Archive for April, 2017

TRANSACTIONAL DUE DILIGENCE TRENDS IN FLORIDA (2006-2016)

April 15th, 2017

Effective 31 December 2016

Lessons Learned 30 – 4Q2016 Annual Due Diligence Trends

Survey Results – This is the seventh annual Survey of consultant and lender trends in environmental due diligence in Florida.   The Survey topics included the following questions, including: (a) what is the growth trend for environmental due diligence (6% over 2015), (b) what was the average cost of due diligence for 2016 (down 1.8% from 2015), and (c) what trends have been identified for 2017 (muddled).   We also see a second year of lender activity above the 2009 levels, including a year over year 21% growth rate from 2015.

As stated in prior Surveys, the respondent consensus indicates that 2006 was the pre-“great Recession” industry high water mark in terms of assessment requests; therefore, we use 2006 as our assumed baseline of “1.0.”  This year’s data from responding consultants continues to show an ongoing growth trend for transactional due diligence, beginning in 2009.  Since 2013, all of surveyed consultants have been doing volume in excess (to varying degrees) of their respective 2006 volumes; however, year over year growth in 2016 was moderate or negative for two thirds of surveyed consultants.  Only one consultant posted double digit growth last year, primarily to an increase in activity in South Florida.  The weighted average shows that the average due diligence of responding consultants returned to 2006 levels in mid-2010 (white Arrow), and is now about 2.5 x higher (or 150%) than the 2010 volume.

(See Exhibit One of Attachment)

2016 was also the second year since 2009 that lending activity (excluding special asset or foreclosure activity) of responding lenders moved into positive territory, meaning activity levels in excess of 2009 high water mark.  In fact, this year (2016) showed a solid 21% increase over 2014 levels, continuing a double digit trend from the 39% increase from 2014 to 2015.    The 2016 pace of loan transactions was 33% higher than 2009 levels.

(See Exhibit Two of Attachment)

Finally, according to respondents’ data, the weighted average cost of a Phase I environmental site assessments in 2016 declined again (3d decline in 4 years), decreasing @ 1.8% from 2016 to $1867 (down from $1900.   This is also the fourth year that the unit cost average remains below the 2012 average of $2047.

(See Exhibit Three of Attachment)

Trends for 2017 –   Survey participants were asked what they feel the due diligence trend will be in 2017, and what factors they feel will be most influential in that trend.

Specific/select comments to the general question “What does [responder] feel the due diligence trend will be in 2017, and what factors does [responder] feel will be most influential in that trend?”  include the following:

– “…the number of phase I ESAs for investors will decrease as investment properties become more and more difficult to find (Harder to find deals that make financial sense). Furthermore, with the possibility that the Dodd-Frank Act will be reformed by removing some restrictions on the banks it is our opinion the number of Phase I ESAs by banks will increase during 2017.”

– “The most influential factor at this point is the change in administration and waiting to see how transition occurs and if market continues to rally, or declines.”

– “We have see some slowing of the developers purchasing large parcels (=100 acres) for new developments.  There continues to be a market for the fill in developments (10-25 acres).  Individual properties, purchase, refinance and lender requests seems to be holding steady.”

Recent reports, including in the 7 February 2017 Wall Street Journal indicate that while large commercial real estate transactions are decreasing , however, there is an enormous increase in refinancing transactions, including ahead of anticipated Fed action to increase interest rates.  This should help spur the market for environmental due diligence, at least in the short term, while investors watch to see how the new adminstration’s posture and attitude towards various markets affects investment strategy.

(see “Rush to Refinance” Chart from Attachment)

While this is an informal and non-scientific poll (with the expected disparity in perceptions), most respondents, lenders and consultants alike, felt that factors like concerns about the staying power of current general economic growth, expectations for increases in interest rates, and fledgling Trump administration, will have material effects on business in 2017.

Thank you to all the participants for their feedback and candor. If you have any comments or questions, please do not hesitate to contact me at gdimaurolaw@gmail.com at your convenience.

TRANSACTIONAL DUE DILIGENCE TRENDS IN FLORIDA (from 2006 – 2015)

April 15th, 2017

Effective 31 December 2015

Lessons Learned 29 – 4Q2015 Annual Due Diligence Trends

Survey Results – This is the sixth annual Survey of consultant and lender trends in environmental due diligence in Florida.   The Survey topics included the following questions, including: (a) what is the growth trend for environmental due diligence, (b) what was the average cost of due diligence for 2015, and (c) what trends have been identified for 2016.   For the past year (2015) we observed a continued increase in consultant activity, plus a first time rate of lender activity above the 2009 levels, including a year over year 38% growth rate from 2014.

