Blogs > Dianne Crocker's - Market Maven

Top 5 List EBA Call: VI, Abandoned Properties, Lending Forecast

Wed, 08 Feb 2012 22:09:06 +0000

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From today’s call of the Environmental Bankers Association Risk Management Committee, here is my list of the top five developments in the real estate and lender due diligence markets.

1. Uncertainty about VI breeds fear, aversion.

Yesterday I moderated a webinar on vapor intrusion in the real world. John Sallman, an environmental professional with Terracon in Dallas, drew attention to how averse lenders are to vapor intrusion risk. Why? He said it's because vapor is a relatively new issue and much is still unknown so lenders fear it more than other types of environmental risk. Even in cases where a property has a vapor barrier installed with a passive venting system, a lender may still call for sampling to ensure that the system is working properly. Loans up for refi are also hitting snags as vapor intrusion issues surface that weren’t uncovered at origination four or five years ago.

2. Neglected, abandoned properties bring environmental issues to the surface.

This year a record $363 billion in maturing commercial real estate debt joins the wave of $170 billion in cumulative troubled loans that remain unresolved. Many of these loans are backed by properties suffer from neglect and a lack of investment. The challenge with these sites involves the dumping of hazardous waste like barrels of used auto fluids, old batteries, tires, improperly disposed of chemical containers and even biohazards. Environmental due diligence today is revealing issues that may have escaped notice at origination when standards were less conservative or uncovering new environmental conditions that arose subsequent to loan origination.

3. More options for refis.

And as more commercial real estate loans approach maturity and shop around for capital, one key change right now versus back in 2008, 2009 is that banks have more choices. The lender can take title and try to sell it themselves now that prices are no longer in free fall, or extend the loan again in the hopes that the property’s value will rise. The lender may also sell the loans to third-party investors who may negotiate with the borrower. Lenders have little appetite in this market environment for highly leveraged loans, so it’s not uncommon for lenders to ask for more capital to be put into the deal. All of this makes for a pretty interesting dynamic and should add up to new environmental due diligence activity as loans change hands this year and beyond.

4. Retail sites on the block.

One of the hardest-hit property types in this downturn is retail. A significant volume of storefronts and big box anchors at shopping centers sit vacant across the country. Borders, Blockbuster, Kmart, Filene’s Basement and Syms are collectively putting thousands of properties up for grabs. Sears recently joined the list, proving that store closings aren’t anywhere close to being over. On top of that, we could be looking at as many as 9,000 more store closings in 2012 by national and regional retailers. This means that not only will there be environmental due diligence in demand at vacant retail space, but also that lenders view retail properties as riskier bets than other safer bets like apartment buildings.

5. Trends from the trenches.

Lastly a few trends to share that came out of our latest quarterly surveys of EPs and lenders:

Work from developers in particular really picked up in the fourth quarter and into 2012 as they look to lock in properties while prices are still low, even if they’re not quite ready to break ground yet.
Refi portfolio work is churning along, often with very very short turnaround time windows, sometimes as short as 1 ½ to two weeks.
Private equity work is really getting stronger, Fortune 500s are buying again and long time real estate owners are looking to sell off real estate again.
One positive trend is that the 4Q results show that the market is starting to see a transition from due diligence performed to protect banks during foreclosure to due diligence for risk management on new loans.
Lending forecast:
- 38% of lenders expect higher lending levels for commercial real estate in 1Q12 (Jan-Mar) compared to 4Q11. Only 11% said lower.
- for the year, 74% expect higher commercial real estate lending volume vs. last year

For anyone who didn’t attend the EBA conference in Santa Fe in January, I’m doing a retake of my luncheon presentation on February 22^ndTop 10 Trends and Emerging Issues in Commercial Real Estate, Banking and Environmental Due Diligence. Hope to see many of you join us for the call!

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Keywords

distressed assets, commercial real estate, due diligence, vapor intrusion

Albergo: Are You Doing All You Can to Avoid Liability?

Thu, 02 Feb 2012 21:46:56 +0000

Entry by dcrocker

Great presenters are both rare and refreshing. Tuesday I moderated a webinar by one of them.

In his presentation titled Phase I ESA Liability Protection: Beyond AAI Nick Albergo, the founder, President and CEO of HSA Engineers & Scientists down in Florida, hit on many of the topics we talk about here on commonground. CERCLA, business environmental risk, vapor intrusion, brownfields, AAI, Phase II environmental site assessments and continuing obligations, just to name a few.

