A couple months ago a local broker emailed this document to me: Trammell Crow-Lessons Learned (click here to download) He said it was a must read, very applicable to our current state of the market. After digesting the 90 pages, I felt like someone from the past had just sent me a ‘How to Survive in a Real Estate Slow Down Manual’ with the subtitle of ‘learn from my mistakes’. For CRE nerds like me the info contained is pure gold and amazingly prescient.
The Background: during the late 80′s Commercial Real Estate in Texas and the Southwest went though a complete melt-down. I won’t go into the history of that event, but right in the middle of it all was Trammell Crow. They had offices in all the major cities with an inventory of hundreds of properties suffering. In 1989 the head honcho at TC sent a memo around to all operating partners in the Southwest requesting a brain dump of all the things they did right and wrong during the slowdown. Essentially a list of lessons learned.
After reading this I was struck by how quickly our industry forgets things (20 yrs) and how history always repeats. I encourage all of you who are owners, brokers, bankers or investors in CRE to read this document and benefit from those that have already walked down the path we are now on.
For those of you who don’t have the time or would like the ‘Cliffs Notes’ version, here are my top take aways (quotes from the many memos):
• Pride kept us from cutting projects, debt, rents, and overhead in a timely manner (psychologists have proven that human psyche will take enormous risks before it will admit to a loss – “press the bet on the last hole” – “hidden odds for the house in Vegas” – etc.).
• Certainly, a good market tends to hide ones mistakes while a bad market overly dramatizes them. • Doing or buying marginal deals because the money was available.
• Keep a conservative strategy as to bad times. Generally, we did not know we were in a bad market until it was very bad. Remember, it doesn’t pay to say “it can’t get worse or last much longer”.
• Make every deal at the best rate you can. The deals we made in the early months of the downturn now look like great deals in retrospect. At the time we did not feel good about most of them, but today they are our best deals. • Lease, lease, lease – keep your building lease. Occupancy helps cover taxes, insurance and other costs that we pay during vacancy.
• Don’t believe that just because rents have gone up at 5% per year for five years that they can’t or won’t drop 25% in one year.
• Don’t put too much faith in a single lender. Despite the myth, large banks do fail and the new guys are not necessarily fair to you just because you are their customer.
• Don’t buy too soon when things are going down. For example, we offered a contract for $22 per square foot in 1987 that we’ll probably get for $17.50 per square foot this year.
• First markdown is the smallest.
• Do not lag a market decline in rental rates for signing leases. If rents are falling, address it quickly. The longer you wait, the more expensive it gets.
• Work renewals hard and early.
• Do not do a project just to do something – maintain careful underwriting standards. • Take more aggressive position with banks and other lenders sooner as opposed to later
• Be willing to make the tough decisions on projects and personnel. The first markdown is the least expensive.
• One bad project can make up for five good ones.
• When the office, retail and industrial absorption softens and rental rates decline, the land values decline at an even greater rate.
• Do fewer deals and do them better.
• One way to stay financially healthy is to “sell too soon”.
• We made a bet that the market would come back in 3 years and tried to bottom fish. When you don’t have staying power and the market stays bad, you turn into the fish.
• We made a bet that there is a reasonable sale market at all times in any market. We have found that just when you most need to sell there is no market.
And I love this one…
• Without question our perceived need to keep busy (working, deals, leases, etc.) caused us to spend and commit unnecessarily. We would have been far better off to have played golf on some days rather than doing a deal.