Reflections on a Real Estate Crisis
Three veterans of the S&L crisis compare the impact of that debacle on commercial property to the current crunch.
Despite talk about another Great Depression and the worst financial crisis in a generation, it’s hard to faze the Dallas real estate players who made it through this region’s darkest hours: the savings-and-loan fiasco of the 1980s-early ’90s. The S&L crisis—a combination of overbuilding, plummeting oil and gas prices, lax lending, and ill-conceived government regulation—spun Dallas-Fort Worth into a commercial real estate downturn that took nearly a decade to reverse. Three executives who lived through and survived those dark days—Scott Lynn, director/principal of Metropolitan Capital; Craig Hall, chairman and founder of the Hall Financial Group; and Sam Hocker, senior vice president with Grubb and Ellis—sat down with D CEO recently to talk about the parallels, and the differences, between then and now.
D CEO: Where were you in your career when the S&L crisis hit? Scott Lynn:
|photography by Lisa Means|
I got into real estate in 1980 after graduating from the University of Texas, and by 1984 I ended up with a subsidiary of Henry S. Miller/Grubb & Ellis called Miller/Dale-Wallenstein. By early 1986, oil dropped to $9 a barrel. I was young, unattached. Everyone was saying the bottom was falling out and it was every man for himself.Craig Hall:
We [Hall Financial Group] were sort of the eye of the storm. We were one of the early companies to indicate that things were going wrong—to publicly admit our difficulties. At the time we were a large borrower as well as the partial owner of some financial institutions. Prior to the S&L crisis we had put together a number of limited partnerships—we had several hundred, with over 10,000 investors.Sam Hocker:
I was doing what I’ve always done: lease office buildings. I started in 1971, really as a landlord’s rep. Tenant representation hadn’t been invented. I had my own company for 10 years, mostly from ’84 through ’94. How did the S&L experience impact your business conduct?
Since the 1980s we have focused on making money in a smaller, controlled environment. We are not looking to be huge. One thing is, we do not want overhead where it is controlling the business.Lynn:
I was flying back from Houston on Southwest Airlines and I saw on a cocktail napkin the places Southwest Airlines flew to that were not part of Texas. I wrote the words “Business Plan” on the top of the napkin and brought it to my boss. I spent a lot of time meeting a lot of people, and it really helped sharpen my business-development skills. It was the longest cold call.Hocker:
A lot of guys got hurt. A lot guys went to jail. A lot of guys filed for bankruptcy because they were in all kinds of deals and they were underwater. It was really 1994 before we came out of this thing. When I represented Blockbuster Video when they came to Dallas in 1996, they needed 240,000 feet. We only had five options in the entire city. That’s because we had come through more than a decade of cleansing.
Both the S&L crisis and the current malaise are rooted in over-lending that resulted in a credit crunch. But is it really fair to compare the two?Hocker:
|photography by Dan Sellers|
[In the 1980s crisis] there were like 1,600 banks in the country that failed and 1,300 savings and loans that failed—and 40 percent of them were in Texas. Texas was the bull’s-eye of all of this, and right now we are not the bull’s-eye. The bull’s-eyes are on the east and west coasts. The indicators that we see today are not nearly as severe. Hopefully people learned their lesson. Lynn:
Back then [the crisis] was a result of overbuilding, what I call a perfect storm: way too much overbuilding that depended on oil staying at $30 a barrel. The current market is being driven by a residential crash, and we have not had an acceleration of residential values versus places like Las Vegas, California, and Phoenix. Hall:
I would argue that the S&L crisis was more serious. We are not going to see disaster. In the mid-1980s, Dallas and Texas in general was the epicenter of the real estate crash. Whereas the problem [in the current crisis is] where you are overleveraged and the loan comes due. If you can’t pay down, that’s where we will see problems. Lenders want to de-leverage. With pressure on owners who need to refinance, do you foresee a significant drop in values in the near future?Lynn:
We have to have a clearing of assets. We are having a devaluation, which comes from a lack of liquidity. Value has been driven by the availability of financing, and now there is nothing greasing the skids. There is some mumbling that commercial real estate is off by 20 percent, but that is only if you have to be a seller or if you have to be refinanced. Renewal of all that debt could be an issue. It could continue to push value down if the lender puts pressure on the borrower.Hall:
For the most part, I don’t think the adjustment will be quite as dramatic for people holding assets. It is not like the 1980s; the buildings are not empty. There was way too much lax lending [then], even more so than there is now. [This time] lenders were more restrained in Texas. Hocker:
The office space in Dallas in 1980 was 60 million square feet. Six years later, it was 120 million square feet. So you had a huge, huge oversupply. But we’re still in a recession; we’ve been in at least four recessions in the last 30-odd years. There will be a slowdown. There will be competition for tenants. There’s going to be pressure on rents because of the recession. And people are going to be making deals that they didn’t want to make. Are there any areas of commercial real estate that are more at risk than others in the current environment?Lynn:
You could argue that all structures are at risk from top to bottom: retail from weak consumer spending, office from a contracting economy and job growth. Residential—maybe more people are doubling up, moving back in with their parents. Then you have to factor in all the houses that are now for lease. Hocker:
The magic word is equity. If you have equity, you’re fine. A friend of mine just bought a $13 million piece of land in another city in Texas, and he put 40 percent equity into it. He had no problems; the bank showed up at closing. But that is not a very leveraged deal. In fact, they would be happy if he defaulted. Although there is a section of the office building ownership out there that does have what they call mezzanine debt, or structured financing. There’s going to be some guys ... who go out [of business]. Is there any upside to the current crisis?Hall:
The worst part is, people usually think it is over before it is over. I think we are very extended and there is going to be a difficult de-leveraging. Many people aren’t going to make it. But it is possible it will provide the best buying opportunities since the mid-1980s. A lot of wealth will change from current owners to new owners. Hocker:
There’s a lot of money on the sidelines. There are a lot of people hoping for another 1980s crash, because there are a lot of people who got rich picking up assets for 20 cents on the dollar. And there are a lot people now that have their vulture funds that are out there picking up land from homebuilders; those are strategic long-term plays. Where do you think we stand in terms of a timeline? any light at the end of the tunnel?Lynn:
I personally think as it relates to commercial real estate that we are more to the beginning than we are to the end. We are probably in the third inning. We are definitely in the acceptance stage.Hocker:
It looks to us like 2010 is going to be the year when a lot of this debt is going to roll over. So I think there will be a reckoning, positively or negatively, in 2010. And it depends on what happens in the next 18 months whether everything is going to be OK and how deep this thing will unwind. Hall:
It takes an optimist to be successful; it takes a realist to survive and come through. This is going to be important, because it’s just starting. … It is better to be facing this reality sooner rather than later—not waiting until 2010.
Simek is a freelance writer in Dallas who also contributes to People Newspapers. His last article for D CEO was about commercial-property tax appraisals in the November 2008 issue.