THE CANADIAN RETREAT

Will the world’s largest developers take their money and run?

Robert Campeau is not accustomed to failure. He comes, he sees, he conquers. The 57-year-old French Canadian started his career as a 60-cents-per-hour apprentice machinist and became the founder and chief officer of Campeau Corp., a billion-dollar development firm. He sweated, swore and stomped his way to the top so rapidly that patience, tact and diplomacy never caught up with him.

In the late Sixties, Ottawa, his home base, would not permit buildings higher than 150 feet. Campeau didn’t like the rule and, after a bitter fight, built a skyscraper 342 feet high.

Campeau didn’t like Charlotte Whitton, the mayor of Ottawa, either. She protested his plans to remove some trees from one of his sites and shielded them from his bulldozers with her body. He started one of the ’dozers and pointed it right at her tree. The trees were moved.

When the mayor really made him mad, he made a point of driving to work early every morning and parking in her reserved space. She would have his car towed away -and he would rise early the next morning and park in her space again.

Even when he tried to be polite, Campeau couldn’t leave the mayor alone. The two met one night at a black-tie party and exchanged frosty, but polite, greetings. The mayor turned to leave, but Campeau was standing on the hem of her dress. She was forced to retreat from the affair with the back ripped out of her gown. “There wasn’t a soul in town who didn’t think Bob did it on purpose,” recalls Jean Paradis, Campeau’s deputy and longtime friend, who did think it was an accident.

Another thing Robert Campeau didn’t like was zoning boards. When he had to talk to them, he often found himself shouting and jumping up and down, with Paradis tugging at his coat.

Campeau wasn’t crazy about advice, either. His subordinates tell a story about one of the company’s executive board meetings -in the early days Campeau would preside wielding not a gavel but a shoe -during which he had asked what everyone thought about an idea. A new manager offered his thoughts. As he left the room, legend has it, Campeau told an old friend on the board: “Did you hear what that guy said? He’s sharp. Fire him.”

But what really burns up Robert Campeau is shoddy work. When his company still specialized in building single-family homes in Ottawa – Campeau started the firm in 1948, putting up a house for $5,000 and selling it for $7,300- he amazed and terrified his employees with spot inspections of their work. If a Sheetrock wall was hung just an eighth of an inch off, BAM! Campeau drove a hammer through it. If he didn’t like the carpet: “This isn’t good enough. Tear it up.”

To Campeau, success was something you got if you were diligent enough, tough enough and good enough. Which he was. Around 1978, he noticed that a lot of his fellow Canadian builders were doing well in the United States. In New York, for instance, Olympia and York had bought eight Manhattan skyscrapers for $350 million, and it was obvious their value had just about doubled.

Campeau had a lot of money-he could borrow $50 million as easily as most Americans could MasterCard a pair of shoes -and he saw big opportunities down in the Sunbelt. All he had to do was come to Dallas and conquer. The local competition didn’t scare him.

The competition doesn’t scare Dallas developer Trammell Crow, either. Especially not nowadays.

An accountant by training, Crow took his blue ballpoint pen to Campeau’s 1981 financial statement a few months ago and decided that, thanks mostly to aggressive land purchases, the company was “bent, if not broke.” In the face of flaccid markets and 17 percent interest rates, Campeau had added $285 million to its holdings in raw land-a 150 percent jump. None of that land would provide the company with any quick source of income unless it was sold, and yet Campeau’s floating-rate debt had more than doubled, from $156 million to $397 million. The firm’s long-term debt payments totaled $442 million by 1984. Any trained accountant would have to wonder how Campeau planned to pay the banks.

When Crow heard that Campeau Corp, was laying off half of its U.S. staff, including its entire Texas commercial properties division, and was asking his friends if they wanted to buy Campeau’s Dallas land, he was not surprised.

Campeau is not alone in its strategic retreat. “Everything we own is for sale, okay? It’s as simple as that,” says an executive at the N.B. Cook Corp., also a Canadian firm and owner of 3, 145 acres in Dallas and Fort Worth. Even mighty Cadillac Fairview, whose $2.7 billion in assets make it the world’s largest publicly owned development firm, is backing away from commercial prospects in several U.S. cities and preparing to shed a subsidiary company that owns five subdivisions in Arlington, Mesquite and Piano.

To some extent, the Canadians suffer the same problems as their American competitors-Reaganomics, tight money and bad luck. But some of their problems stem from growth pains and from the banking and financial systems that let them muscle into the U.S. market so spectacularly in less than a decade.