The core of Nick’s message drew on his years of experience of being called as an expert witness on Phase I ESA litigation to educate the audience about how environmental professionals can get themselves into trouble by veering from the practice defined by ASTM E 1527-05.

Here's my top 10 list of tips Nick delivered in his 1-hour presentation:

Don’t just default to calling something a REC to play it safe. (It could actually be worse.)
Clearly document your role on projects.
Never, under any circumstances, give a client a recommendation in your Phase I ESA report.
Be cautious about recommending additional investigation and understand that doing so does not make your report incomplete.
Tell your client when continuing obligations kick in.
Stick with what you know.
Stick to your scope of work, and don't ever veer beyond it.
Focus on potential misuse of hazardous substances on sites like golf course and agricultural land.
Understand vapor migration and when it might constitute a REC.
Build your own defense, just in case. And run it by some folks you trust.

To learn more about what Nick had to say about the tips in this list, check out EDR Insight’s latest Research Note.

And if you have a free hour at lunch or after work or can’t sleep some night, I highly recommend that you click on the free replay and hear Nick in action. He covered each of the above in great technical detail, including case studies and examples from the field.

Are Phase IIs part of your business? Make sure you stay until the end. Nick spent a fair amount of time on why he believes the Phase II standard has finally come into its own—and why we’re going to see a lot more ASTM Phase IIs in practice.

The Winner of 2011's Phase I ESA Forecasting Contest Is... (2 Comments)

Fri, 27 Jan 2012 20:45:53 +0000

Entry by dcrocker

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This week I gave a luncheon presentation at the Environmental Bankers Association conference in Santa Fe, NM. I spent a few minutes talking about the metros expected to drive much of the growth in commercial real estate investment this year and how, collectively, Phase I ESA volume in these areas already outperformed 2011’s average growth of 7 percent.

Later, Mike Covert, Senior Principal and National Director of Environmental Services at Terracon approached me to say that he thinks he won the 2011 Phase I ESA Forecasting contest I launched last May. So as soon as I got back, I dug out the entries and sure enough, Mike was right on the money with his guess this year.

The forecasts that came in ranged from a 1 percent decline to a very bullish 40% growth, and averaged 16%. So the market's actual performance was less than half the group’s average. This is likely due to the sobering setbacks that were still to come in the third quarter of 2011 (e.g., the European debt crisis, the S&P's downgrade of the U.S. debt rating, etc.). After a very rocky summer, many investors, lenders and environmental consultants dialed back their expectations for the rest of the year.

So congratulations to Mike for a dead-on accurate guess in a market that’s not exactly a forecaster’s dream. In a modest reaction to the news, Mike quipped, “You know what they say: ‘A broken clock is right twice a day.’”

We’ll find out how much more optimistic EPs are about their market when I launch this year’s contest in just a few months.

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Keywords

commercial real estate, environmental professionals, Phase I environmental site assessments

“You Don’t Need Heavy Industry to Have a Big Issue” (2 Comments)

Wed, 18 Jan 2012 16:41:33 +0000

Entry by dcrocker

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Environmental professionals doing work in the Twin Cities got a nice plug in an article I just read in Minnesota’s Finance & Commerce. What caught my eye is that it featured Joe Maternowski, an attorney with Hessian & McKasy. I had the pleasure of presenting with Joe at EDR's Due Diligence at Dawn workshop the last time we were in Minneapolis. He led a spirited discussion on vapor intrusion and how it was impacting deals there.

This article highlights two of the most talked-about properties in the Twin Cities right now:

The 430-acre former Twin Cities Army Ammunitions Plant property being eyed for the next Vikings stadium
The former St. Paul Ford plant that closed in December

Both sites are receiving a fair amount of attention by developers with big plans, yet both would require a fair amount of environmental remediation first.

The article went on to emphasize that beyond these large former industrial sites, environmental contamination can potentially affect every real estate transaction. Joe made a great point in saying, “You don’t need heavy industry to have a big issue. A small release of dry cleaning chemicals in an underground drain can cause problems."

The article encourages buyers to contract an environmental professional to have a Phase I ESA and a “thorough professional inspection” upfront to protect themselves from liability, in addition to any further investigation that might be warranted.

