© 2012 Environmental Data Resources, Inc.

EDR Insight Market Update:

For presentation at:

EBA, New Orleans

January 2013

Risk Management In An Uncertain Market Presented by:

Dianne P. Crocker, Principal Analyst

Commercial Real Estate

Environmental Due Diligence

Challenges

Forecast

•Transaction volume uneven in 2013.

•Slower rate of growth Q1-Q3.

•Year ended strong.

Bumpy Road for Property Deals

• Strong 4Q, robust start to 2013.

• Major deal in January involving 100+ properties.

• As much as $8 billion in deals for January:

• the highest monthly volume since December 2007.

• Issuance poised to climb 50 percent to $60 billion in

2013.

Good News on the CMBS Front

CMBS Forecast

Office, Apt’s Lead Price Recovery

Capital Remains Concentrated in Largest Metros

Top 10 Markets for 2013 Investment

Fastest-

growing

Phase I

metros

in 2012

LENDING: Positive Signs

“By almost every observable metric, the

American banking system will enter 2013 with

its strongest balance sheet position since

before the financial crisis.”

• Glacial deleveraging continues.

• More confidence, more borrowers.

• Competition for loans heating up.

• Certain large financial institutions are extremely

bullish about CRE lending.

Lending in 2013

• 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.”

• “The definition of Business Environmental Risk is different at our

bank. Historically, these were covered under Phase I Plus scopes of

work. Now, these expanded-scope items are an everyday expectation.”

Lenders’ Approach to Due Diligence

Benchmarks in Environmental Due Diligence

4Q11 4Q12

% of EDD for

foreclosures

16.7% 10.6%

Liquidating CRE loans

(% of respondents)

51.1% 37.5%

Selling REO

(% of respondents)

77.2% 69.2%

Phase Is to Phase IIs 5.7% 9.6%

Weighted Avg Score

(1=not challenging to

5=extremely

challenging)

Balancing risk management with pressure to stay

competitive 3.3

Meeting fast turnaround time pressures internally 3.0

Doing more with smaller risk management staff 2.9

Complying with changing environmental regulations 2.8

Lack of education on environmental risk internally in

the context of overall lending process 2.8

Pressure to cut costs 2.7

Stringent pressure from bank regulators 2.6

• How aware are you of the proposed revisions to the ASTM

Phase I ESA standard?

Challenge of Education: New E 1527 Standard

Very aware,

12%

Somewhat, 25% Not at all,

63%

“I have NOT been

privy to the task

force or the

pending changes

and would greatly

appreciate any

information.”

• Refocuses attention on education and awareness

• Some new requirements to consider

• Valuable reminders on certain areas of EDD (e.g., user

responsibilities) that risk managers may not have given much

thought to in the past eight years

Impact of a New ASTM Standard

Page 20

• Real estate remains attractive to lenders, investors.

• Improvements in both the cost and availability of

commercial mortgage capital will drive transactions.

• Future consolidation in lending sector is likely.

• 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.

Positive Forces in the Forecast

• Continued focus on modeling the downside

• More emphasis on technology, streamlining

• Repurposing the oversupply of obsolescent properties

• More deferred maintenance issues arising on refis or

neglected properties

• Property Condition Assessments growing in importance

Forecast for Risk Management

Commercial Real Estate

Environmental Due Diligence

Challenges

Forecast

Dianne P. Crocker

Principal Analyst, EDR Insight

Research and Analytics:

www.edrnet.com/EDRInsight

Twitter:

@dpcrocker

Email:

dcrocker@edrnet.com