In the mid-Seventies, when the Canadian firms first started buying up Sunbelt properties, American real estate companies were stunned by the worst development slump since the Depression. Housing starts fell from 2.4 million in 1972 to 1.5 million in 1974; nationally, construction rates in 1975 amounted to only 40 percent of 1973’s record 184 million square feet. Preferring amputation to death, U.S. landowners were selling good properties at bargain rates. It was only a matter of time before the real estate market got hot again, but many of the American companies could not afford the wait.

In 1976, Olympia & York Developments Ltd. paid $350 million for eight buildings in the heart of New York City, including the headquarters of ITT, Harper and Row and Chemical Bank. Within five years, the value of those buildings had more than quadrupled. That return was peanuts compared to the opportunities in California, Florida or Texas, where $350 million could buy an entire downtown business district or a thousand acres of good city land. Even conservative analysts could predict five fold increases in the value of such investments.

It was a perfect game for anyone who could afford to ante up, and the Canadian companies had dump trucks full of cash. Partly, it was the sheer size of the development firms. Olympia & York, with 1981 assets conservatively estimated at $3.5 billion, noses out Trammell Crow (at $3.4 billion) as the world’s largest builder.

Cadillac Fairview’s $2.7 billion in assets and Trizec Corporation’s $2.1 billion place them ahead of Houston’s Gerald Hines, whose 1981 assets were estimated at $2 billion. Not far behind are other Canadian firms:

● Nu-West Group Ltd. ($1.98 billion)

● Daon Development Corp. ($1.6 billion)

● Oxford Development Group ($1.4billion)

● Campeau ($1.4 billion)

● Bramalea Ltd. ($1 billion)

The Canadian financial system gave these companies more strength and flexibility than U.S. methods allowed people like Crow (though, as the Canadians would find later, it also exposed them to more risk).

The United States is host to about 15,000 banks, which have been legally prohibited from expanding nationwide. Canada has 11 national banks, and they are huge. The Royal Bank of Canada’s 1980 assets of $62.8 billion would rank it 34th in the world and fourth among U.S. institutions -behind Bank America of San Francisco (1981 assets of $121 billion), Citicorp of New York ($119 billion) and Chase Manhattan of New York ($77.8 billion). The largest bank in Texas is Inter-First of Dallas; its 1981 assets were a comparatively modest $17.3 billion.

And the Canadian banks loved to loan money. In fact, the more the developers spent, the more the banks would lend them.

The banks would periodically examine the value of each developer’s assets – not the book value quoted to stockholders but the estimated market value. This figure was called the “appraised value.” Usually it was a good bit higher than book value, and it tended to rise rapidly. When it did, the company that owned the property could expand its bank credit accordingly; the general assets of the corporation were the security on the loans.

Here is a simplified description of how the system might work, in happy times, for the developers: Campeau would come into Dallas and buy, say, 20 acres in Oak Lawn at $20 a square foot. The paper price for that land would be $17.4 million, but Campeau probably could tie it up for far less -perhaps as little as 10 percent down. After holding the property for a while, Campeau could have it appraised.

Maybe its value would be estimated at $40 a square foot. The extra $20 a square foot in “appraisal surplus” would give Campeau another $17.4 million in assets – on paper – and the new assets would be included in the bank’s calculations of how-much more money it would let Campeau borrow; the credit limit increase could be far more than the “appraisal surplus” alone. So the bottom line for the developers was that by spending, say, $1.7 million, they could add perhaps $35 million to their bank credit ceilings.

And they could use the money they borrowed for anything they wanted, while Americans like Trammell Crow and Gerald Hines had to go through the time-consuming, tedious process of financing their projects case by case.

While Crow’s lender might require him to have tenants for a building before any loans were approved, the Canadians could build with only a reasonable assumption-a speculation – that anyone would want to rent space from them.

The Canadian system had the same flaws that were revealed to Americans in 1929, regarding their stock market. An appraisal surplus is not the same thing as money in the bank. If it falls -and theoretically it could become an “appraisal deficit” -the company’s loans would not be sufficiently covered by collateral. That would leave the company open to the bankers’ equivalent of a margin call.

Then, too, there was the problem with speculating on future renters. But back in 1978, to the firms entering the Dallas market, that didn’t seem like much of a problem.

