I recently attended the Environmental Bankers Association winter conference in Phoenix, AZ. The EBA meetings, held twice per year, provide a platform to discuss environmental risk management, sustainable development lending information and technical expertise. This year, there was a renewed focus on emerging environmental risk, more stringent underwriting requirements, regulatory changes, and the collective impact on commercial real estate transactions.
Here are eight essential areas of interest to the commercial real estate industry, and what they portend for lenders and financial stakeholders over the coming year.
2020 CRE Market Forecast
The US economy has experienced 127 consecutive months of growth. It is growing but less smoothly than in 2019. Industrial and hotel sectors were high performers. 2019 had a slow first quarter. The lending environment was highly competitive with and aggressive debt fund lender landscape There was a 27% increase CMBS lending over 2018 and non-bank lenders were big. With no major upsets in 2019, marker fundamentals were stable.
In 2020, property prices will continue to rise and the trend of metro growth with continue. Lending indicators point to growth and low interest rates. Banks will hold the line on risk management with more rigorous underwriting standards based on the lack of good deals out there. Retail will see more store closings. In 2019, 9,300 stores closed. This outpaces openings 2:1. Big retailers are overleveraged. Re-use will be a continuing trend. Industrial will lead in 2020. Warehouses due to the online retail trend is driving this and development is going vertical in metro areas.
Environmental, social and corporate governance (ESG) will be in the forefront of lending strategies. ESG recognizes that green performance is linked to value. Technology will be infused into CRE bring together multiple silos. Use of space in CRE will matter. Tenants are far more demanding than ever.
SFB RWQBC Soil Vapor ESLs
|Contaminant||Old ESL||New ESL||Old ESL||New ESL|
Evaluating Seismic Risk – More Critical Than Ever
Why do an SRA? How much risk does an earthquake pose to a building asset? One of the first steps to determine seismic is identifying what seismic zone a building is in. The 1997 Seismic zone map was commonly used but the industry is moving away from this map and towards the USGS peak ground acceleration map (PGA). The PGA map is different from the 1997 map, less areas on the west coast are high risk and more on the Midwest and southeast are high risk.
There are two ASTM standards to evaluate seismic risk, E2026 and E2557, used to determine seismic risk. ASTM 2026 is a guide and 2557 is a practice. Using these two standards, there are dozens of ways to conduct an SRA and depending on what model is used, the reports can have different results. This can be confusing for the end user, so it is important to use the model that best fits the client’s needs and risk tolerance. Other things that can impact outcome is the information provided during the assessment such as plans, access, and amount of data. Its important to note the ASTM standard in not a methodology not a list of ingredients. The standard allows for 6-10 damage loss models with different loss estimates.
Also keep in mind building stability– will it remain stable in an earthquake? Building stability is particularly important to agencies like Freddie Mac which requires retrofitting if building stability issues are identified.
What to Expect when Retrofitting an Existing Building Against Vapor Intrusion
When a vapor intrusion condition exists on a vacant property that is slated for redevelopment, the solution can often involve the installation of a vapor barrier system on the slab which can be installed during construction. This becomes a lot more complex when installing these systems on existing buildings. Challenges discussed include installation these systems in tight crawl spaces, existing residential areas, identifying preferential pathways such as trash chutes and sealing them, and determining thickness of barriers. This panel discussed how creative solutions can be implemented and how regulations vary from state to state.
EBA Journal Highlights
ASTM announces the publication of E3224 to incorporate building energy into property due diligence
The existing PCA standard (ASTM E2018) does not address building’s energy performance. The new standard will include collection of building and energy-consuming equipment information, weather normalizing the building’s baseline energy consumption, and determining if a building’s energy consumption meets, is greater than, or is less than energy consumption of peer buildings
Upcoming changes to ASTM E1527
Proposed substantive changes to the current E1527 standard include the addition or clarification of notable definitions including the Significant Data Gap, Historical and Controlled Recognized Conditions and AULs/Environmental Liens in Title Records. There has been some discussion of changing requirements for Site Visits and Interviews and historical research will likely be revised to be strengthened. Additionally, environmental professionals will be encouraged to document and explain how they arrived at the conclusion present in the report.
PFAS are creeping into due diligence reports
PFAS is not currently a classified hazardous substance under CERCLA; however, the EPA recently issued an action plan in February 2019 which included the process for classifying two types of PFAS but it is not clear when the classification will be finalized. Some states are starting to regulate PFAS in due diligence reports such as New Jersey and New York. Evaluation of PFAS is still outside the scope of E1527-13 but 15 states have guidance or interim regulations related to PFAS. Currently it is the responsibility of the environmental professional to determine on a case by case basis what approach is the most appropriate for a Phase I.
For all of your due diligence needs, especially at this time of rising complexity, make sure to engage with a knowledgeable, experienced consultant who can provide multi-disciplinary services to ensure you limit liability and end up with a successful transaction.