Risk Aversion Elevated, Metro Hot Spots from Today’s EBA Call

I spoke on today’s call of the Environmental Bankers Association Risk Management Committee to share my monthly list of top five observations on the economy, commercial real estate and property assessment markets. Here goes:

  1. In terms of commercial property transactions, 2nd quarter data isn’t out yet, but early signs are that deal making is up year over year. For the near term, the most active property buyers will be private equity and foreign investors, but private local investors and public equity REITs making up a larger share of purchases than previously expected. These are the client types that will be driving the majority of assessment demand in the coming quarters.
  2. Insurance companies lead the pack as the #1 source of debt capital right now. Lending by GSEs is up, CMBS issuance up 12% year on year. Also, some strength from commercial banks and mezzanine lenders. All good news, but (and there’s always a but!), available capital still pales in comparison to what is needed to provide liquidity in secondary and tertiary metros and for average-quality assets. There is extremely tight bank lending in smaller towns and rural areas, as the large national banks focus on gateway markets and institutional properties, and small community banks struggle to work out existing bad commercial real estate debt.
  3. Geographically, among the top 10 investment markets to watch, Boston is in the top spot right now, followed by Houston. San Jose, Austin and San Francisco also showed big mid-year 2012 gains. For the complete list of the 15 metros showing the highest growth rates for environmental due diligence, read our latest ScoreKeeper news brief.
  4. In two days, we’ll be closing out EDR Insight’s 2nd quarter surveys of both environmental professionals and lenders. Those results feed into our Environmental Risk Aversion Index, which I presented at EBA’s Newport meeting in June. While the previous three quarters saw a progressive tightening of underwriting standards by lenders, which made sense after the market unrest we saw exactly one year ago, the latest quarter shows a leveling off, or normalizing, of this trend. Risk aversion is holding firm at elevated levels and very few are relaxing their underwriting.You can bet on continued regulator scrutiny keeping risk management on banks’ radar screens. The OCC just came out with a sternly worded warning for banks to not lower underwriting standards in their quest for higher profits. The OCC warned against a litany of risks, among them the risk that banks will go out too far out on the risk curve, especially community banks that do not have the diverse revenue streams of their larger counterparts.
  5. Lastly, as of July 1, CA’s Registered Environmental Assessor, or REA, program is discontinued, the latest casualty of limited state funding for environmental programs. We did some outreach to market to find out the reaction, and I know there have been some related discussions here as well. The responses we received ranged from “Good riddance…that program was a waste of time/money”…to some who felt like have REA after their names was well-earned and a valuable way of differentiating themselves from less qualified providers.

For more of EDR Insight’s mid-year update on property assessment markets, we’re hosting a 2Q12 market briefing in two weeks. It’s free and all are welcome to join us!

And for more commentary on my top 5 list, read my latest Market