When Cadillac Fairview, Bramalea and Campeau came down to Dallas, most local developers were just rebounding from the real estate crash or were looking primarily outside the central city for their opportunities. “The Canadians were able to buy commercial sites at an opportune time,” says Toronto stock analyst Ira Gluskin. “They were among the few who had the interest and the chips.”

Daon bought 167 acres at Belt Line and Inwood roads, in the heart of far North Dallas, and within nine months had sold about half the land, which it called the Quorum, at a $7 million profit. It also swirled through the condominium market like a tornado, buying 2,852 apartment units and attempting to convert them into condominiums; it sold 1,800 units in six months, according to Gipp Dupree, who ran its Dallas operations.

Cadillac Fairview set up a 12-state regional office in Dallas, then-just to show that it wanted to give all of Texas equal attention-bought 30 blocks of downtown Houston. In Fort Worth, the company is building the 40-story First United Tower. In Dallas, its projects include the 20-story Pacific Place building and the 50-story First City Center, both near Thanks-Giving Square, and some 420 acres of suburban office park development, including Park West at LBJ and Luna. In Dallas and Fort Worth alone, construction costs could reach $400 million.

Olympia & York moved into TrammellCrow’s neighborhood and is completingits 36-story, 801,000-square- foot tower atBryan and Harwood. One of its subsidiaries, Block Bros. Development [Texas]Inc., is developing a planned communityon 2,400 acres of land at Valley View andLBJ, in concert with two other Canadianfirms, Wycliffe International and Cavendish Investments. A fourth Canadianfirm, Triland, is managing the property.Triland also owns land in the middle of theproposed Arts District.

Rostland Corp. of Toronto had, by1980, participated in a North Dallas luxury residential development, begun constructing three office buildings at LBJ andHillcrest and started planning for an officecomplex at Belt Line and Preston.

N.B. Cook Corp. of Vancouver begansnapping up land in both Dallas and FortWorth. It owns 600 acres in Arlington, 400 in a Dallas industrial park and 2,145 in south Fort Worth.

Bramalea, one of the smaller Canadianfirms, plans to erect the city’s tallestbuilding on one of the four downtownDallas blocks it owns in the Main-Lamar-Griffin area. Upon completion of the firsttower, which would be the 10th tallest inthe world, Bramalea would start construction on an identical 1.9-million square-foot tower nearby.

Campeau, which entered the Dallasmarket late in the game-1979 and1980 -managed to gobble up two primeparcels of land, one six-acre tract behindthe Fairmont Hotel and the 20-odd acresof Oak Lawn that it calls The Vineyard.Campeau’s La Tour condominium tower,a 23-story glass-faced 131-unit building onMcKinney Avenue, is scheduled to begintaking occupants in October.

Throughout the best U.S. markets, the Canadians made similar inroads. By 1981, Cadillac Fairview was devoting 80 percent of its financial and managerial resources to projects in the United States. Campeau, in five years, went from a one-office operation in Ottawa to a 14-office multinational corporation, with subsidiaries in Florida, California and Texas. And, for as long as the real estate market boomed well above interest rates, it was almost impossible for the Canadians to go wrong.

The key word is “almost.” All empires have their problems, and the Canadian firms, with their explosive growth rates, certainly had theirs, too.

There were problems with talent; a small company can be run by three or four brilliant entrepreneurs, but a firm with 14 offices needs at least that many intelligent, over-achieving managers, preferably intimately familiar with the markets in which they are working.

There were problems with administration; the difference between Robert Campeau’s company in the Fifties and the Eighties is, roughly, the difference between a canoe and an aircraft carrier.

There were problems with competition; when a Robert Campeau meets a Tram-mell Crow, every stroke of the pencil becomes crucial.

If the word “Campeau” appears a lot in the above paragraphs, it’s not an accident. The Campeau firm’s history in Dallas illustrates several of those unpleasant realities, as well as some of the finer facets of the invaders from the north.

When he came down to Dallas three years ago, Ken Cooper did not intend to do anything but succeed, in the grandest style possible. He was bright, hard-working and knowledgeable, having done extensive work in the United States for the Prudential real estate interests. He did a reasonably impressive job; his picture was included in Campeau’s 1981 annual report, which was released just about the same time Cooper was laid off.

