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PHILADELPHIA-Last month Incisive Media’s RealShare Philadelphia here brought together real estate professionals from around the area to speak in front of about 450 attendees. One of the panelists was Art Pasquarella, executive vice president and chief operating officer of locally based BPG Properties, a firm with 20 million square feet of commercial real estate and 25,000 apartment units across the country. During the conference, Pasquarella spoke with GlobeSt.com about the state of the industry during the recession and how firms are adapting.

GlobeSt.com: What makes you optimistic about multifamily properties right now?

Pasquarella: Everything is cyclical of course, but what we’ve experienced is that the multifamily market is a recipient of the downturn in the for-sale housing market. So what had happened was back between 2003 and 2006, the boom period for for-sale housing, we actually were having very difficult operating conditions for the multifamily side, if only for the reason that while the economy was strong, people were leaving apartment communities in droves because of plenty of available housing, incredibly low interest rates and the teaser rates where you would get an adjustable-rate mortgage. We do exit surveys all the time, and by far, the majority were leaving to buy a home. When the market cooled, we saw an about-face on the operating conditions of the multifamily side. We were no longer struggling to keep tenants in the community–they were coming in droves. Occupancy rates jumped, concessions to get tenants to come into the community fell precipitously. It became a very strong revenue-growth period on the multifamily side.

The other thing that people tend to forget is that the population of the country continues to grow. Demographically, there is still immigration, population grows through natural birth and people are living longer. There is an increasing pool of potential renters, as there is an increasing pool of potential home buyers. There is still growth in the population base of the country, so you are still seeing strong inherent demand that way.

GlobeSt.com: If housing bounces back, will multifamily then suffer?

Pasquarella: I don’t have the macrostatistics to say how many unsold homes are on the market today and what impact it would have if all of the buyers of those homes came from apartment communities. My intuition is that it would definitely have a dampening effect to the multifamily-rental side. Inevitably, you’re going to take off some people that would be a renter and make them a homeowner. If there was a rapid shift back to the home-buying market, we would see some damage back to the rental side.

GlobeSt.com: You’ve talked about becoming a controlling partner on projects having financing issues. Are there any typical scenarios in which you see this taking place?

Pasquarella: It’s becoming across the board. Your first tier of property owner that this would be appealing to is the group that would have over-financed their acquisition, bought at the peak of the market, compounded that error with putting 90% or 80% of the purchase price in debt, and as soon as there’s a problem, there’s not enough cash flow to service the debt service, or the lenders don’t want to loan at what has now become 110% of the loan. So they’ll call their loan, if they have the right to call if, or if it matures they’ll call it. That’s the obvious situation.

But there could be other reasons. We foresee large real estate equity funds that have a large portfolio with some assets that are doing just fine and some of the assets are not doing that well. If those bleeding assets need a big infusion of capital, the cash-flowing assets probably can’t support the bleed, coupled with the fact that the lenders are really cutting the loan amounts. As a loan matures, you’re going to see, for example, a $20-million mortgage loan on a $25-million purchase, and now if its value is $18 million, they’re going to want to lend $12 million. Where is that $8-million gap going to come from? What we see is being able to create liquidity at a fund level where they would give up a position in their fund, perhaps a controlling position, and we would then step into the shoes of operating those particular assets that we are being asked to contribute to. The control is a relative thing. I don’t want to be a lender; I don’t like being that passive. We are used to being our own king. We want to be able to operate and make the property decisions that are best for the real estate. That will be the challenge for some fund managers, to give up that operating control.

GlobeSt.com: How has the relationship with tenants changed through the recession?

Pasquarella: I don’t know if it really has changed. In a lot of ways, they’re a victim as much as we are. They’re struggling with trying to make intelligent decisions and are scared. In some ways, they’re working as your partner in that they want to find a win-win solution. We do get an increasing number of requests in our retail portfolio from the retailers who are trying to use the bad news in the retail sector as a way of bluffing you into a lower rent. In certain cases we’ll examine their situation. The first response is: Give us your tenant sales-volume reports, and we’ll see how you’re doing. In some cases, they give them to you, you see that they are struggling, and you want to enter into some sort of short-term rent relief. On the other hand, we’ve seen some that are bluffing. You look at their sales volumes, and if they’re doing a big sales volume, you say: “You’ve got to be kidding.” When you say “no” typically it was a game of poker, and they give their renewal.

GlobeSt.com: Why is there such a disconnect between buyers and sellers because it seems as if there is money out there to make transactions?

Pasquarella: It’s human nature. It’s greed. People want the best price they can possibly get, and probably even more so. With the seller, there is sort of a disbelief. “I know the guy down the street just sold his home for $300,000, but two years ago they were selling them for $400,000, and I’m just not going to move. I’ll just stay put.” There’s a disbelief that this is the price. It’s the same thing on the commercial property side. It is hard to acknowledge that you just lost millions of dollars once you sell. When I own it and continue to operate, I still have hope. Cap rates fall, property values go up, the stimulus works. We can always have optimism. You tend to get to that point where you hold on and hold on. Sometimes that’s the right decision; sometimes that’s the wrong decision. I would put forth, though, that sometimes taking your first, quickest loss is the best loss to take. On the other hand, if you have staying power and hang in and weather the storm, this is a terrible time to sell.

But even though there is a lot of talk about the lenders putting pressure on the property owners to pay off mortgages, it hasn’t translated into massive foreclosures on the commercial property side. To a certain degree, the properties are probably still making debt service, or maybe the property owner is feeding it a little bit. There hasn’t been this total crisis yet where the lender is absolutely demanding payoff. Until that happens you’re not going to have that hard stimulus to start clearing the market.

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