Nine Business Lessons from the Recession
By: Ron Derven, contributing editor, Development.
At the recent Development ‘11 Conference, two past winners of the NAIOP Developer of the Year Award, Michael Alter, president, The Alter Group and Pat Ryan, president and CEO, Ryan Companies U.S. Inc., talked about their businesses and lessons learned from recent downturns. Their insights might be applicable to your business now or in the future.
Lesson 1: Land Eats Every Day
Ryan Companies has always been very cautious regarding land inventory, but as the market got hot in the mid-2000s and then turned down, the company found itself with too much land. “We were starting to ramp up at a very rapid pace because you need the inventory. Then when the market shuts off, land continues to eat every day. We had too much land and were too levered.”
The Alter Group’s president said that his firm learned its land lesson back in an early 1990s market downturn. This time around, it was not overstocked with land.
Lesson 2: Keep Spec Building
Under Control In the hot market of a few years ago, Ryan did not get caught up in speculative development, therefore, it did not have a lot of empty space when the recession hit.
Lesson 3: Use a Multi-legged Business Model
The Alter Group is a development company and a property management company, a two-legged business, while the Ryan Companies has three legs to its business. “We are a design-build business. It’s not the development engine that drives us, it’s the construction engine. We are also an asset and property management company, so when one leg turns down, we still have two other legs to stand on,” noted Ryan.
Lesson 4: Don’t Underestimate a Downturn
If you are smart enough to call a downturn in advance, then don’t underestimate its intensity. “The biggest mistake we made,” said Alter, “was that three or four years ago when we looked into our crystal ball, we saw a bad recession ahead. We also predicted that the market would be getting better by now [the end of 2011]. Now we are looking at our plans again and trying to figure out the next couple of years.”
Lesson 5: Resist Getting Greedy in an Up Market
Alter remarked that a critical lesson is to avoid getting greedy when the market is booming. “Greed could be manifested by doing deals that you should not do or by hanging on to property in anticipation of a higher move when the trend is starting to turn down. When I look back, there are a couple of buildings I wish I had sold when we had a good, but not great, offer.”
Lesson 6: Don’t Wait for Things to Get Back to Normal
Are you and your people waiting for the commercial real estate market to return to “normal?” Both Ryan and Alter suggest rethinking that strategy.
Ryan said that one of the biggest challenges he is facing right now is to drive the message through the organization that the way things were in 2007 are not the way they will be tomorrow. “Waiting for 2007 to return is not an option,” he stressed. “So then you have to look at how you do business and see if there is a different way to do it without abandoning your business and culture.”
“Getting people behind what you are doing is challenging,” Alter explained. “What are your people going to do to keep them excited every day when they wake up and come to work? We all need to get excited about what we are doing. That is the most difficult thing right now.”
Lesson 7: Motivate Your Staff
“These downturns always provide opportunities and that is a big challenge for us. We decided that even with a big recession coming that we were not going to change our core business. We were going to stay developers even though we knew there was not much development going on,” said Alter.
“You are in a tough spot because you have to be the motivator,” said Ryan. “That is difficult when there is nothing positive going on. You have to wake up in the morning and figure out how to ‘take the hill’ and make sure your people are with you. On the other side of the coin, you cannot BS them, and have to address the issues in the most positive way.”
Lesson 8: Right Size, No Matter How Much It Hurts
“You must be a realist and make sure you are staffing appropriately. The last thing we ever want to do is let go of people who have been friends and people who have been dedicated to us. It’s the hardest thing. You do it respectfully and as generously as possible. This instills fear in the organization and you have to figure out how to deal with that so that people can come to work and function. We did three rounds of layoffs,” noted Ryan.
Lesson 9: Coping with Personal Tragedy
According to Pat Ryan, it’s tough, but necessary, to keep business matters in perspective in a serious recession. His cousin and partner of many years, Jim Ryan, was diagnosed with a fatal illness and battled it valiantly right up to his death. Jim was a greater teacher for Pat. While his cousin was fighting for his life, all Pat had to do was fight a lousy economy. “When you compare business challenges to life challenges, it can put everything in its proper perspective,” said Pat.