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THE SCHOOL of OPPORTUNITY KNOCKS

SENIOR EXECS RECALL LIFELONG LESSONS GLEANED FROM PAST TOUGH TIMES

By Joel Groover

A spirit of youthful optimism was palpable this summer at ICSC’s Next Generation event in New York City. A 30-something leasing professional stood at the podium and declared, “I’ve been in this business for a long, long time, and in every one of those 11 years, people told me the market had peaked, and in each of those 11 years, the market set new records.”

A group of young owners made their leanings equally clear in a meeting with Joseph C. French Jr., national retail director at White Plains, N.Y.–based Sperry Van Ness/JC French Associates. “These guys were in their late 20s, and in a short period of time, maybe five years, had been very successful as developers in New York,” French said. “I was saying to them, ‘Aren’t you concerned about a downturn in the market?’ One of them looked across the table at me and, with a straight face, said, ‘New York is never going to have a downturn.’ ”

Veterans like French, who got into real estate in the early 1980s, chuckle when they run into such bullish sentiment among the members of a generation that has every reason to think the cycle goes just one way: up. “We’ve got a lot of people in the industry who have never been through a full cycle,” said Stevan Buxbaum, executive vice president of Agoura Hills, Calif.–based Buxbaum Group, a 30-year-old retail consulting and investment firm. “Their whole experience in life has been on the upswing.”

This new generation’s optimism might not be at all misplaced, however, even amid an onslaught of headlines about the U.S. housing slump, the credit crunch and a lengthening list of consumer woes. Especially in today’s fast-growing and rapidly globalizing industry, a long-term view helps put things in perspective, says Michael P. Kercheval, ICSC’s president and CEO. “There will always be cyclical valleys,” Kercheval said. “But the inertia of population growth and productivity will also create opportunities for new peaks.”

Indeed, this eagerness to seek upsides and opportunities even in situations that might seem counterintuitive is a jiujitsu trick that professionals with decades in the business have used to survive, even prosper, during the roughest of times. “Of the 10 greatest deals I’ve made in my lifetime, something like eight of them would have been made during very bad times,” said James E. Maurin, SCSM, chairman of Covington, La.–based Stirling Properties. “People who have been through difficult times understand that you can create as much or more value as a result of the bad times as you can as a result of the good.”

Dips in the cycle teach inquisitive people lessons about life and real estate that serve them well for the rest of their days, says Maurin. “Bad times are much greater teachers than good times,” Maurin said. “Albeit no one likes bad times, you learn a lot.”

Maurin, whose full-service real estate firm has operated in the Gulf South for over 30 years, has had his share of learning opportunities. No state was hit harder by the oil shocks of the mid-1980s than his petroleum-producing home base of Louisiana. “My downturn started in 1985, when oil prices began to fall dramatically,” Maurin said. “Oil prices had been as high as $36 a barrel in the early ’80s. By 1986 they were down to $14 a barrel and then stayed there for the next 8 years.”

The shopping center industry then took a body blow when Congress passed the Tax Reform Act of 1986, which got rid of certain tax shelters that had buoyed the value of real estate investments. “It took away some tremendous tax benefits that real estate had,” Maurin said. “Commercial real estate in particular was devalued dramatically.” This set off a chain reaction by undercutting the value of assets that banks used for collateral. “Banks started calling in loans and quit making loans on real estate,” Maurin said. “Liquidity completely dried up. We then had a second wave of valuation drops.”

Some harrowing balance sheets, painfully frank exchanges with employees, and tense calls with lenders and tenants were the stuff of Maurin’s daily routine until about 1994. “It was like one of those great famines that you read about in the Bible,” he said. “Year after year was worse than the previous year. The longer cycle, though, taught us many more valuable lessons.” Chief among these was a deeper realization of the adage that real estate is all about people, Maurin says. Relationships forged during economic upswings are put to the test during slowdowns. “You find out how well you’ve done in developing good relationships with all of the key people in your business — your vendors, tenants, investors, partners, bankers, whoever it is that is critical to your success,” Maurin said.

Throughout these lean years, Maurin strove to cultivate what he calls a “never, never quit” mentality that would be apparent to those around him. Even as some of his colleagues in the industry folded their cards and got up from the table, Maurin and his team constantly reminded themselves of the hard work they had put into building the firm’s reputation, client base and staff. “When you quit, you lose all of that,” he said. “When you think about it that way, it is a lot harder to just walk away.”

This resolve, moreover, helped Maurin build and cement relationships that gave him an edge over opportunistic newcomers once the market rebounded. Staying visible in the industry and accessible to lenders, employees and the press was a key part of the effort. And so was making sure that bad news traveled at least as fast as good news and that stakeholders heard it directly from the company.

