cre update: ddd chicago
TRANSCRIPT
“ A century of misery ends with the Chicago Cubs winning the World Series.”CNN
CRE MARKET UPDATEDDD Chicago
By: Dianne Crocker, Principal AnalystEDR InsightNovember 3, 2016
US Economy and CRE
2016 looks much like it did in 2015—with
somewhat less impressive numbers
How excited are you that the Cubs madeit to the World Series?
19%
14%
0%
67%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Hate baseball.
My team didn't make it.
I'm an Indians fan.
Giddy! Go Cubs!!
“I'm a White Sox fan but happy that the other team from Chicago is doing well.”
“THE CUBS ARE GOING TO WIN THE WORLD SERIES!!!!!!!!!!”
“I'll be sobbing inmy beer if it happens.
GoCubsGo!”
0%
10%
20%
30%
40%
50%
60%
Rising quickly Rising slowly Plateauing Declining
8%
50%
38%
4%
The Chicago due diligence market is: SURVEY
Your commentary on the Chicago due diligence market:
▸“Saw-tooth, up and down but better than last year”▸ “Cautiously growing in an election year.”▸ “Slightly increasing but still slow”▸ “Plenty of opportunities; clients expect top-notch service, well written reports”▸ “Seems steady, not rising quickly, nor shrinking.”▸ “The industrial market is the most active.”
CRE TRANSACTIONS: Small Is Big
▸Rate of growth is tapering off.▸Fewer portfolios hurt large cap deals but individual deals up 2% YonY.▸Secondary metros in vogue…
‘11 ‘12 ‘13 ‘14 ‘15 ‘16
…3QYTD Fastest-Growing Metros: Phase I ESAs
2016 Rank
Metro Volume YonY Growth
1 San Antonio, TX 1,430 19%
2 Nashville, TN 1,516 12%
3 Milwaukee, WI 1,025 12%
4 Austin, TX 1,146 10%
5 Raleigh, NC 1,638 10%
6 Portland, OR 2,365 8%
7 Oklahoma City, OK 857 8%
8 Denver, CO 2,207 5%
9 St. Louis, MO 1,535 5%
10 Boston, MA 5,758 3%
“Investors are looking to smaller, up-and-coming cities that still offer good values. Cities like Austin, San Antonio, Raleigh and Portland.”
~Ryan Severino, REIS at PRISM ‘16
Trends Working in Chicago’s Favors
▸3rd most popular U.S destination for foreign investment ▸High interest by the next generation of tech firms▸Corporate relocations like downtown Chicago▸Cubs are World Series champs!▸Chicago is a target for a new trend in CRE…
Data Centers: A “New Class of CRE”
▸Up 14.6% over 2015▸Most active data center REITs:
Core Data Center Markets▸23 states now have incentives specifically to attract data centers▸Core markets: ▹Northern Virginia outside DC▹Silicon Valley ▹Chicago ▹Outside Dallas ▸Site Selection Criteria: ▹robust connectivity ▹significant regional demand
“The Age of Amazon”
▸Once-familiar stores have been closing at their fastest rate since 2010 ▸Triggered a major data/warehouse boom in CRE▸Major players:▸Amazon is the heavyweight, accounts for over 50% of fulfillment centers▸Traditional retailers voraciously adding more warehouse space to accommodate online business:▹Home Depot▹Walmart ▹Macy's
Warehouses-An “Explosive Asset Class”
▸Will boost annual demand for industrial space by 20 percent in the next few years▸$1B of e-commerce sales requires 3x the space of traditional retail▸Site selection criteria:▹Excess land for auto/trailer parking lots▹Increased power loads▹Stronger foundations/floors to support storage▹Proximity to transportation, labor, UPS-FedEx hubs▸Hot spots:▹Central US-Memphis, Louisville▹Chicago, Indianapolis▹Also smaller, infill sites close to population centers
“ It’s at this stage of the cycle that we also see strong loan growth combined with easing underwriting to result in increased credit risk.”