As stated in prior Surveys, the respondent consensus indicates that 2006 was the previous industry high water mark in terms of assessment requests; therefore, we use 2006 as our assumed baseline of “1.0.”  This year’s data from responding consultants continues to show an ongoing growth trend for transactional due diligence, beginning in 2009.  Since 2013, all of surveyed consultants have been doing volume in excess of their respective 2006 volumes.  The weighted average shows that the average due diligence of responding consultants returned to 2006 levels in mid-2010, and is now about 2.2 x higher (or 120%) than the 2010 volume.

(see Chart One from Attachment)

2015 was also the first time since 2009 that lending activity (excluding special asset or foreclosure activity) of responding lenders moved into positive territory, meaning activity levels in excess of 2009 high water mark.  In fact, this year (2015) showed a dramatic 37% increase over 2014 levels, compared to the relatively tepid 8% group from 2013 to 2014.    The 2015 pace of loan transactions is now 7.8% higher than 2009 levels.  Factors which may be contributing to these higher commercial real estate lending numbers include market reaction (signaling moderate confidence levels) to the incremental rate increase by the Federal Reserve (signaling moderate assurance of economic health/growth), as well as a general moderate trend up in real estate values across the top 80 market regions .

(see Chart Two from Attachment)

Finally, according to respondents’ data, the weighted average cost of a Phase I environmental site assessments in 2015 rebounded after a two year decline, increasing @ 9.5% from 2014 to $1900.   However, the unit cost average is still 6% lower than the 2012 average of $2047.

(See Chart Three from Attachment)

Trends for 2016 –   Survey participants were asked what they feel the due diligence trend will be in 2016, and what factors they feel will be most influential in that trend.  Respondents referred to a current [slightly] positive but queasy tone in the market.  The factors for this feeling included (a) perception that the current moderate pace of growth in the general economy, if sustained, would generate steady business; but (b) concern that current volatile financial markets and depressed bond returns will continue, pushing money into RE as investors seek shelter in hard assets, and (c) the current relatively low cost of credit is not assured (where the Federal Reserve has put future interest rate increases on the table for this year).

Specific/select comments to the general question “What does [consultant/lender] feel the due diligence trend will be in 2015, and what factors does [consultant/lender] feel will be most influential in that trend?”  included the following:

 

[Consultant] It is our opinion there will be an increased demand for Phase I ESAs by investors as property values are speculated to increase in metropolitan areas. Furthermore, with the possibility that the Federal government will increase interest rates, it is our opinion the number of Phase I ESAs by banks will increase as property owners will be looking to refinance their properties before the interest rates go up again.

 

[Consultant] – It is the consultant’s understanding that approximately half of 2016 activity will come from developers, while another 30% will be associated with lenders, and another 20% focused on refinancing.  The consultant believes that Vapor Intrusion concerns will be a material source of interest/activity in 2016.

 

[Lender]  We continue to experience a [continued] pick-up in business, which started half-way through 2014.  I would expect a 30-40% increase in requests for environmental reports.  We will be looking to do a few more investor loans also.

 

[Consultant] – Consultant  believes that 2016 activity for the company will be lead by the financial sector (lenders or related financial / investment groups) approximately 40%, while 20% developers, 20% owners, 10% real estate brokers, 10% law firms representing others.  The overall trend is likely to be stable or decreasing if the Fed raises rates again. Rising interest rates will play a role on the velocity of real estate as an investment.

 

[Consultant] The first ¼ of the year will generally be off to a slow start (not unusual since November and December are usually busy months).  The summer months will likely see an increase, and given it is an election year, things may slow in the fourth ¼ of 2016.  Interest rates always play a role in investing and financing for the DD arena as well.

 

While this is an informal and non-scientific poll (with the expected disparity in perceptions), most respondents, lenders and consultants alike, felt that factors like concerns about the staying power of current general economic growth, uncertainty about interest rates, and the ongoing election campaign season, will have material effects on business in 2016.  This firm agrees there are a number of factors which are whipsawing the market. One the one hand, election year concerns (especially the wide disparity between proposed economic courses of action between the leading Democratic and Republican candidates) could dampen activity in the latter 3rd of this year, pending election outcomes.  Additionally, one may also expect additional market concerns that economic weakness in the BRIC nations and the EU could also hamper the present moderate growth in the United States, as well as continue to depress the stock market, while the bond market is providing only a neutral safe haven at best for investors.  These factors could result in new/additional money being channeled to purchases of hard assets like real estate, pending evidence of a specific and sustained market direction. Conclusion – uncertainty and volatility appear to be the consensus forecast elements for 2016.

Thank you to all the participants for their feedback and candor. If you have any comments or questions, please do not hesitate to contact me at gbdimauro@yahoo.com at your convenience.