Wth every corporate bankruptcy or downsizing, sites with past contamination are going on the selling block. Borders, Sears, our own U.S. Post Office and a slew of other entities are collectively putting thousands of properties up for grabs, which makes local articles like this highlighting the importance of due diligence so critical.

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5 Commercial Real Estate Market Developments, EBA Call

Wed, 11 Jan 2012 22:03:37 +0000

Entry by dcrocker

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Happy 2012, everyone. It’s going to be an interesting year on the market front. I resolve, among a number of self-improvements, to blog more this year and am starting with the top 5 market developments of the month that I shared on today’s monthly call of the Environmental Bankers Association’s Risk Management Committee. These are based on the results of my latest EDR Insight quarterly market intell report.

Trend 1. The first is about market sentiment, which is much different today than what it was one year ago—or, come to think of it, even four months ago when I came back from summer leave. Last January, you might remember the market was coming off a very, very active year-end rush to close deals. Then in the first two quarters of 2011, we saw liquidity finally returning to the real estate investment market as both debt and equity transactions increased, environmental underwriting loosened a bit and many investors began to re-enter the market.

But then the summer brought a confluence of events. We had our own problems in the broader economy, and then the disturbing news about Europe’s debt problems. And unfortunately, when such global economic concerns surface, the knee-jerk reaction is for everyone to hold things close to the vest. As a result, we’re left (again) in a market riddled with uncertainty. Our Environmental Risk Aversion Index shows that in the 3rd and 4th quarters, there was a definite transition toward a tightening of environmental underwriting by lenders. As the market stumbles along, I expect we’ll continue to have this type of “risk-on risk-off” behavior among investors and lenders.

That brings me to Trend 2. Commercial real estate transactions slowed drastically in the third and fourth quarters from the pace of the first two quarters of 2011. Volume is still up year-on-year, but certainly not as high as many expected. A pullback in CMBS conduit lending has been one factor, but the greater economic unrest is what’s really weighing more heavily on investors. Even in the apartment sector where financing is cheaper and more readily available, investors have grown more circumspect. For the year, early results show that commercial-property sales still managed to grow by 20% this year but that’s far below the growth we saw in the first half of 2011. Activity is still focused on multifamily mainly because home ownership is on the decline. Vacancy rates on multifamily are low in most areas, capital is more readily available and banks are more comfortable underwriting multifamily than any other property type. Across all property types, the investment prospects for the next 6-12 months remain murky. Some believe we’re looking at another 2009, which is not exactly good news.

Trend 3 is that geographic variability is expected to continue. Yesterday we published a Research Note titled "For Transactional Due Diligence: Location, Location, Location." It's based on an analysis comparing PricewaterhouseCoopers’ top 20 prospects for commercial property investment to Phase I environmental site assessment activity. Where you find investors, you find demand for environmental due diligence. In fact, the top 20 investment hubs for commercial/multifamily properties overlap with many of the fastest-growing markets for Phase I environmental site assessment activity in 2011. Environmental assessment volume in PwC’s top 20 metros collectively registered growth at 15%, more than double the U.S. average of 7%, according to the latest ScoreKeeper results. Metros that scored high on PwC’s list and had growth in Phase I ESA activity of 20% or more last year are Austin, Houston, Miami, Raleigh/Durham, Los Angeles and San Diego. If PwC’s forecast is accurate, these 20 metros will be the headline-makers in commercial real estate this year.

Trend 4 is that banks are likely to continue to face headwinds in 2012, according to our sister company Trepp. Their forecast is that banks as a whole stand to earn less in 2012 and will have to take on additional risk to make that happen. Part of this is attributed to low demand as well as the sale of distressed and non-core assets that is going to put pressure on banks' loan growth this year. One area of uncertainty is what the regulatory environment will mean to banks’ profitability and business models. Relatively tight lending conditions are expected to continue.

Last but not least, Trend 5 is what I call “refi heartache.” There’s a significant wave of loans scheduled to mature in 2012, and this is the first major wave of maturities from the 2007 vintage, issued at the peak of the market. Prospects for refinancing all of these loans are pretty grim. This is bad news if you’re holding those notes, but good news for distressed asset investors.