~Thomas Curry, U.S. Comptroller of the Currency
▸Pullback in CMBS▸Shifting sand in lending sources▸Caution rules
LENDING CLIMATE in 2016
CMBS: Tough Market to Love
▸Mid-year issuance was $37B▸CY2016 forecast: $70B (vs. $97B in ‘15)▸Recover to $80B in 2017
28%
19%
13%12%
7%
10%9%
18%
20%21%
7%
13%
0%
5%
10%
15%
20%
25%
30%
CMBS Govt Agency National banks Regional/local banks Global Insurance
Other Lending Sources Fill the CMBS Gap
2014 2016
Top Lenders…
1. Wells Fargo
2. JP Morgan
3. Citigroup
4. CBRE
5. Deutsche Bank
6. Morgan Stanley
7. Bank of America
8. Met Life
9. Walker Dunlop
10. Goldman Sachs
…1H16
11. Berkadia
12. Key Corp.
13. PGM Real Estate
14. Capital One
15. Berkeley Point
16. PNC
17. US Bancorp
18. NY Community Bank
19. Signature Bank
20. Bank of China
Who Are the Top Lenders This Year?
NREI’s October survey:- 53 percent expect underwriting standards to tighten over the next 12 months- Only 7 percent loosen
3.42
Risk aversion of your LENDER clients?
1= very tolerant of “red flags”5 = very risk averse
How risk-averse are your LENDER clients?
2.96
How risk-averse are your INVESTOR clients?
Risk aversion of your INVESTOR clients?
1= very tolerant of “red flags”5 = very risk averse
2.The Phase I ESA Market
…in the context of CRE market trends
Progressing Along Long Top of Recovery
?
ILLINOIS’s Phase I ESA Trend Line…
…Mirrors the U.S. Phase I ESA Trend Line
IL’s Metros Ranked in U.S. Top 50
MORE TECHNOLOGY
MORE PRESSURE
THE ERA OF “NOW”
Efficiency Is the Name of the Game
3.
“Pressures on efficiency in the lending sector are all moving in the same direction. How can you conduct underwriting faster and cheaper, and yet better than in the past? “Technology and using data in new ways will be part of the solution.”
~Michael Berman, former CEO of CW Capital and past Chairman of the Mortgage Bankers Association
Your Top Challenges
Name the top 3 challenges you face in today's market:
INTENSE COMPETITION
PRICING PRESSURE
FINDING NEW BUSINESS
How sensitive are your clients to price in selecting a Phase I ESA provider?
1=NOT VERY, OTHER
FACTORS MATTER MORE
5=PRICE IS THE MOST
IMPORTANT FACTOR
3.82
“Commodity pricing, too many lowball firms”
1=NOT VERY, OTHER
FACTORS MATTER MORE
5=SPEED IS THE MOST
IMPORTANT FACTOR
3.79
“Everyone is making quick deals, and needs Phase Is fast. “
How sensitive are your clients to TAT in selecting a Phase I ESA provider?
4.Market Forecast
…preparing for the next phase
NEAR-TERM FORECAST:Transactions to decline over next 2 years…
NEAR-TERM FORECAST
▸Foreign investment: what makes US markets attractive to foreign investors also appeals to domestic investors.▸Capital likely to be plentiful for real estate companies taking on new projects.▸High activity in growing secondary markets like Denver, Seattle and Austin.▸Interest rates will creep up slowly.▸Modest CRE lending growth (3%), strong competition▸Investors are recalibrating their expectations. ▸Property transactions market unlikely to suffer as long as core fundamentals remain strong.
“Investors are growing cautious about the longevity of the current expansion cycle and, as a result, are taking steps to de-risk their portfolios.”
“On a scale of 1-5, what is your outlook for the Chicago due
diligence market just one year from now?
1 = Very pessimistic 5 = Very confident
3.2
Steady. However, no evidence of significant growth likely in the next year.”“Plenty of opportunities”
MARKET OUTLOOK
