April 15th, 2017 by Geoffrey di Mauro Leave a reply »

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 at your convenience.