It’ll be especially hard for these loans to get refinancing without a fully functioning CMBS market. And forecasts for last year fell far short of expectations. A lot of people thought that this market might reach upward of $50 billion for this year. More like $30 billion. Still more than 2010 ($12.7 billion) but below what it needs to be for a long-term sustainable market. Annemarie DiCola, Trepp’s CEO told me they expect to see roughly $75 billion worth of loans in CMBS maturing. They’d like to see issuance of at least that level in order to handle the refinancing needs of loans that are just in CMBS. This seems unlikely and as a result, these mortgages have a 50-60 percent likelihood of failing to refinance.We could be headed for a major re-valuation of commercial properties as the market hits this refi shortfall head on.

I’ll be sharing more on 4th quarter results and a 2012 forecast at EBA’s winter meeting in Santa Fe in a few weeks.

Look forward to seeing many of you there!

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Keywords

banks, environmental due diligence, CMBS, commercial real estate, transactions, risk, lenders

How Can Two Environmental Studies Come to Opposite Conclusions? (7 Comments)

Fri, 04 Nov 2011 15:39:53 +0000

Entry by dcrocker

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I'm sure a number of you could give the mayor of Kingsport, TN an earful.

He can't understand how one environmental study on a property in town found no contamination, while another several years later came to the opposite conclusion.

The property in question is a former foundry site that operated for more than 90 years, including many when no environmental regulatory regime was in place [red flag].

After the foundry went belly up in 2003, a private buyer bought it for $300k. Then the town's Economic Development Board bought it for more than twice that based on an environmental assessment that determined the site was clean.

The board claims it found out about the contamination only after a prospective buyer of a portion of the site just opted to kill the deal after a Phase II ESA revealed contamination at the site. Now the city's looking to have it designated as a brownfield.

The mayor seems absolutely incredulous that their report came back clean and another came back showing semi-volatile organics and pieces of asbestos tile on-site. As the board looks at buying future properties, he said "We cannot continue to buy property under the pretense that it's clean as a whistle and then have this happen. We've got to make sure this doesn't happen again."

Could be a hot lead for an EP in the area. Could also be the town was the victim of result of the low-ball Phase I bids that muncipalities go for due to tight budget restrictions. Or maybe it's just that the contamination resulted as the foundry was demolished following the first environmental study.

The town is testing is now to the tune of $35-$50,000. Let's just hope that if the site is redeveloped someone at the local or state level makes sure appropriate cleanup is conducted before it becomes the next residential development or day care facility.

Keywords

brownfield, foundry, Phase I ESA, Phase II ESA

More Caution than Optimism at Real Estate Luncheon

Thu, 27 Oct 2011 20:04:55 +0000

Entry by dcrocker

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Depending on the day, our economy is either on the verge of collapse or things are finally looking up. That’s just the nature of the cycle right now—and the real truth lies somewhere in between. I remember back in January when use of the term “cautious optimism” was so prevalent that it quickly became trite. Chalk it up to the hope that we all feel every New Year’s…compared to now when, thanks to a pretty dicey third quarter, caution is winning over optimism.

That seemed to be the collective sentiment at the New England Women in Real Estate luncheon in Boston last week. Seated at my table was a real estate attorney, a developer, a portfolio analyst, an environmental consultant and a few institutional investors. Everyone seemed pretty resigned to the belief that this new normal wasn’t going to improve anytime soon and that it could be awhile before things start to feel remotely “good” again.

When you look at graphs like the one below, it’s easy to understand why the people at my lunch table were so resigned to our unpredictable market. With such an erratic trend line for large commercial property deals this year, it’s hard to plan (or dare to hope) for a more robust 2012.

Other take-aways from the event were:

fears that the upcoming Presidential election will leave the market recovery in limbo
concern that a double-dip recession will derail what few gains the market's made
and still a lot of interest in investing in 'distress' in some way

The keynote was by a guy with a Maryland-based REIT heading up a major multi-use development project just two miles from where we were in downtown Boston. A transplant from Florida, his comments were very upbeat about deal making and development in certain areas of the country. We in the U.S. are, he said, “at our core, an inventive society” and so a metro like Boston that is so rich in technology, education and scientific brainpower is extremely attractive to investors right now.

It was reminiscent of comments made by KC Conway, a highly respected commercial real estate analyst who spoke at EDR's client summit in Vegas this past May. Industry and jobs, he said, “will follow the educated workforce. This has huge implications for commercial real estate demand.”

So if you’re working in metros like Boston, DC, Seattle, Denver, areas of North Carolina, Virginia and San Francisco, this trend could bode well for new opportunities.

