Am I Being Too Subtle? by Sam Zell

Author:Sam Zell
Language: eng
Format: epub
Publisher: Penguin Publishing Group
Published: 2017-04-10T12:04:03+00:00

CHAPTER SIX

Cassandra

One of my favorite quotes, paraphrased, is “Those who cannot remember the past are condemned to repeat it” by George Santayana. And no quote was more fitting for the real estate industry in the 1980s. A lot of so-called real estate professionals—many of whom had been through the bust just a decade earlier—didn’t know what the hell they were doing. Once again, too many people got swept up in the fever of easy money and the perceived notion that we could build our cities to the sky.

The Black Monday stock market crash in October 1987 kicked off a new recession. In effect, we’d been borrowing on the future, and now the bill had come due. Since real estate tends to lag the general economy, the full impact to our industry was still years away, but by the end of 1987, I knew it was too late. I also knew that this time it was more than simply cyclical. We were looking at a seismic collapse, with lasting fundamental changes to the industry. I told people it was coming, but no one would listen. Unfortunately, when people live in a balloon, they tend to shy away from the guy holding the needle.

So I wrote an article titled “From Cassandra, With Love” and it ran in the March 1988 Real Estate Issues. Cassandra was a character in Greek legend cursed by Apollo with the ability to make accurate predictions that no one believed. In my article, I presented a dire warning to the real estate industry, which, not surprisingly, no one took seriously.

I cited the panic I was seeing. It was fragmented but spreading. The downturn was being grossly underestimated. People were asking when it would end, but that was the wrong question.

This time, as I pointed out in my article, there was a structural change in real estate that went deeper than the normal peaks and valleys of a boom-bust cycle. Although oversupply was definitely a factor, the damage was compounded by other emerging realities in the marketplace.

I likened the fuzzy thinking to that of a postoperative patient waking up in the recovery room. Before he even knows the extent of the damage and the fix, his first reaction is that he’s been through the worst of it and all will be well. But the prognosis of a patient suffering from a broken leg is radically different from one who just had his leg amputated. The newly awakened patient can’t know the difference until the drugs wear off and the full reality of his situation sets in. In the real estate scenario, the drug was easy Japanese money, which led to overbuilding and overinvesting and simultaneously disguised massive permanent changes for the industry.

They included the obliteration of dedicated real estate lenders through the savings and loan crisis and extreme tax reform. S&Ls provided federally insured loans at long-term fixed interest rates. When inflation rose and the Fed doubled rates, S&Ls were no longer competitive for depositors and lost much of their business to money markets, depleting the banks’ coffers.

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