Leadership Roundtable: the real estate industry & the CRE organization.

Panelists:

RICHARD A. HANSON, CRE

2008 CRE Chairman of the Board

Principal -- Mesa Development, LLC

Chicago, Ill.

A.C. SCHWETHELM, CRE

2008 CRE First Vice Chairman

(to serve as 2009 Chairman)

President -- A.C. Schwethelm Associates, Inc.

Comfort, Texas

ARTHUR P. PASQUARELLA, CRE

2008 CRE Second Vice Chairman

(to serve as 2010 Chairman)

Executive Vice President, COO -- BPG Properties, Ltd.

Philadelphia, Pa.

Moderator:

MAURA M. COCHRAN, CRE

Editor in Chief Principal -- Bartram & Cochran, Inc.

Hartford, Conn.

WHILE THE THREE COUNSELORS WHO ARE IN LINE TO SERVE AS CRE Chairman of the Board have many decades of experience in the real estate industry among them, each possesses a unique perspective on the many issues we face each day, including development, appraisal and investment.

How are these CRE leaders and their companies navigating the current real estate environment during this period of change? What challenges do they face? What role do all three see the CRE organization playing as a guiding force? Maura M. Cochran, CRE, editor in chief of Real Estate Issue, discusses these issues with the three CRE leaders.

COCHRAN: What are the major projects you're working on right now?

HANSON: We're in the process of constructing two buildings. One is a 72-story condominium in Chicago called the Legacy at Millennium Park. The second, in San Jose, Calif., is the 360 Residences, a 213-unit, 23-story condominium tower.

PASQUARELLA: We are a private equity real estate fund manager and just closed our eighth investment fund--at $850 million, our largest by far. In July, we commenced investing it, and we have three to four years to invest that capital in an intelligent way. Since it's a leveraged pool of capital, we'll wind up having to buy about $1 billion of acquisitions throughout the country in each of the next three years, diversifying among the main four groups--office, retail, industrial and multifamily.

SCHWETHELM: My work most recently has been in the courtroom as a result of appraisal issues. I recently testified as a consultant, not as an appraiser, for a property owner in a hearing critiquing the appraisal prepared for the condemning authority. The commissioners gave an award approximately five times the testimony of the appraiser, although I gave no opinion of value, merely an analysis of an appraisal that defied reason. The next day the attorney for the condemner called and hired me to "do for them what I did to them." I believe it will result in a lengthy assignment in which I can help the condemner avoid the kind of situation they faced in that case by careful examination of their appraisals before hearings or trials. Obviously, I will not be involved in any further consideration of the case in which I testified, nor any other parcels in that project.

COCHRAN: What is the impact of today's market volatility and credit crunch on your work and your business plans? It's a big news story.

HANSON: The credit crunch has finally started to affect the business I'm in. Everything you've read in the papers is true--there was way too much credit and, unfortunately, too many people buying homes who couldn't afford them. Now we have to deal with it. For a long time, though, the effect was really only in the subprime market, the lower end of the housing market. However, that has now bubbled up to luxury condominiums.

Almost all housing is a move-up market. You buy your first home, you sell it, buy a better home, sell it, and buy a better home, and so on. So, if someone is moving up from their house in the suburbs to buy a luxury condominium, down the housing chain they need the entry-level people. Our buyers have now realized how much trouble they're having selling their homes, and so they're hesitant to buy a condo downtown.

PASQUARELLA: On the commercial front, I don't see earth-shattering changes, but market volatility and the credit crunch are having an impact on my business. I think it actually helps me and my firm. It's keeping out of the game the real estate investor who would borrow 90 to 100 percent of the purchase price from a whole host of financing sources.

The real estate market in many ways is relatively efficient and, despite the media reports to the contrary, is rather orderly. On a macro level, the markets throughout the country among the different property types are all relatively healthy and improving, primarily because new supply has been kept to a relative minimum. Certain markets have more speculative commercial development than others, but they're few and far between. Most U.S. markets have improving occupancy and improving rental rates among the different property types. So, things continue to stabilize and improve and it's increasingly expensive to build new products, so to see rampant over-building would be very surprising.

COCHRAN: What about the impact on financing?

HANSON: The jumbo mortgage market (any mortgage for more than $417,000 which makes it ineligible for purchase by Fannie Mae and Freddie Mac) is feeling the adverse effects of the credit crunch. Since each of our condos is averaging around $1 million, the investor appetite for our type of mortgage loan has dropped significantly. Our typical buyer who usually enjoys a very high credit score is finding it difficult to secure a loan due to the lack of federally-sponsored guarantees.

In addition, from talking to our banking sources, we're beginning to see that project underwriters are taking a much closer look at the whole condo business, getting much more particular on what projects they'll finance, hiking their requirements for presales in order to start to fund the debt and scrutinizing location and competitors much more thoroughly. They're certainly going to developers with track records, developers they have a relationship with. I'd say, if you are relatively new to the business, you'll have a much more difficult time.

PASQUARELLA: The adage in the real estate business definitely applies that when you use other people's money, you don't have any skin in the game. People become very undisciplined with their capital and injudiciously acquire assets just to make deals and get fees. That being said, we're only looking for lenders to finance two-thirds of the cost, not 80, 90 or 100 percent. In today's financing environment, the net effect is that some of the higher leveraged investors, buyers and competitors are kept out of the game. In turn, that lessened competition means less demand and slightly more attractive pricing for me. We were seeing some extraordinarily crazy pricing and deals that you scratch your head and say, "This doesn't make sense." Even lenders were doing some pretty outrageous things. If they go back to the fundamentals--reasonable loan underwriting, requiring borrowers to invest some cash, making sure that there are loan-to-value covenants and strict debt cover ratio covenants--it brings sanity to the market. And that's healthy for the industry. It's not good for any investment class when there's rampant speculation and an undisciplined, excessive supply of capital.

COCHRAN: Foreclosures have been a big item in the news recently. How important do you see that being?

PASQUARELLA: It's mostly limited to the residential sector, but it does affect investment real estate, particularly in the multifamily market. I recently went on a multi-city tour in Florida, and they were talking about "re-version." A few years ago developers came in en force to convert apartment houses from rentals to condos. Then the market fell apart. They're reacting by converting back, reverting, to rental products. It's a local phenomenon, by no means national; yet it is occurring in pockets around the country. It's a good lesson to keep in mind: Real estate doesn't always develop linearly, and smart real estate professionals always have to adapt.

COCHRAN: Globalization is clearly an intriguing subject in today's market. Are your firms moving into the international arena?

PASQUARELLA: Our fund's strategy is to create a diversified pool of U.S.-based real estate assets, probably a third of our acquisitions or development will be in office space, another third in multifamily property and a third a mix of industrial and retail. Likewise, in terms of location, everything else being equal, we'd like to be highly diversified. But that being said, it never happens that way; you go with where the opportunities are at that point when you're looking to make an investment.

Being based in Philadelphia, our investments 10 years ago were more east coast-oriented. But over the last seven years, we've opened up several offices, including a large one in Chicago. So our portfolio has shifted towards the midwest and now the west, as we opened an office a year ago in Los Angeles. When we complete assembling this portfolio in three or four years, you'll see a pretty diverse national portfolio.

HANSON: Is my firm moving into the international scene? In one sense, no. In another sense, definitely yes. At this time, we would not consider building outside of the United States. If I can't get to a site on a plane in four hours, I don't want to do a development there. We're in a business that requires an amazing amount of attention to detail. Either you have to be a very big company with resources wherever you're going to build or you don't do it.