But Cooper’s appointment violated one fundamental development rule: Know thy market. He knew about real estate but not about Dallas in particular. And, coming from Canada, he did not know the brokers, buyers and sellers who, by passing on tips and remembering one’s name to their friends and colleagues, can make or break a deal. “Those sorts of connections are probably only 2 percent of what makes a deal work, but sometimes 2 percent is all it takes,” says Harlan Crow, Trammell’s son, who steers the Crow interests through the downtown market.

Pierre Benoit, who was in charge of the residential work in Dallas, is also an able administrator and politician. He is, in fact, a former mayor of Ottawa. That makes him, like Cooper, an outsider to the Dallas market.

Cooper did not have a whole lot of spare time to find out about Dallas, either. Much of his work involved setting up the Campeau office in Dallas or working on Robert Campeau’s dream of building an 80-story tower in Houston, giving Campeau symbolic domination of that city’s skyline. It proved to be an impossible dream; the Campeau planners have reduced its size by one-half and are looking for joint-venture partners or buyers for the property. In retrospect, Campeau violated rule number two of the developer’s credo: Thou shalt not overextend thyself.

Campeau even violated rule number three: Let he who is in charge make the decisions or fire him. When Trammell Crow moves to a strange city, he usually takes a partner there -someone familiar with the market -and allows that partner to make many of the decisions about the development. Harlan says his father has about 100 such partners. To make sure they pay attention to their work, each is given some share of the project’s equity.

Cooper had an equity stake in the Campeau organization, but he wasn’t very much in charge. Any decision involving money had to be made at three higher levels of the corporation. A commercial-properties decision would be forwarded to Grant Sedgwick, Campeau’s senior vice president for commercial development, in California. Then it would bounce up to David King, in Toronto, the firm’s executive vice president. And then it would go before the executive committee of Campeau Corp.

A striking example of Cooper’s dilemma is the firm’s purchase last fall of 10 acres of land in Las Colinas. The $2.5 million tract was bought, according to three former Campeau employees, over the objections of the local staff and directly at King’s behest. “That’s just gossip,” King says. But the man who brokered the deal, Gipp Dupree, says he went directly to King, his friend of seven years, “because there wasn’t a senior enough official in Dallas who could make a decision.”

“No one at the local level was asked about it,” says a member of the now-defunct Dallas commercial team. “We did absolutely no marketing studies before we bought it; David King just called Ken Cooper and said, ’We’re going to buy this land in Las Colinas. What do you think?’ “

William Lawley, who heads the leasing operations of the Wayne Swearingen Co., thinks it was a bad idea. “There are six million square feet of empty buildings out there,” he says. “You’d have to be out of your mind to build in Las Colinas today.” True, King says, but the firm is prepared to wait, for years if necessary. “They’ve got another problem,” Lawley says. “If Ben Carpenter [who owns Las Colinas] put deed restrictions on them like he does on every other deal, then if they don’t develop the land within a year, Carpenter can buy it back from them at the same price they paid for it. And their carrying costs [interest and tax payments] would be lost forever.”

Ron Witten, president of MP/F Research, Inc., the city’s premier market research firm, predicts that current Las Colinas office space should satisfy renters “for two or three years, perhaps more.” Campeau’s former Dallas officers confirm that Carpenter did include his standard buy-back provision in the sales contract. So if, in two years, Campeau has not started a project of its own but the market seems to be improving, it will be Carpenter who takes advantage of the better climate. He will buy the land and then sell it – perhaps even resell it to Campeau-at a higher price.

The Las Colinas purchase was a nickle-and-dime affair for Campeau, but it struck Cooper and his friends for two reasons: First, it seemed stupid in light of the company’s worries about excessive debt; and second, it seemed to be a sign that their opinions were not highly valued in Toronto. Some thought it a sign that Dupree, who works in Dallas as an independent broker, had managed to worm his way above them in the unofficial corporate hierarchy. “He was going around town saying he had these deals with Campeau,” one executive recalls. “I know that he was talking to the people in Toronto. I don’t know what he was saying, but I know that it couldn’t have helped us.”

Cooper and his people were alarmed late last fall when Dupree presented them with a proposal to buy a vacant lot near the Magnolia Building at Main and Akard.

“He told the people in Toronto that he had three tenants lined up, at $25 a square foot,” a Campeau staff member recalls. Since $25 a square foot was well above prevailing rental rates -some space in new buildings was leasing for less than $17 a foot – David King in Toronto was understandably interested.