Although I wouldn’t go so far as to say I’m cautiously optimistic about the near-term, I do know there are a number of drivers in the market now that are creating opportunities for environmental consultants. And if 2011 ends anything like its predecessor, we could also see a year-end rush for deals before a post-holiday slowdown. Some at the luncheon were already seeing a more robust fourth quarter shaping up. We’ll know in just a few months time how much traction it gets.

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Keywords

commercial real estate, environmental due diligence

New SBA Policy Coincides with FY11 Loan Volume High

Wed, 05 Oct 2011 18:45:31 +0000

Entry by dcrocker

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Well, after an eight-week hiatus, I came back to find a new SBA policy for the 7(a) and CDC loan programs on the books. So, if you’re doing work for lenders in support of SBA-guaranteed lending, be aware that SOP 50 10 5(C) was obsolete just as your weekend was getting underway last Friday.

The release of the new policy coincided with two positive developments in this segment of the market:

Federal FY11 ended with SBA loan volume at a record-high of more than $19B under the 7(a) program and another $4.5B for CDC lending (see graphic). At our May summit in Las Vegas, Eric Adams, the chair of SBA’s environmental committee, estimated that slightly less than 25% of SBA loans had a real estate acquisition component. So that means FY11’s roughly 60,000 7(a) and 504 loans amounted to about 14,000 loans involving commercial real estate, many of which went through the environmental scrutiny laid out in SOP 50 10 5(C). That’s a lot of Phase I ESAs and RSRAs.

There was also some tough talk a few weeks ago from 13 big banks, including Bank of America, JP Morgan Chase, Citigroup and Wells Fargo, promising to up their small business lending by an extra $200 billion over the next three years. So, barring some unforeseen disruption that forces big banks to abort these plans, healthy volume in the small business lending sector should continue.

Given this past Saturday’s effective date of October 1^st, if you’re working with lenders on 7(a) or CDC loans, make sure your documentation now references the new version (D), change your protocol as necessary and alert staff of the new policy.

I have to say that after reviewing the new SOP, I didn’t see much in the way of significant changes (my list of what changed is posted here), which is a testament to its acceptance in the market after several other previous revisions.

But that doesn’t mean it’s not a good opportunity to educate your lender clients. Nor should you assume that they’re up to speed on the SOP. On Monday I sent a summary of the policy to thousands of lenders and consultants. In return, I received questions about the policy from a number of lenders. Questions like:

“How am I supposed to find out the NAICS code of a property?”

“What’s the difference between an RSRA and a TSA?”

“When does a Transaction Screen need to be conducted?”

“If an RSRA comes back elevated, what’s the next step?”

You’ll notice they had more to do with a basic understanding of the policy than with anything that just changed, and I’m sure those of you doing SBA work can answer these off the tops of your heads.

But like any policy update or new regulation, SOP 50 10 5 (D) is an excuse for getting in front of clients. To educate them on a recent development—maybe before any other consultants do. As a colleague said, it’s like the mother-in-law who drops by with an old piece of mail or a newspaper clipping that caught her eye when all she really wants to face time with her grandchild.

And as I posted in a previous blog there’s a big difference between big banks that do huge volumes of lending and understand due diligence, and smaller banks who aren’t doing as much work on SBA loans and know they need to follow the SOP but aren’t necessarily sure what or why. That’s where you come in.

For a list of changes to the SBA’s environmental policy, see my Research Note here, along with other materials, including a link to the SBA’s new policy.

Or if you want to see what changed within the policy itself, here’s the tracked-changes version.

Let’s hope the strong forecast in this market segment pans out in FY12 and the SBA continues to be, as Adams pointed out back in May, somewhat immune to the budget cuts that other federal agencies have endured.

Enjoy and it’s great to be back.

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Keywords

Small Business Administration, SBA, SOP 50 10 5, RSRA, Phase I, lenders

Environmental Contamination at Commercial Properties: Examples from the Field (3 Comments)

Wed, 20 Jul 2011 21:53:15 +0000

Entry by dcrocker

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In late May, I delivered a webinar to about 550 environmental professionals on the latest environmental due diligence trends in the lender sector.

The content was based on our Annual Benchmark Survey of Financial Institutions, which had a sample size of 819 respondents, a significant two-thirds of whom are responsible for risk management at community banks.

