There was a lot of discussion at the recent Environmental Bankers Association conference, in Newport Beach, Calif., about the state of environmental due diligence in commercial real estate, both on a macro level and on more granular topics.
Luckily, GRS Group had a presence at the event and can help you filter through some of the details in case your attendance wasn’t possible. Rick Levis, associate director of client services, and Ross Simmons, a GRS project manager, break down their key takeaways on what was expressed about the future of commercial real estate due diligence at EBA.
What was the mood of attendees about the overall industry and economy?
Rick Levis: The general mood of attendees could be classified as cautiously optimistic. Dianne Crocker, Principal Analyst at EDR Insight, opened the conference with a discussion on what to expect in 2018 in terms of the economy. She stated that economic growth has been slow and measured. There is still low inflation, job growth is increasing, overall business confidence is strong, the housing market is generally healthy, and by April 2018, we will have reached the second-longest period of economic expansion. With that being said, expansions don’t last forever, so the: “I think I hear a recession!” refrain is gaining volume.
Crocker also stated that deal volume in 2017 did not match the prior two years, and the forecast in transactions is expected to decline over the next couple of years ($427 billion in 2018 and $414 billion in 2019, as compared to $450 billion in 2017).
In spite of this, commercial real estate investment capital remains at staggering levels and is migrating to smaller markets. Deal volume is increasing on smaller properties.
There will also be an emphasis on repurposing obsolete retail space going forward and the industrial sector of commercial real estate will be the winner going forward, given the increase in e-commerce sales and investors fighting over prime industrial space in hot metro areas.
Ross Simmons: Attendees were generally expecting the status quo. As described by Crocker, last year saw moderate growth in commercial real estate transactions, and more of the same is forecast for 2018. Market fundamentals (housing, employment, etc.) remain strong, so there are no signs of an imminent downturn. But there is some underlying nervousness, based on historical economic cycles. This recovery has already lasted longer than most, so it is likely running its course, with a downturn coming. But no one really knows when, and there are no danger signs on the immediate horizon. So people are generally expecting continued slow growth (two percent to four percent). It won’t be a gangbusters expansion, nor an imminent contraction.
Was there a session that was particularly more valuable than others?
Levis: One of the more valuable sessions was actually not related to environmental issues. It was “Seven Habits of Highly Effective Consultants: A Banker’s Perspective.” Consultants are retained to provide an opinion on an asset so that the client can make informed financial decisions that align with their risk-management tolerances. However, as we have long known, if that is all you do, your firm will not be in commercial real estate for very long. The panel reiterated some of the key characteristics that they value in their top consultants and that we at GRS strive to continually improve upon and excel at:
- Providing thorough and comprehensive reports and going the extra mile to try to fill in gaps, rather than sending reports with open issues.
- Begin with the end in mind and make the client’s job easy.
- Be a resource and/or partner.
- Be a good manager of the turnaround time and schedule.
- Don’t just identify problems, identify solutions. Manage the project as if the deal is your deal and/or your money.
- Seek first to understand your client and their needs. Then be understood
- Be proactive when issues arise. Problems don’t age well.
Data security is a huge deal for nearly every industry. What makes it important and unique in this sector of CRE?
Simmons: Like most industries, the trend in recent years has been for more and more of the data required for CRE transactions (Phase I, surveys, PCA, etc.) to come in a digital format. When deal timing can result in significant costs (interest rate locks, earnest money, etc.), any data-security breach that impacts the ability to provide and use the digital data to complete a deal can become very costly for all parties involved.
Was there any discussion regarding the recent SBA SOP 50 10 5 (J) changes?
Levis: There was not any discussion regarding the recent SBA SOP changes in any of the main panels. But there was some brief discussion in one of the breakout sessions. One of the recent changes relates to the “shelf life” of a Phase I. SBA will now accept an AAI compliant Phase I if it was performed within one year of submittal to SBA. Previously, a compliant Phase I had to be completed within 180 days of submittal. In addition, SBA now requires a Phase II ESA on any property with current, or former, on-site dry-cleaning facilities that used, likely used, or use chlorinated and/or petroleum-based solvents. In the prior SOP, Phase II’s were required where current and/or former dry cleaners operated for a period of five years or more, and used PCE or TCE, on site. There have also been updates to the required documentation for gasoline stations and historical research requirements for Records Search with Risk Assessment (RSRA) reports.
What did you learn about stormwater infractions and how landlords can avoid problems?
Simmons: For most environmental concerns, the risks for property owners and lenders can be fairly well defined by existing cleanup standards, or permit conditions (usually numerical, well defined). In the case of stormwater discharge under CWA (Clean Water Act), and air emissions under CAA, there is an added risk related to the ability of citizens to file suits. They can be frivolous and based on most any grievance, but you still have to shoulder the cost to defend, perhaps take corrective measures, and/or settle out of court.
What was your one major takeaway from the conference that will help you better assist GRS clients?
Levis: It is always valuable to attend a conference where both consultants and lenders, both of which are generally competing against each other throughout the year, engage in true collaboration to identify trends in the industry and educate each other with respect to issues that both lenders and consultants face on a daily basis. As a consultant, it is critical to understand our clients’ needs, hot buttons, and risk tolerances throughout the duration of any given project. Having a true understanding allows us to provide superior service and to become a valuable and trusted partner.
Simmons: Since we work in a niche industry not very well understood by the public (and even sometimes our clients), it’s incredibly helpful just to network with more than 200 other professionals who devote their time every day to wrestling with the same issues and nuances. Also, since many of our clients are lenders, it is very helpful to get a flavor of the lender’s perspective on these issues, since their viewpoint is central to this conference. It’s good to hear what current issues are important to others in the industry, and how they are dealing with them.
About GRS Group:
GRS Group is a leading provider of commercial real estate (“CRE”) services worldwide. With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with a global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.
Through the company’s proprietary management process, Global Services Connection, GRS Group delivers an integrated suite of services including Financial Advisory, Transaction Management, Assessment and Title Insurance. We provide a single point of contact, capable of leveraging the GRS Group portfolio of companies and delivering customized solutions to assist our clients in achieving their investment goals.