When the local staff looked into the offer, however, it found that one of the tenants was the architecture firm that would design the building, another was a law firm that would take the penthouse floor, and the third was Rex Cauble’s Dallas International Bank. The bank was not on sound financial footing, and its rent would have soared from $200,000 to $2 million a year. “That lease would have put them in the red, if they’d signed it,” a top Campeau official says. Michael Young, a broker who competes with Du-pree, says the deal presented to Campeau was not feasible.

Campeau’s local office managed to stifle that particular purchase, but still, the whole affair made them wonder.

Even in day-to-day matters, Campeau’s comparatively Byzantine chain of command caused the company unnecessary grief. The residential and commercial officials of the company were housed in the same office suite at the Plaza of the Americas but were under separate leadership all the way to the level of the executive board in Toronto. That schism may or may not have fueled internal political rivalry between the two groups, but it certainly did not help them work together.

Last January, the commercial staffers handling The Vineyard project assured nervous neighborhood leaders in Oak Lawn that they would not pull any sneaky tricks to reduce the legal restrictions on how much space they had to put between their buildings and their property lines. All they wanted, the commercial people said, was a slight variance to reduce the number of parking spaces they would have to provide. A sigh of relief went up from the surrounding property owners. It quickly changed to a howl of indignation.

The lawyer for one of the neighborhood associations makes a point of reading the legal notices in the Dallas papers. One of the notices said that Campeau was indeed seeking a setback variance. The neighbors suspected treachery, not knowing that the real problem was corporate schizophre-nia. The commercial side had ceased its quest for setback changes, but the residential side decided that it still wanted to build closer to the curb. “We didn’t even know what they had done; there were two separate zoning requests, both from Campeau,” one commercial Campeau staff member says.

Because of neighborhood opposition, Campeau backed off both requests. Had it proceeded, the city might have rejected both of them, if only because the neighbors were so upset and seemed to be so justified. The flap delayed Campeau’s planning process, and although the delay turned out to be financially unimportant, the lack of communication was a serious error. Time is money to a developer, and anything that delays a project is costly.

Not all of the other Canadian firms have shown Campeau’s administrative weaknesses. Cadillac Fairview has given Michael Prentiss, who heads its Dallas office, broader authority and discretion than Campeau gave Cooper. Bramalea’s Dallas head, Thomas Galvin, flies to Toronto at least once a month to discuss his project, and his boss, Bramalea President Ken Field, flies into Dallas every few weeks to stay abreast of things. At Campeau, one commercial staff member says, “David King and Bob Campeau came much less often than even once a month.”

It may just be local chauvinism, but many Dallas developers and brokers say that the Canadian firms often fatally misjudged the desires of Dallas renters and buyers. Most of the local experts make statements like that off the record, so as not to appear unseemly. But they say it, and they have their reasons.

Daon, for instance, swirled out of the condo market as quickly as it swirled in. It was crushed by high interest rates on its own debt and doubly hurt when Texas’ old usury law shut off all mortgage lending to potential buyers after interest rates climbed above the 10 percent legal limit. Other residential builders were in a similar predicament, but none had 1,000 empty condos on the market.

In addition to the interest rate problems, Daon discovered that people in Dallas and Fort Worth just weren’t as excited about condos as Daon thought they would be. Daon had to sell several of its condominium projects so they could be converted back into apartments, even though some of the condo units already had been purchased. (The Campeau group, perhaps unfairly, blames Gipp Dupree for leading Daon into this debacle. Dupree blames the interest rates and the usury law.)

Oxford bought an interest in the Southland Center but left the market quickly, after it “had a heck of a hard time getting its building leased,” says William Lawley, president of The Swearingen Co.

Campeau, others noted, apparently overestimated the demand for luxury condominiums. Its nearly completed La Tour building is only about 45 percent sold, perhaps because it is charging Turtle Creek prices for a location along McKinney Avenue, with a cemetery directly behind it.

The locals also say that by paying top dollar for premium office-building land, companies such as Olympia & York and Cadillac Fairview may have put themselves at a competitive disadvantage to, say, Trammell Crow, who has held his property for a relatively long period of time. And they maintain that while Cadillac and O&Y are constructing first-class buildings – better, in terms of amenities and architecture, than almost anything else in the market – the Canadians are not necessarily giving their customers what they want.

“You take parking,” says one wise and experienced Dallas office-space broker (wise enough, at least, to ask for anonymity). “Trammell Crow is sitting up there with one parking space for every 1,500 square feet of office area, and Olympia & York has one for every 2,500 square feet. And Cadillac has one for every 1,500 or 1,800 square feet, but they’ve put their parking garage two blocks away from their buildings. And you know we are in love with our automobiles.”