“During the worst of times, we used to meet with our bankers once a month,” Maurin said. “We would just say, ‘OK, let’s talk about what happened in the last month, and here’s what we’re going to do about that.’ People would say, ‘This guy is going to work everyday. He is dealing with the challenges and is trying to make the difference.’ ”

This same real estate cycle was equally instructive for Gordon T. Greeby, president of the Lake Bluff, Ill.–based Greeby Cos., which represents owners in managing the design and construction of shopping centers. Memories of that era came flooding back to Greeby, who started in the development business in 1977. “I just went up and met with Social Security [Administration officials] the other day because I’m almost 65, and I was looking at my income statements,” he said. “[One year in the 1980s] I had zero income that would count toward my Social Security. I had done a development deal in Wisconsin, and, because of the write-off, my taxable income was negative.”

Greeby quotes a slogan from the 1986 movie Heartbreak Ridge to explain his strategy during this time. “You have to ‘improvise, adapt and overcome,’ ” he said. With that mantra in mind, Greeby chose to take a risk and parlay his decade of development experience into a new business. “I tried to stay as flexible as I could,” he said. “I knew that having been through the development process, I could bring real value to other developers by consulting.” Making this leap was not easy — he and his business partner split over the idea — but Greeby soon found that the turn in the cycle had a silver lining. His largest clients maintained in-house design and construction staffs of up to 100 people. The slowdown and credit crunch led them to trim operations and later to go public. Both moves boosted demand for experienced consultant firms like his at these formerly private and traditionally insular development giants.

“They outsourced these services,” Greeby said. “The fees they paid us were a project cost and were capitalized, as opposed to counting against a now publicly traded company’s fixed overhead.” Today Greeby’s client list includes the likes of Simon Property Group, Taubman Centers and Urban Retail Properties, as well as private owners.

Like Greeby, Michael Wiener, founder, president and CEO of Excess Space Retail Services, chose to improvise, adapt and overcome during the early ’90s. Today Excess Space, the first consulting and advisory firm to focus on real estate disposition and lease restructuring for retailers, maintains offices in Lake Success, N.Y., and Huntington Beach, Calif., and boasts a client list that reads like a who’s who of national retailers. “We started during the recession of 1992,” Wiener said. “It was not only during the recession, but also the first-ever real crash of luxury goods had just taken place.”

Wiener’s fundamental insight, namely, that retailers craved an efficient way to deal with undesirable leases and stores, helped create what is today an established niche within the shopping center industry. “We helped retailers let the world know that, yes, pruning your portfolio, looking at the bottom 10 percent of the underperformers and reshaping your company is a prudent thing to do, not only during a recession but in good times as well,” he said.

If starting new businesses seems counterintuitive in the face of a downturn, so might the opening of new stores in coveted urban locations. And yet that is just what a key client of New York City–based Robert K. Futterman & Associates did in 1987. “The Gap, they were my biggest client,” said Robert Futterman, founder, chairman and CEO. “I was finding them stores, and I just remember the stock went from about $60 to something like $16. I thought, ‘Oh my God, all my deals are going to die.’ But you know what? None of them did. The Gap ended up taking some of the best real estate locations in New York City. They didn’t bat an eye.”

It might be an irksome fact for owners, but retailers, too, can take advantage of opportunities during a slowdown, Futterman says. Indeed, he urges his credit tenants, at least those in high-growth areas where space is far more valuable rented than vacant, to expand when the market slows. “It’s a time to start expanding,” he said. “It’s a time to take advantage of better opportunities, to see a little blood in the water in that landlords are willing to fork over some tenant improvement dollars, some longer terms, perhaps some lower rents.”

Not that owners and investors do not themselves gain leverage when a boom ends. Maurin cites the stock market maxim, “buy low, sell high.” He says he could not have known it at the time, but many of the properties he held onto during the late ’80s and early ’90s would mushroom in value years later, as would assets he acquired at fire-sale prices during those years.

More to the point, the experiences one has during such times tend to promote sharper instincts. This can manifest itself as a small voice that whispers “no” when something about a deal seems not quite right, or as the tendency to be hypervigilant about the credit-worthiness of tenants, says Ben Reiling, president and owner of Los Angeles–based Zelman Development Co.

Having experienced his first down cycle in 1966, Reiling watched California’s subprime residential boom with a mixture of amusement and concern. He cautioned friends to steer clear of such investments and was not surprised when the bubble burst. “You could feel fear in the air,” he said. “A lot of people in Southern California believed rising real estate prices were a birthright.”

“If you make it through difficult times it’s like becoming an Eagle Scout — it’s the badge that you wear,” Maurin said. “When we came out of maybe eight or nine bad years here in the South, our company was maybe 40 or 50 people. Today it is 350. So not only do you survive, but you learn how to prosper.”

Not that such days, if and when they come, are pleasant.

“Have you ever seen that poster with the wet cat,” said Greeby, “and its paws are hanging over the pole, and it says, ‘Hang in there baby?’ That’s how it felt, just like that.”