• Nothing Is Over Until We Say It Is!
  • March 20, 2009 | Author: Mark L. Nastri
  • Law Firm: Munsch Hardt Kopf & Harr, P.C. - Dallas Office
  • As I contemplate the predicament the commercial real estate industry is facing in 2009, and what we ought to do about it, I keep coming back to that classic scene from the greatest motion picture of the 20th century, Animal House. Dean Wormer has kicked the Deltas out of school. The gig is up, the party over, and the brothers are dejected, unable to generate the energy to do anything except mope about on how bad things have become. “The war’s over,” says D-Day. All of which prompts Bluto to rally the troops with that immortal pearl of wisdom: “Over? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell, No. And it ain’t over now!”

    Of course, the Deltas responded to their predicament with a “really futile and stupid gesture,” which doesn’t seem very helpful for a real estate professional. Instead, our decision to fight back should perhaps be tempered by the wisdom of St. Francis of Assisi, who prayed “Lord, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.”

    Let’s be honest: None of us can generate liquidity out of thin air, increase the availability of debt, push cap rates back down, rescue tenants facing insolvency or save the equity in real estate projects that has evaporated during the past year. We have to accept the things that we can’t change. But, that doesn’t mean we are powerless to take any action at all. Nor does it mean that we will all end up on the losing end of the Credit Crisis in the long term. Nature seems to have a way of creating opportunities at the same time it wreaks destruction. The only reason we humans are here to talk about these problems now is because when that asteroid hit the earth 65 million years ago and wiped out the dinosaurs and 70% of all other species on earth, our ancestors (those small, nimble, opportunistic and adaptable mammals) were able to take advantage of the opportunities that such destruction created. So it must be for us in business: we must find the opportunities that are being created by the current carnage in the real estate markets and take advantage of those opportunities in order to survive and, ultimately, thrive.

    I remember well how the last downturn played out. For the most part, it wasn’t the long-time Texas real estate investors and developers who profited from the historic opportunity in the early 1990's to buy real estate from the RTC at what, in hindsight, were absurdly low valuations. Most Texas players were too wounded, too preoccupied with their own problems and too pessimistic to see and take advantage of the opportunities that lay before them. Instead, it was 28 year-olds with headsets in cubicles at New York investment banks who profited because they could see what appeared obvious in retrospect: if you could buy a well-located property for 30% of the replacement cost, that just had to be a great deal (and they were right). Of course, it helped that they also had access to huge amounts of capital.

    The current real estate downturn won’t play out exactly the same way – these things never do. For example, it is not at all apparent where all the capital will come from to deleverage all the commercial real estate assets that need deleveraging. But I have no doubt that 20 years from now it will appear obvious in hindsight that those who are able to first find and take advantage of the current value opportunities will do very, very well on the backside of this Credit Crisis.

    To even have a chance to take advantage of these opportunities, we need to first make it through that most dreaded phase of all real estate cycles: the Doldrums. The “positive transaction wind” – full of new investment, development and leasing – was blowing along very nicely until it began to peter out in late 2007 and stopped abruptly on September 15, 2008 (the day the market absorbed news of the failure of Lehman Brothers). The “negative transaction wind” – with an unfortunate (but necessary) re-pricing of real estate assets and consequential workouts, insolvencies and distressed asset sales – will assuredly start blowing in the other direction at some point. But for the time being the wind has stopped altogether and we all sit in the Doldrums, drifting, feeling powerless. That doesn’t feel very good to us, so we’ve decided to start paddling.

    The 2009 mission of the Munsch Hardt Real Estate group is to help our clients make it through the Doldrums and find the opportunities that will make them successful during the next cycle. To help developers find service income to keep their team intact. To help investors craft creative strategies to take advantage of whatever form of distressed loan and/or asset sales take shape this time around. To help landlords manage tenant vacancies. To help lenders and borrowers navigate difficult workout negotiations and understand the mysteries of the CMBS tranche warfare that is going on behind the scenes.