Maybe the Canadians’ buildings will be impressive enough to make a slightly longer walk to the parking lot seem unimportant. But so far, in the only head-to-head match between a big local and a big Canadian firm, Trammell Crow trounced Olympia & York. “Oh, he took their pants off,” says Bramalea’s Galvin. “He undercut them, he left them high and dry. I asked them what they were going to do about it, and they said that they would just wait until Crow had leased up. I told them, ’That’s not much of an answer! He’ll just build another building.’”

“They can’t make Trammell go away,” says Swearingen’s Lawley. “He’s said publicly that he’s going to get bloody. He’s going to build right along with them. And they say that he’s not invincible, but I do think that he changes his clothes in a phone booth.” Barry Henry, one of Crow’s marketing chiefs, says that Crow’s 922,000-square-foot San Jacinto Tower is about 65 percent leased; O&Y’s tower is about 75 percent empty, even though it is closer to completion. Henry attributes the difference not to Crow’s phone-booth routine but to hard-headed marketing.

Indeed, Michael Young, a leading Canadian broker in Dallas, says the Crow organization leased about one-third of its building at $17 a square foot. “We did try to make every deal that was halfway feasible,” Henry says. “As long as we don’t lose money, there’s no reason not to make the deal.” Olympia & York, according to Young, is content to keep its prices a bit higher and wait a little longer for tenants.

Crow has certain other advantages over “outside” developers, however, that would make it difficult for O&Y to win a bidding war even if it chose to compete at the same price levels.

O&Y built “prestige” space but put wide expanses of granite between windows, meaning, according to Harlan Crow, that with standard intervals between offices some people in the building would get two windows in their office, and some would get only one. “That seems awfully petty, but we got someone to sign a contract because of it,” says Crow. The company involved simply did not want to deal with any status wars between the one-window and two-window executives.

Another firm, Arthur Young, signed on for 125,000 square feet of space in Crow’s building because the Dallas leasing staff for O&Y had to consult Toronto before making any binding commitments, Har-lan Crow says. “They just told us that they couldn’t deal with people who couldn’t make decisions.”

Crow, of course, is based in Dallas and has a huge organization that looks after everything from leasing a building to replacing its fluorescent tubes. As his salesmen are quick to point out, none of the Canadian firms so far have shown that sort of staying power in Dallas. Oxford, Daon and now Campeau came in with bangs and left, if not with whimpers, then with very small pops.

More to the point, Crow already owns several millions of square feet of commercial space in Dallas. If one of his tenants is growing rapidly and wants to move to larger -or merely grander -quarters, Crow will allow them to break their leases and do so. But only if the newer, grander quarters are in another Crow building.

“Another thing is, we are a very big company,” says Harlan Crow. “We use a lot of lawyers and a lot of accountants. And we don’t do business with people who are not in our buildings.”

Ron McCartney, the president of Cam-peau, says that the competition does not bother him. “We have gone up against competitors like that in virtually every city we enter, and we have done well,” he says. But David King says that the rental-rate fire, which Crow fanned even if he did not ignite it, made it virtually impossible for Campeau to cost-justify new office construction. “I know that when we were soliciting tenants we could not break the $20-per-square-foot [for office rents] figure in the city,” he says. “That was a major difficulty in considering building costs and the cost of money.”

“Cost of money.” The magic words. The words that explain why I can’t afford to buy a house and developers can’t afford to build many.

Inflation is great for developers. Steep inflation and fixed-rate, low-interest financing make developers practically infallible. The more money they owe, the more they make. But high interest rates – particularly rates that are approximately double the rate of inflation-can make even infallible developers go bellyup, as their debts outrun the growth of their assets. And that is the situation in which we have found ourselves for the past nine months, and in which we are likely to remain for another nine.

Then there’s the problem of overbuilding downtown.

Even in the city’s best years, MP/F President Ron Witten says, Dallas’ downtown has absorbed “a couple of million square feet of office space a year.” As of January, 11.4 million square feet of downtown construction were already under way, with another 8.5 million square feet scheduled for construction to start in 1982. At this rate, by 1985 newly constructed office towers would amount to 15.9 million square feet -an eight-year supply, at the city’s normal rate of growth.

