Open Discussion: CRE During a Downturn

bd.charlus's picture
Rank: King Kong | 1,368

I want this thread to be a way to think out loud about how we do business during trying economic times. It seems many (most?) of us on this forum are newer to CRE and have never been in the industry during a recession/downturn/correction. For those of you who have, I'd love to get some conversations going outlining strategies you've employed or seen peers utilize to help get through tough times.

Feel free to get specific, eg "I worked as an asset manager for an office REIT during the downturn, here's how we dealt with leasing" or "I was a debt broker for CBRE during the downturn, here's how tough the capital markets were and here's how we tried to maintain relationships and drum up business" or "I worked in multifamily REPE, here are some deals that worked and here are some deals that failed." Stuff like that.

Some specific questions I have for folks:

  • What were the main threats to your career as a real estate professional, and how did you adapt?
  • As an acquisitions guy, how did you get deals done?
  • As an asset manager, how did you minimize loss?
  • What were the things that seemed apocalyptic at the time that turned out to not be, and what were the things you may have overlooked that came back to bite you in the ass?

Comments (9)

Apr 23, 2017

Been thinking about this as well. Would love to hear some experienced CRE guy's take on what it is like riding out the end of a cycle.

Apr 23, 2017

Very interested as well.

Apr 24, 2017

I'm sure @PacNumber can provide some good insight here

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Best Response
Apr 24, 2017

I think most here know my basic story...

I got in the business in 1995 with a national finance company. Real estate was trash. I didn't know quite how bad it was until the early 2000's when things were rocking and I got perspective. I was mainly a resi loan guy and sold some homes until 1999/2000. I was successful but hated showing property, doing open houses etc. With the help and advice of a well known CRE banker, I got into commercial in 2000/2001. In 2001 I got my CA broker license and opened my own shop. I'm a mid market guy with a pipeline of CRE loans and listings/purchases in the 2mil to 7mil range.

2007 was a great year for me and the CRE world at large. Resi guys were already going broke. Values were way up on for sale housing but lack of volume killed their income. Deals weren't getting done (this is true today in 2017...no inventory, low volume, high prices).

2008 I managed to scrape out a decent gross income but paid it to office leases, assistants, etc. Overhead ate it up. 2008 income was down 50% from 2007. Deals kept falling out of escrow.

Jan 2009 I moved my office home for the first time in ten years.

2009 was a disaster. I feel that by 2010 the real players were buying again.

Moving forward, what could I have done then to take advantage of such terrible economic and cyclical trends? Lots of things!

I think Acq Managers and Brokers have a lot in common. You have to source deals. As an Acq Manager, and I've never been one, I would say you need to keep your job by convincing management that through a downturn, the work you put in early will pay out in just 2yrs. That's not a huge salary vs company returns. In 2009, as an Acq Manager, if you were to beat the streets with local brokers on the regular, by 2010 you'll be closing on deals that by todays standards were absolute steals.

Sell your value to the firm.

As a broker, you need a pipeline of high net worth buyers that have tons of cash and equity. There are more out there than you realize. I use software like Prospectnow where I can research when people got loans and with what bank to determine their equity, interest rates, etc. Then I try to find them. That work early in a down turn will pay off in about 12mo. These high net worth guys really started to do deals in 2010. So you need to be able to make it through an 18mo to 24mo slowdown not of prices, but of deal volume.

These high net worth buyers will do refi's to buy new deals, use cash on hand to buy new deals, or, if you bring them a nice off market deal, you might earn a smaller listing out of it to perform the exchange.

***Learn your buyers style. I know big MF buyers but some won't do that 1950's, 40 unit, rehabbed and stabilized building in the Barrio even if it's a nice Cap. But they'll do a 10 unit, coastal fixer at a low cap cause that's their style. There is an investor here in San Diego with 6000 units. He'll take down 8 units by the beach though.

Lastly, keep your head in the game. Stay fit, eat right, don't drink except on weekends. Understand that once a correction comes, it's not low values that are the problem. It's low volume. You need to find deal volume. Don't get side tracked with some other venture or business.

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Apr 24, 2017
PacNumber:

Stay fit, eat right, don't drink except on weekends. Understand that once a correction comes, it's not low values that are the problem. It's low volume. You need to find deal volume. Don't get side tracked with some other venture or business.

Couldn't agree more with "don't drink except on weekends." It's made a big difference in my productivity and ability to stay focused.

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Apr 24, 2017

Wait until market bottoms then go work for Carval, Lonestar or cerberus buy NPLs and foreclose and take control of the assets, hold out/rennovation let the cash trickle in and then sell once the market has recovered.

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Apr 28, 2017

Great thread. Would love to hear more input from other users.

May 10, 2017

I am a second year analyst at a RE LIHTC syndicator in Boston so I definitely don't have the experience to comment here, but I've been on A LOT of interviews with large brokerage firms and smaller PERE shops in the past six months. One of my last questions is, "How is this business in a downturn i.e. 2009?" The brokerage men/women go silent for a few seconds and then generally respond with, "It's not fun." A debt placement MD told me, "I made $0 in 2009 (all commission, no base salary). The spreads on asking prices and bidding prices are too high in a downturn. You need to be ready for when it happens. If you save your money and don't buy multiple houses, cars, boats, etc. you can survive and then thrive when the eventual upswing happens." That sucks when you are an Analyst grinding for $60k a year and then your bonus disappears, but I believe that one bad year is worth grinding out for future earnings in this business. PERE MDs generally tell me people kept thinking the market would keep going lower so the majority was not buying assets (the smart ones were buying). They don't want to make that mistake again so one MD believed they'd be more aggressive in the next downturn. From an Analyst's standpoint, my takeaway from these answers is that an Analyst's bonus might disappear for a year, BUT it's worth it to stay in this game for the long haul.

May 23, 2017
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