One of the most significant findings was that distinct differences separate larger national/international banks from regional banks and community banks. The bigger the bank, the more likely it is to have environmental experts in-house who not only understand—but value—due diligence. At the other end of spectrum are risk managers at smaller banks who know (due largely to regulator pressure) that they need to conduct environmental due diligence but may not know why, how or how much is enough (see accompanying image). And without this know-how, it’s virtually impossible for these risk managers to communicate to internal bank officers or directors the value of getting due diligence done right—or at all, for that matter.

And it’s not their fault, especially considering that only 27% of respondents at community banks receive any kind of training on environmental risk.

So it’s not surprising that one of the most common questions I get from lenders is: Do you have any specific examples of instances when environmental contamination at a commercial property impacted an owner or the lender?

In June, one particularly persistent (in a good way) contact on the West Coast who was also a classmate in my Due Diligence University class convinced me it was time to finally put a list of examples together. For help, I reached out to some of my contacts in the consultant and attorney sectors.

The final list of ten stories is posted here where you’ll find some of the more interesting ones that came back. There’s the bank that got stuck with a stigmatized former dry cleaner site that developers won’t touch in a down market. Another that was fined $5 million for not disclosing contamination to a purchaser. And you’ll see that several involve foreclosures, all too common today. I’ve heard many more stories that aren’t on the list and I’m sure many of you can think of a few gems you’ve dealt with when banks were impacted by property contamination that went undetected during due diligence.

This type of information can be hugely valuable to some risk managers. When asked to identify the greatest environmental due diligence challenge they face, survey respondents identified “internal education/training bank staff on importance of environmental due diligence” as the 2^nd top challenge (right behind “understanding environmental due diligence reports.”). They need to be able to justify the time and cost associated with doing due diligence, both up the food chain at the bank and to their borrowers.

This is something many of them are challenged by every day.

One of the interesting things that came to the surface in developing this list is that small banks may think they know their local lending area better than anyone. But consider this story I heard earlier this week: a bank bought an adjacent site to expand operations. It was a restaurant as long as they’d been there (decades) so they deemed it a low-risk property. What they didn’t know until they broke ground was that it used to be a gas station and an on-site UST that they didn’t know about ahead of time ended up costing them almost half a million dollars and construction delays.

This lender was on the East Coast. But a West Coast lender doesn’t know this story nor does the one in Texas trying to write his community bank’s first environmental policy before regulators come knocking again.

So if you’re working with banks--especially smaller ones--education becomes much more important depending on where they are on the learning curve. If you can convey the value of due diligence and you’re lucky enough to have a receptive audience, then in the end, you could gain a trusting, valued client. And if you can give them a tool in the form of a list of examples to use internally for showing that loan officer or borrower why they can’t afford not to do environmental due diligence, all the better.

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Keywords

environmental, commercial property, environmental impact, lenders

Monthly EBA Call: Top Commercial Real Estate Developments

Thu, 23 Jun 2011 15:40:15 +0000

Entry by dcrocker

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Yesterday I spoke on the June call of the Environmental Bankers Association’s Risk Management Committee to share my list of the leading market developments in commercial real estate, lending and environmental due diligence. Proving yet again that, try as we might, we can’t control everything, we all got dropped from the call sometime in the final section of mine. So for those who were with us—and those who weren’t—my list follows:

Economic growth falters this month

It seems the economic recovery is slowing and the forecast for the rest of ’11 and ’12 is now less optimistic than it was just two months ago. The barometers of late have been nothing short of disappointing. Economists, and our own Fed Chairman Bernanke, downgraded their growth forecasts this month. For this shift toward pessimism, you can blame factors like persistent negative employment, manufacturing, consumer spending and housing data. That’s why we’re starting to see the “cautious optimism” that started this year give way to phrases like "diminished expectations." Along these same lines, few have been talking about a double dip recession since last summer, but now that phrase is back in vogue along with the dreaded c-word—correction. While things aren't nearly as bleak as they were during the depths of the downturn, there’s certainly a sense that the market has slowed down in the past few months, and the word I’m getting is that qualified buyers are holding back as the confidence they had a few months back wanes.

