TRANSACTIONAL DUE DILIGENCE TRENDS IN FLORIDA (2006-2014)

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

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.

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