1Q2015 SCOREKEEPER UPDATE: A Recovery for the Ages

More than five years have passed since the official end of the Great Recession, and this is shaping up to be a recovery for the ages. The effects of the downturn are fading further back in the rear-view mirror and market indicators across the board continue their slow improvement. Earlier this month, I delivered the 1Q2015 ScoreKeeper Market Update, highlighting the latest stats and trends on in the Phase I environmental site assessment market. Here are five key take-aways:

  1. The Return to 2005/2006

The major market indicators in the broader economy that correlate with Phase I ESA activity are all trending in the right direction. That includes housing starts, consumer spending, low interest rates and property deal flow, among others. Real Capital Analytics just released its first quarter statistics on sales of significant commercial properties, which were up (on a $ value basis) by an impressive 45% in Q1 over Q1 2014 with positive pricing trends across all property types. The industrial sector posted the strongest overall gains, while the office sector posted the strongest overall dollar volume. Similar data just out from CoStar painted a similarly encouraging story: The preliminary $126.3 billion in total office, apartment, industrial, retail and hospitality sales in 1Q15 was the highest since the first quarter of 2007, and a 47% increase over 1Q14.

  1. Growth Beyond NYC and LA: The Rise of Secondary and Tertiary Metros

The slow migration trend away from the safe primary metros like NYC and LA into smaller secondary metros is now firmly underway. Here’s your proof: EDR’s ScoreKeeper model output for 1Q2015 shows the highest growth in Phase I ESA activity occurring in metros like Las Vegas, San Antonio and Portland. It is worth noting that this table looked very different just a few years ago when the highest growth rates were found in the big gateway markets.

SKPhaseIGrowthMetros1Q15

This metro trend aligns very closely with what is happening in commercial real estate right now. Only very recently have investors shown a willingness to go further out on the risk curve in search of higher yields and less competition. This trend brings new opportunities to metros that are seeing double-digit growth rates for the first time in this recovery. The 10 metros in this table had Phase I growth rates in the first quarter that ranges from 13% to 52% growth compared to an overall U.S. growth of only 4%. On a state basis, activity in the Western region, particularly in Washington state and Oregon, and in the Mid-Atlantic region, has been trending stronger than the rest of the country—and the U.S. as a whole. In coming quarters, ScoreKeeper output will identify where growth is consistently strong quarter to quarter as these and other new markets gain traction.

 

3.  More Buyers–Many More Buyers

 

Another exciting trend for environmental professionals has to do with who’s purchasing commercial properties. Far more pronounced than the return to 2006 real estate transaction levels is the increase in the number of active buyers—now 24% higher than pre-crisis. Last year, there were an estimated 18,574 unique buyers in the property market, more than three times as many as in 2009 during the low point of the downturn.

Buyers

4.  Get Ready for a New Round of Refis

Originations of commercial real estate loans are growing only modestly, but the more noteworthy trend in the lending sector is that we are heading into a new round of refinancing with $360B in commercial loans maturing by 2017. The majority of these are 10-year balloon loans originated in the high CMBS issuance years of 2005-early 2007, driving a wall of maturities from 2015 to 2017. And some of these loans were aggressively underwritten (particularly the ones originated in 2007) and could have trouble getting refinanced with extensive additional investigation. For perspective, the more than $300 billion in loans maturing through 2017 is more than 2.5 times the amount that matured from 2012 to 2014. And the competition could be intense. Lenders are widely viewing this wave as a welcome opportunity to provide financing for solid real estate deals. EDR is already seeing higher due diligence activity tied to refi’s and, if interest rates start to rise, it is not unrealistic to expect that volume to surge as owners try to lock in rates before rates go up any further.

MaturingLoans

5.  2015: The Year for New Development

The other strong area of opportunity this year is in new construction/development. Total construction spending ended 2014 at its highest level since downturn, and it looks like 2015 will be the year for new development. Lenders are more comfortable issuing loans for new construction than they have been in a long while. In fact, construction and development lending was the fastest growing category of commercial real estate loans across banks of all asset sizes. Cranes are showing up again in cities that are finally seeing a pickup in employment. It’s because land prices and construction prices are going up and retailers in particular have expansion plans to meet. Beyond the key metros of New York, San Francisco and Boston, there has been a marked increase in development in 2015 in Denver, Raleigh-Durham, suburban Virginia, Oakland, Las Vegas, Austin and San Jose. Environmental professionals serving these metros could see an increase in work this year related to property assessments for new development projects.

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As we head into May, all of the key drivers for property assessments are firing in the right direction and the market risks are relatively tame. There is still a lot of road to run in this recovery so expectations for the near-term are positive. All eyes are on the horizon for an increase in interest rates, but until then, you can be reasonably optimistic about continued moderate growth in demand through the end of this year and into 2016.

FOR MORE INFORMATION

-Listen to the replay of my 1Q2015 ScoreKeeper Market Update for more trends, including the variation in lending volume by bank size, the 2015/2016 market forecast and more.

-Slides for the 1Q2015 ScoreKeeper Quarterly Market Update are posted here.

-Mark Your Calendar

Be sure to register for my next ScoreKeeper Quarterly Market Update: 2Q2015 on July 9th for the latest in mid-year trends and outlook.