Lessons I MUST Learn From the Great Recession
Let me be the first to say, congratulations!
You made it. (Or you have almost made it.)
The Great Recession is slowly grinding to an end. It isn’t happening quickly and it certainly still isn’t easy, but it is ending. And you are still here. You made it through. You stayed in commercial real estate through the greatest downturn anyone alive has ever seen.
Now what? I think we need to learn from where we went wrong and how we can prevent a recurrence of the carnage (or at least plan for it).
So here is what I think I should take away from the toughest 5 years in Atlanta CRE history:
1. Understand the difference between “can” and “should”
Can you get a loan on an office building in Buckhead? Yep. Can you get an apartment development started? Sure. Can you borrower 90% LTV at interest-only? Uh-huh.
But . . . should you? We in CRE like to talk about our feasibility studies and thorough demographic reports. We throw around these fancy trends and numbers to show why we “should” build this new condo project or apartment building or spec warehouse or whatever. Somewhere along the way we confused “can” with “should.” We need to take a deep, long look at our assumptions going into our big projects.
Foreign investors will throw money at you. Bankers may beg you to take their debt. A tenant may even be pushing for you to build some new space for her. But you, Mr. Dealmaker, need to know when to hit the brakes. It can be one of the most difficult decisions for a leader to make. But those who can slow down and avoid growth-for-growth’s-sake will be the legends in the long run. Hopefully the scars from all these foreclosures, bankruptcies, and early retirements are deep enough that we remember where the brakes are on our runaway train.
2. Prepare for the Worst
Remember 2006? Rents never decline. Tenants never back out of LOIs. Students always need a place to live. Right?
Stuff happens. It happened before. It happened big this time. It will happen again.
Plan for it. Write out a worst case-scenario. Have a rainy day fund. What happens if all that deal flow dries up? What happens if you lose your revolving line of credit? What happens if your bank fails?
Plan for it. Write it down. And you will find that you always have your umbrella when it starts to rain.
3. Debt structure matters
So about all that debt you got in 2005 . . . how did that work out? How many of those 10-year notes are still in good standing? Remember how you rushed through the diligence and didn’t negotiate the terms of the debt? Let’s not do that again.
If they bank offers you 80% LTV, make it work at 75%. Stay the heck away from interest only. (Take it from a creditor: amortization can be your friend just as much as it is your banker’s). Personal guarantees are serious and should be treated as such. Default interest and provisions are also important (see point 2).
Basically, just be cautious about the way you structure your debt. Negotiate the terms and be sure to have your attorney and accountant present. The adage in Proverbs about the borrower being slave to the lender is absolutely true. As long as you recognize that you are entering into that type of relationship you will not be as inclined to stretch and squeeze every dime out of your lender.
4. Who are the truly great men and women?
Tough times have the way of bringing out the true faces of the people around us. Pay attention to how the people around you behaved when they defaulted on their debt or had major tenants leave.
What did they do when threatened with bankruptcy? How did they treat their lenders? What did they do to their tenants when the building was in trouble?
Pay attention to the men and women who handled the strife with patience and grace. Stick close to them and trust them. They are the people you want to spend your career with.
Anyone can be kind and forgiving when they are making $1,000,000 in income per year. Who showed the same grace while losing $1,000,000 per year?
5. Enjoy it
Life is short and so is your career. I can’t tell you how many retirees or industry veterans have told me that their career seemed to go by in the blink of an eye. It will be over before you know it.
So have fun with it. Enjoy something about your career every day. Even when times are tough and everyone around you is losing money, you should still be able to find some fulfillment from you career. If not, you’re in the wrong place.
Notice that I didn’t title this article as “Lessons that YOU Should Learn”. These are lessons for me that I thought I would share with you. I have no idea what you learned and how it will affect you. But I do know that you should have learned something.
What do you think are the most important lessons to take away from the Great Recession?