But Dallas’ past boom years have been due in large part to its capture of new businesses. The predicted local office space glut makes Dallas developers, who always have been at the mercy of national economic trends, especially vulnerable now. They cannot be happy about that prospect. The U.S. gross national product fell 4.5 percent in the last quarter of 1981, and 3.9 percent in the first three months of 1982. The prime rate of interest has been at or above 16 percent for the past year. Companies that want to expand cannot afford the financing costs, and their employees are not eager to take out new, 15-percent mortgages.

Throughout the country, construction and the real estate business are at their lowest points in 20 years. In Dallas, real estate loans adjusted for inflation fell to $186.7 million in the first quarter of 1982, compared with $254 million in 1981. Nationally, home sales in March were down 35 percent from March 1981. Trammell Crow has abandoned plans for projects in Boston, and he has thought long and hard about closing his Washington, D.C., office.

And things are even worse in Canada. The Canadian government has, as a matter of policy, tried to keep its interest rates higher than those in the United States, to avoid flight of investment capital from the country. The building markets in the oil-boom cities of western Canada have gone bust. And the overall index on the Toronto Stock Exchange fell 34 percent in April from its high of November 1980.

And things are worse still for the Canadian developers. Their index on the Toronto Stock Exchange had fallen 71 percent by April, from its high 12 months earlier. Companies had used short-term floating-rate bank financing to pick up U.S. land in 1981; even though interest rates were high, the land was appreciating so fast that the deals seemed too good to pass up. The companies were, in effect, betting that land prices would continue to inflate and that interest rates would deflate rapidly enough that they would not be eaten alive by finance charges. It seemed reasonable. Either interest rates would fall and they could get long-term financing, or they could sell their assets for a large, quick profit.

Campeau was one of the biggest bettors. Its variable-rate debt almost doubled between December 1980 and December 1981, rising from $264.8 million to $496.5 million. At an average interest rate of about 16.5 percent, it could anticipate interest payments in 1982, on its short-term debt alone, of $82 million. It had not used the loans to purchase income-producing properties, either. Its revenue-producing assets actually fell from $483 million in 1980 to $456 million in 1981. Its land holdings and properties under development, on the other hand, soared from $245 million to $624 million. And its inventory of unsold goods – primarily residential units -was $121 million, up from $77 million just a year earlier.

In other words, the only way Campeau could pay its loans off was to develop the land – but then who would buy or rent the space?-or to sell it. Of course, it could support the debt payments from other revenue sources. But Campeau’s pretax income would cover only 87 percent of its interest payments, given 1981 figures, according to Harry Rannala, real estate analyst at Merrill Lynch Royal Securities Inc. in Toronto. Daon would be in tighter financial straits, with pretax income covering only 83 percent of its interest costs. Over the brink, in other words. They would have to borrow to pay their interest or sell some of their holdings. Quickly.

For firms like Daon and Campeau, it was time to place another bet. A decision to borrow to pay their loans was a wager on relatively quick economic recovery and falling interest rates. For some firms, such as Daon and Nu-West, it wasn’t necessarily a matter of choice. They, like N.B. Cook, owned a large proportion of vacant land, which could make them money only if they sold it. And much of that land was in western Canada, where property values had fallen most drastically, or in the American Pacific Northwest, where some properties had actually fallen far below their purchase price. “Nu-West and Daon are in for a major blood bath,” financially and managerially, predicts Gluskin, probably Canada’s leading real estate analyst. “For the next nine months, they will struggle to stay alive.” (As of April, Nu-West had put $350 million of its assets on the auction block; Daon, which had the foresight to start selling last August, had already parted with $340 million in assets.)

At Campeau, McCartney confirms that the Vineyard properties are for sale and indeed that virtually any asset is “for sale, for a price.” But, he adds, not a desperation price. Campeau, like Cadillac Fair-view, has a large base of profitable commercial properties to help it through hard times. When tenants at two of its Ottawa office towers went through lease renewals last year, Campeau walked away from negotiations with an extra $17 million in annual income. “We have the cash flow to wait this thing out for two or three years, but we have to answer the economic question of whether we want to,” says the company’s chief financial officer, William J. (Don) Carroll.

In other words, why hold on to an asset that is costing you money, or giving you a smaller return on your investment than a passbook savings account? And, Carroll says, if there is some chance, however slight, that high interest rates and economic sluggishness will last long enough to bankrupt your billion-dollar company, “it is not prudent” to bet on a hasty recovery. Campeau, he adds, is battening down the hatches before it gets in serious trouble.