TRANSACTIONAL DUE DILIGENCE TRENDS IN FLORIDA (2006-2014)

April 15th, 2017

Effective 31 December 2014

Lessons Learned 28 – 4Q2014 Annual Due Diligence Trends

Survey Results – This is the fifth annual Survey of consultant and lender trends in environmental due diligence in Florida.   The Survey topics included the following questions, including: (a) what is the growth trend for environmental due diligence, (b) what was the average cost of due diligence this year, and (c) what trends were identified for 2015.   For the past year (2014) we continue to see a situation where lender growth is moribund in the due diligence arena, while consultant activity continues to increase.  This is may be attributable to both a continued tightened credit policy, and the influence of cash deals by investors and developers.

As stated in prior Surveys, the respondent consensus indicates that 2006 was the previous industry high water mark in terms of assessment requests; therefore, we use 2006 as our assumed baseline of 1.0.  This year’s data from responding consultants continues to show an ongoing growth trend since 2009, with all of surveyed consultants now doing volume in excess of their respective 2006 volumes.  The weighted average shows that the average due diligence of responding consultants returned to 2006 levels in mid-2010, and is now about 100% higher (or double) the 2010 volume.

[See Chart One of Attachment]

On the other hand, the activity of responding lenders continues to be below the last high water mark of 2009.  In fact, this year (2014) showed only a moderate upward trend in activity over last year.  This is still 20% lower than 2009 levels.  Since lender loan rates continue to be low, other factors which may be contributing to these lower commercial real estate lending numbers include the number of cash deals still being done, as well as non-lender financing.

[See Chart Two of Attachment]

The lenders which responded continue to report relatively tight credit policy requirements, which may also be contributing to slower growth.  (Note: the lenders surveyed have not reported any foreclosure-based due diligence, therefore, that kind of lender issues are not reflected in the trend reported by the responding consultants).

[See Chart Three of Attachment]

Finally, according to respondents’ data, the weighted average cost of a Phase I environmental site assessments in 2014 continues to fall, dropping @ 4.6% from 2013 to $1735.   The unit cost average has declined almost 18% from the 2012 high point.

[See Chart Four of Attachment]

Trends for 2015 –   Survey participants were asked what they feel the due diligence trend will be in 2015, and what factors they feel will be most influential in that trend.  Respondents referred to a generally optimistic tone in the market.  The factors for this feeling included (a) perception that the positive turnaround in the general economy would generate business; (b) concern that the “bargain” properties and prices will be scarcer, driving more deals to snap up remaining values, and (c) the current relatively low cost of credit (which could trend higher if the Federal Reserve raises rates later this year).

Specific comments to the general question “What does [consultant/lender] feel the due diligence trend will be in 2015, and what factors does [consultant/lender] feel will be most influential in that trend?”  included the following:

[Consultant] It is believed that the market will be comparable to 2015.  A lot of “good” real estate deals are not expected to be on the market this year for investors to acquire.  As such, the client base may lean more towards owners/operators or financial institutions.

[Consultant] – South Florida Real estate seems to be strong for both residential and commercial projects.  We feel that this trend will continue in 2015 and will influence the demand for Phase I’s from lenders, purchasers of commercial properties and development parcels.

[Lender]  We continue to experience a pick-up in business which started half-way through 2014.  I would expect a 30-40% increase in requests for environmental reports.  We will be looking to do a few more investor loans also.

[Consultant] – I think we will see the number of Phase I ESAs increase in 2015 due to the upturn in the economy.

[Consultant] Beginning a few years ago we saw a market from banks assessing property prior to foreclosure.  That transitioned into assessments for people buying the foreclosures.  There was a period where developers who weathered the storm were buying up lots in developments that didn’t make it.  Lots were permitted and utilities, roads, etc were all in place.  They could sit on the lots until they were needed.  Last year we saw a return of developers to [this] acreage for new developments.  We have seen a few urban redevelopment projects [including brownfields, come back online].  [It is unclear] if the new development will remain strong or if there is a backlog of properties waiting for purchasers.  [It appears that] we’ll continue to see refinancing and investment purchases along with commercial projects.

[Consultant]  We anticipate an increase in environmental due diligence as lending continues to relax and real estate investment and sales rate increase.

While this is an informal and non-scientific poll, most respondents, lenders and consultants alike, felt that factors like positive perceptions about general economic growth, as well as relatively low credit rates, will continue to move money off of the sidelines this year.  This firm shares this general consensus.

Thank you to all the participants for their feedback and candor. If you have any comments or questions, please do not hesitate to contact me at gbdimauro@yahoo.com at your convenience.