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

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

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.

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