Optimism Prevails But Recovery Still Anemic

On the distress front, Nadji said that "sales have been few and far between." He added that while there are a "tremendous number of maturities coming due, once the workouts are factored in that number won't be nearly as high." And on a brighter note, the real estate industry should look to the future, namely the 80 million Baby Boomers and the subsequent 70 million Echo Boomers, who will have an enormous impact on commercial real estate.

Nadji's presentation was followed by a second keynote in the form of Peter Linneman, managing principal of Linneman Associates. He noted that despite Philadelphia's tenant trifecta--healthcare, pharmaceutical and education--the city is "still a cesspool of corruption and political ineptitude. He cited the fact Philadelphia has no snow removal plan in its budget as an example of the "good enough is fine" attitude. "How can the city not budge for snow removal? The last I checked we aren't in Miami," Linneman said.

According to Linneman, the city has lost jobs primarily due to an alarmist government. "When the government says the world is ending unless we fix it this weekend--this was one week after the Lehman Brothers collapse--of course everyone's going to panic," he said. "Seventy percent of all jobs lost were not in weak sectors of the economy," he added. "Rather, they were in fundamentally strong sectors," further pointing to panic and government intervention as the root cause of the recession. Linneman noted that officials are there to make rules, but not to be players. "The notion that the government is there to play will destroy economic growth," he continued.

The budget deficit was also top of mind during Linneman's presentation. "The problem is that the deficit is increasing at a rate of 12% of the GDP per year and the GDP is only ratcheting up by 2% to 3%," he noted. Still, Linneman believes that we "will have a strong rebound if--and it's a big if--the government stops being a player and if they do something about healthcare, which is simply too big to reform with one bill."

The keynotes were followed by a Town Hall panel, moderated by Rich Gottlieb, SVP of operations and development at Keystone Properties Group. Panelists included Matthew Pestronk at Ackman-Ziff Real Estate Group, James Mazzrelli at Liberty Property Trust, Brandywine Realty Trust's Jeff DeVuono, Spencer Yablon at Marcus & Millichap, Anthony J. Hayden at Hayden Real Estate Investments and PNC Real Estate Finance's Sean Costello. Most speakers were optimistic about the years ahead.

According to Yablon, "There are more retail shopping center deals north of $10 million now and life companies are stepping up more aggressively." He also noted that cap rates are starting to normalize. "In the last 60 to 90 days, we have seen retail deals that have closed at a 7.5% to 8% cap rate, almost 150 basis points higher than where we were one year ago." He noted that for multifamily cap rates are even south of 7%.

Following a networking break, the Debt and Equity Market Update took center stage, with moderator Joseph Kessler, chair of the Real Estate Group at Dilworth Paxson LLP, leading a group that consisted of Warren Higgins at Berkadia Commercial Mortgage, Christophe Terlizzi at Laurier Capital Advisors, HRPT/REIT Management's David Campoli, Peter Longstreth at Philadelphia Industrial Development Corp. and RAIT Financial Trust's Greg Marks.

This was followed by a panel on Philadelphia's University City, with representatives from major players here providing an overview on development, including the nearly $1 billion being spent currently. John Derham, senior managing director/branch manager, Mid-Atlantic region at Cushman & Wakefield led the discussion with Campus Apartment's David Adelman, Gerard H. Sweeney of Brandywine Realty Trust, Drexel University's James Tucker, Craig Carnaroli of University of Pennsylvania and Philip Economou of Amtrak.

Following a networking break, moderator David Popp kicked off the Opportunities in Distressed Assets and Debt discussion. Panelists included Matthew McManus at Bluestone Real Estate Capital, Craig Butchenhart at NorthMarq Capital, Pam Gibbs at Berkadia, Dominic De Simone at Ballard Spahr and David Binswanger at Binswanger. Gibbs first laid out the role of the special servicer and explained that they often find themselves with their hands tied, as they may be retained by B bondholders and then required to report to the controlling class representative. "CMBS deals are fraught with internal conflicts because of the way they are structured," she added. Binswanger chimed in that special servicers report to so many people, it almost seems like nothing every happens. But even more important to him was the issue of value. "Who knows what values is these days?," he asked. Binswanger believes that we will be "floundering with CMBS loans for a long time, especially when you add in the problems with special servicers.

So what will get investors to buy and sellers to sell? "From an institutional standpoint, I'd say you push the button now," said Butchenhart. But some of this property is likely never coming back, added Gibbs. "If you can't find it with a map and a guide and what was supposed to be a multifamily asset turns out to be a converted motel, it shouldn't have been financed to being with," she said. Gibbs also noted that special servicers cannot hold onto these assets indefinitely thanks to tax rules. Lastly, noted Biswanger, "Every bit of money has been raised to buy these assets, but investors want to do it at 10 cents on the dollar and not 40 cents or 60 cents. Maybe it's just time, though. Because eventually there's going to be pressure on these investors to buy, but not until 2012."

RealShare wrapped up this year with a Q&A with ALM Real Estate Media Group's vice president and group publisher, Michael Desiato, and William Hankowsky, chairman, president and CEO of Liberty Property Trust. Among the topics tackled were Simon's bid for General Growth Properties, with Hankowsky noting that the fundamental assets in GGP's portfolio are solid and Simon is a strong company that could likely handle the REIT's problem areas.

As for his own company, Hankowsky is keeping development to a minimum. "We would only do build-to-suit now, which is more than we could say last year." The company is currently in talks with 12 businesses. And while the company had scaled back operations last year, it is "back to operating like things are normal," said Hankowsky. A major area of interest right now is purchasing both stabilized or vacant assets. When asked about the wave--or lack thereof--of distressed assets, Hankowsky noted that "banks will eventually be able to take command once they build up their balance sheets, but distressed opportunities will ooze out; it won't happen in a great wave." And the CEO remains bullish on Philadelphia, pointing out that the city did not overbuild, boasts a diverse economic base and is a historically low beta market, which should bode well this time around.

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