Trammel Crow Company - Lessons Learned from the 80's Southwest Disaster
This was one of my favorite resource discovered when COVID19 Pandemic hit the US in March 2020. All of us Real Estate Experts are scrambling to find footing, have the best information, and stay up to date as the information changes daily. We need to be agile and know where the market is going. I have found it priceless to step back in time and see what the partners at Trammel Crow learned in the 80’s. Maybe we can learn from their mistakes 30 years ago, heed their wisdom, and navigate these peculiar times.
Here is a compilation of memos from various partners and staff at Trammell Crow Company, reflecting on the causes and lessons learned from the collapse of the Southwest real estate markets during the late 1980s. It includes detailed lists of strategic, personnel, administrative, and project-related mistakes, as well as reflections on what the company did right and what influenced their decision-making. The document is divided into multiple pages, each containing contributions from different individuals within the company.
Introduction
Several partners in the Southwest region of Trammel Crow were asked to reflect on what led to the collapse of the Southwest real estate markets, including strategy, personnel, administration, and individual projects. The purpose is to learn from these experiences and prepare better for future challenges. They started with a request to outline the mistakes made in :
Strategy
Personnel
Administration and Overhead
Individual Projects
HIGHLIGHTED LESSONS FROM THE 80 REAL ESTATE CRASH
"High overheads (some costs fixed like fancy offices with high rents). Pride kept us from cutting projects, debt, rents, and overhead in a timely manner"
"Doubtless ride out the no-rent storm. Then, when vacancy rates finally fall enough so that rents stabilize and start rising and property ownership comes into its own again, you can adopt a truly positive attitude"
"We tended to focus on great real estate while ignoring the storm clouds of overbuilding and increasing debt and overhead burdens"
"Avoid debt like the plague. The sixth commandment is, Thou shalt shrink thine own organization before its overhead drives thee into the grave"
"Market and became unduly influenced by our staff, the brokerage community, and the press, all of whom have a tendency to be myopic"
"We let land and/or financing costs sometimes dictate what we developed"
Lessons Learned and Strategic Reflections
Memorandum by Gary Shafer:
Shafer emphasizes the necessity of learning from past mistakes and sharing experiences to avoid future issues.
He encourages partners to outline mistakes in strategy, personnel, administration, and individual projects.
Marc Myers:
Strategy mistakes include investing in unsuitable locations, relying on service centers for deals, and taking on partial liability in long-term JV's.
Personnel mistakes identified include hiring non-partner material for leasing and under-hiring for property management.
Administration errors were not terminating underperformers early and failing to institute financial controls.
Individual project mistakes involved pursuing marginal deals and overestimating spec space needs.
John Walsh:
Strategic errors highlighted include overestimating land values, getting caught in market frenzies, and relying on high-interest rate non-recourse loans.
He noted personnel issues like hiring adequate yet under-experienced individuals and maintaining too many staff.
Administration mistakes involved not delegating responsibilities effectively and underestimating overhead costs.
Individual project mistakes included aggressive expansion without market support.
Steve Meyer:
Strategy errors consisted of not trading equity for reduced liability, improper cash management, and over-reliance on readily available capital.
Personnel mistakes included inadequate development of leasing personnel.
Administration errors were failing to appreciate the increased effort required for project work, especially during downturns.
Individual project faults included mis judging market demands and over-investing in uncertain developments.
Mike Birnbaum, Mike Jaffe, Bryce Miller:
Strategic mistakes included overly optimistic projections, delaying markdowns, and underestimating market downturns.
Personnel mistakes involved failing to upgrade staff quality and not maintaining a lean operation.
Administration errors encompassed not having top-notch controllers and failing to monitor automatic payments.
Individual project issues were influenced by competitor actions and projecting an overly optimistic market.
Sandy Gottesman:
Gottesman focused on strategic errors like not anticipating interest rates correctly, expensive historical restorations, and over-promising on projects.
He highlighted the importance of full disclosure in leases and serious consideration of personal guarantees.
Personnel issues included the reluctance of senior partners to reject unsound deals.
External forces included relying too much on inflation, mistreating the brokerage community, and overestimating market absorption rates.
Gary Shafer’s Compilation of Mistakes:
The review identifies common mistakes across partners and outlines lessons learned from the market collapse.
Emphasis on managing existing assets well and avoiding new construction unless projects were well-preleased with strong tenants.
Importance of maintaining cash holdings and reducing debt.
Need for flexibility in staffing and operations to adapt to changing market conditions.
Response to Market Realities:
The document notes a shift in capital availability from the 1980s to the 1990s, reducing new developments and emphasizing the management of existing properties.
It includes guidelines adapted from emerging market realities, emphasizing cautious expansion, cash management, and strategic rethinking of organizational strengths and weaknesses.
Conclusion
Overall, this document serves as a detailed post-mortem of the Trammell Crow Company’s experience during the Southwest real estate market collapse. It highlights the importance of strategic caution, personnel management, administration efficiency, and realistic project planning in navigating market cycles. The collective wisdom aims to better prepare the company for future economic challenges by learning from past mistakes and successes. The lessons are timeless - history repeats itself.