So related to that, in terms of Phase I ESA volume data from EDR’s ScoreKeeper model, May continued the slow, but steady, increase in ESA volume, and consultants are reporting month-to-month periods of active work followed by slowdowns. Driving recent growth are modest improvements in due diligence work for developers taking advantage of low property prices. There’s also been some improvement in the M&A sector, and moderate increases in due diligence involving workouts, loan sales and foreclosures. While consultants report that lenders are more conservative on commercial and industrial deals, some report that lender clients are choosing to sell notes as a discount rather than doing due diligence due to fear about potential environmental liability or occupant exposure.

What’s also notable of late (and the subject of a recent Research Note I wrote last week) is that there continues to be a lot of geographic variation as you look from metro to metro. To date, the strongest Phase I ESA growth so far this year is occurring in metros such as Houston, Portland, San Diego, New York, Atlanta, and Miami. These areas are either attracting new investors or dealing with higher levels of distress than other areas. Institutional investors are also starting to stretch beyond the top tier markets to seek out investments in secondary cities… so think San Diego, Denver, Houston, Salt Lake City and Austin. Investor demand for apartment buildings in particular—which is the current darling asset class--is showing early signs of moving beyond the coasts and spilling into middle America.

As for new lending…

…the word on the lending front is also one of slow growth. Data that came out this month from the FDIC shows that bank lending declined again in the first quarter of this year. All told, total bank lending has declined nearly 9 percent since March 2008. The FDIC said that last quarter’s decrease was the fifth largest quarterly decline since it began tracking the numbers 28 years ago. Lending often softens during recessions, but usually rebounds fairly quickly. That hasn’t been the case this time around. Despite the softness in lending, overall bank performance indicators seem to point to a continued, slow recovery from the depths of the financial crisis.

What we’re likely to see in the coming quarters is that banks will look to increase their lending for stabilized properties, but the problem is they’ll face stiff challenges from other lenders seeking to extend credit for core assets, particularly in major coastal markets. Here we’re talking about DC, NY, Boston, San Francisco and Los Angeles (metros also closely aligned with the largest overall Phase I markets). I think JPMorgan Chase’s commercial bank chief put it best when he said “We’re lending more…but not enough to brag about.”

The word from attorneys on front lines of dealmaking

I moderated a panel of environmental attorneys at our client summit in May who made a few points worth highlighting here. These comments were the subject of a previous blog so I won’t repeat them here except to say that the point of these two attorneys was that deals were happening, strategic buyers who understand the value of due diligence are coming back, and that lenders are more willing to “wade waist deep” into environmental due diligence (all good news), but that turnaround times are short and cash deals are closing with little or no environmental due diligence (the not-so-good news). So the message was that, with some buyers, due diligence is getting pushed aside on deals today. Just depends on who you’re working with and who's funding the deal.

Workouts and loan sales are alive and well

There’s been a definite and recent step-up in the volume of loan workouts as borrowers and lenders come to terms with commercial loan workouts for distressed assets. According to data I have from our sister company Trepp, there have been about $30 billion worth of loan modifications and extensions over the past 18 months. And the data show more workouts are likely on the horizon. Ditto for loan sales.

There’s been strong demand for commercial property loans which is helping lending institutions to get stronger prices for their loans. Lending institutions, especially regional banks, have been quick to capitalize on this, and are selling both performing and non-performing commercial property loans. Who’s buying them? Distressed loans are proving attractive to private equity funds, hedge funds and opportunity funds that are comfortable taking on additional risk. They’re often buying loans on properties that are in danger of foreclosure, or that are in negative equity. For them, the loan purchases are opportunities to buy commercial property at attractive prices that can then be repositioned to generate positive cash flow. I’d say these buyers of loans are perhaps the biggest benefit to the commercial property market, as they are injecting new capital and management into properties that have been in a state of limbo.

And deals beget more deals so the more buyers who get comfortable wading into the water, the better for everyone. Just this week, a Moody's release stated that "The uptick in transaction volume helps set the stage for a meaningful broad recovery in the U.S. commercial real estate market.” Let's hope so.

That’s it for my list of developments this month. And for those who have been asking, EDR’s two Insider newsletters for environmental professionals and commercial real estate lenders went through a rework and are scheduled to resume publication in July so look for both editions to come out next month.

As always, thanks to Dennis Firestone for organizing these monthly calls and including our research in the circulated materials. Anyone interested in getting involved in these calls is invited to email Dennis at Dennis.P.Firestone@cbre.com

The next call will feature what looks like it will be a great presentation by my fellow commonground blogger Joe Derhake on the most common reasons for missed RECs.