS, RERC

“OPTIMISM IS THE HIGHEST IT’S BEEN SINCE THE DOWNTURN.”

~RYAN SEVERINO, REIS

THE NEAR-TERM MARKET FORECAST

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• RISK MANAGEMENT IS NOW EVERYONE’S BUSINESS.

• PAST “DEAL KILLERS” ARE NOW BEING MANAGED.

• FAILED PROPERTIES/PROJECTS ARE MOVING BACK INTO PLAY.

• EFFICIENCY IN DUE DILIGENCE IS PARAMOUNT.

“MAKE HAY WHILE THE SUN SHINES.”

THE FORECAST FOR RISK MANAGEMENT

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