“One thing we know for sure is that under the current economic conditions, we cannot go ahead with all the projects that are on our plate,” he adds. “Land we are holding for sale or development went up by $300 million last year. While that is a big number, it is only the tip of the iceberg. Because if you develop $50 million in property, it might cost you $300 million. And we don’t feel that we can afford to develop $3 billion to $5 billion in this economic climate.”

Gluskin says that the Canadian banks may be nudging some of their clients into cutting back their debt, but that for Cadillac Fairview, Bramalea and Cam-peau the retrenchments are matters of common sense, not dire necessity. “Essentially, what has happened is that the Canadians have all overextended themselves, and now each of them is developing priorities,” he says. “When everything is going up, you can afford marginal people and marginal projects. When times get hard, you cannot.”

For Campeau, Texas was not a high priority. Although the firm purchased acres of prime land, it never built much in Dallas or Houston, save for La Tour and two condominium projects in Houston. Nor, judging by the way his opinions were treated in Toronto, was Ken Cooper considered to be a heavy corporate hitter. California, on the other hand, was home to Grant Sedgwick and to five income-producing office and mixed-use developments, plus 14 industrial parks. “You go with your strengths,” Carroll says.

For Cadillac Fairview, Texas is a strength. It has a large local staff and several huge buildings under construction or in the final planning stages. It also has lead tenants, though -perhaps because Cadillac needed to use special enticements in order to crack the local market – those tenants also are equity partners in its buildings. Gluskin says Cadillac’s marginal projects are in Washington, D.C., and New York City. “My guess is that they will extricate themselves from New York and Washington in some way and concentrate on Dallas,” he adds.

Olympia & York is staying in Dallas; its office building is almost completed and its excellent reputation in its other markets indicates that it stands behind its work.

Bramalea does not yet have financing for its huge downtown complex, but the consensus among local developers is that the towers will be built. Bramalea has a lead tenant, and its plans for the project are stunning.

Among all the Canadian firms, staying in Dallas will be a matter of economics-here and throughout their empires. They will sell as much land as they have to, for as long as they have to, wherever they can command good prices.

Even in markets where the Canadians choose to stay, Gluskin says, they probably will be doing business differently in the future. “What made the Canadian developers different three years ago was that they were willing to buy land with cash and start building without long-term financing,” he says. “They are not going to do that any more.”

Gluskin titled a recent report on the Canadian real estate industry “End of a Decade,” and with good reason.

The Canadians’ financial strength has been dissipated by their aggressive purchases and high interest costs, while that of the formerly prostrate American developers has grown – sometimes because of the high prices that the Canadians were willing to pay them for their land. And the Canadians were forced to contend with some unexpected competition once the U.S. market heated up. Pension funds and insurance companies have been pouring money into real estate. “You say Dallas has an office space glut? Well, the Canadians didn’t cause that glut,” Gluskin notes.

The Canadians’ managerial and creative strengths also were overextended by their rapid growth, and their American competitors, always more aware of their local markets, have grown more sophisticated. So, as many an American developer will crow -no pun intended -the Canadians have learned a lesson.

So far, in Dallas at least, the lesson has come cheap.

Some of the Canadians may have to wait three years to fill their towers in Dallas, but the ones who are staying can afford to wait. And the ones who are leaving are crying all the way to the bank. “I just signed the papers this morning to sell a piece of industrial land in Dallas for $2,050,000,” says an N.B. Cook executive. “Our costs were about $1.6 million.”

“Since their arrival, I think that the Canadians have learned that development is a multi-faceted process and that land acquisition is only the first phase,” says Young, the chief Dallas booster among Canadian brokers. “It’s something they knew, or should have known, before. Maybe the lesson is, ’You can’t do it by remote control’.”

Trammell Crow concedes that his company learned that lesson several years ago when it tried to crack the market in Paris. His son, Harlan, recalls that the firm hired the very best people it could find, built an excellent twin-tower development, and then discovered that its site was smack in the middle of a Communist area of the city. “We sold it, and we didn’t lose any money but we didn’t make much either,” Trammell Crow says.

“I’ve got a picture of those buildings inmy office,” Harlan says. “The other daythis guy from Otis Elevator, who workedin Paris, came by. He looked at those pictures and said, ’Haw! You guys built thosethings? They’re still empty!’ “

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