Don't Panic - Lessons Learned from Real Estate Busts

In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Georgette Chapman Phillips, dean of the College of Business about lessons learned from surviving two previous economic downturns and how they relate to the current pandemic.

Dean Phillips' research and teaching is focused on the intersection of law, economics, and public policy within the context of the built environment. She has published in the areas of urban and regional planning, local government law, real estate and housing.

She spoke with Rob Gerth, director of marketing and communications for the College of Business. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation.

Read the complete podcast transcript.

Rob Gerth: Tell me where you were during the previous downturns.

Georgette Chapman Phillips: I got to see the downturns from very different vantage points. In the '90s, I was still doing deals. I was actively closing deals. And at the peak, I was closing, oh, a deal a week easily in mainly office, some retail. And I took maternity leave, came back after my son was born, and there were no deals. It was almost like someone had turned off the lights and walked away, and I thought, "What is going on here?" Then in 2007, 2008, 2009, I was in academia, and I got to see that recession from the vantage point of a more scholarly looking at the underlying causes, not having the direct effect on what I was doing. And so both vantage points allowed me to really experience what it is to be resilient in the middle of an economic recession.

I can remember in the '90s when we were just all kind of looking at each other, going, "Well, what's next?" And we had a slogan which was, "Stay alive till '95." [laughter] That if we could make it until '95, if we could keep the businesses going until '95, things were going to be okay. And guess what? They were. Things turned out fine.

Gerth: Have you seen anything that people are talking about that's similar to the stimulus package that the banks got?

Phillips: No, I haven't, and it's kind of scary. One of the largest retail REITs is in really big trouble right now. They defaulted on a loan payment back in July, I believe. And the special servicer on this REIT has been able to make interest payments to the bondholders from money it held back in prior months, but that money is running out. So this will be very, very interesting to watch.

Gerth: It feels like everybody's focused on the COVID-19 part of it, the disease part of it, and not focused on what's going to be the outcome-- what else it's affecting. You look at things like-- what people say to me-- what I've heard people say is the pandemic is speeding everything up. So everything bad that was going to happen is happening faster, like shifting to e-commerce or department stores going out of business or buying all your food, shopping, doing it all online, or even transitioning to working remotely. Were they these kind of predictions that experts were making back in the '90s and in 2007, 2008? Were they predicting those same kinds of things? Was it speeding things up as well?

Phillips: Well, it did speed things up in terms of the way that mortgage debt was issued. It sped things up in the homogenization of loan product. It used to be that on a commercial deal, it was unique to that property. I mean, you could really do a lot of wheeling and dealing and changing of the loan documents. Now your documents are pretty homogenized across the board. What is interesting about this recession is that it wasn't caused by real estate, but real estate is taking the brunt. And the reason real estate's taking the brunt-- I mean, not just real estate. There's so many sectors that are taking the brunt. But the way that we are taking the brunt in real estate are lifestyle changes. So you remember what happened to newspapers when things started to go digital. A lot of newspapers are out of business now. But the newspapers that pivoted, that embraced technology, that embraced new ways of interacting - I think the New York Times is probably the best example here, or the Washington Post, clearly the Los Angeles Times - they are more than just that newspaper that's delivered every morning. They get you soup to nuts. I mean, how many times have we gone to the New York Times cooking app?

But it's still the New York Times, but now it's my cooking app. And I think that, in real estate, we have to start thinking about these lifestyle changes and what does this mean? I am still confident in the market. I'm confident in both the retail and in the office market. I'm a little bit more confident in office than in retail. But the reason I'm so confident is that we just have to adapt. We just have to find where things are going, not necessarily that it's going away forever, but how can we harness the change that's occurring? So when you talk about the office market, instead of leasing X square feet for 15 years, 20 years, whatever it may be, is there a partnership that occurs between the tenant and the landlord in terms of redoing the office space and thinking about the tenant not having X square feet in use every day? I think that's one of the big changes that's going to happen. We're going back to work. We are definitely going back to work.

Gerth: Do you think there's going be seller's remorse at the other side of this when Amazon has bought up all the malls and all the office buildings for their centers or for their office people? The people will be like, "Jeez, I wish I hadn't sold all my buildings to those people."

Phillips: Malls were already suffering from the effects of e-commerce. So how can we think about using that space as more of a community space? The advent of community malls was a direct response to the rise in e-commerce. You're not going to the mall now for a pair of jeans. You're going to the mall for an experience and, oh, and by the way, if you need a pair of jeans, you can do that too.

Gerth: Talk to me a little bit about agglomeration. That's a word I learned when all this started happening.

Phillips: Agglomeration is the idea that there is a synergy that is created with colocation. So that's why you get places like Silicon Valley. It's not just that the tech companies are there. It's that the add-ons from the tech company and then the third- and the fourth-order companies are also there. So from the middle of the circle, you have the tech companies. You have the knowledge transfer. You go out and you meet somebody. You learn more. It's the chance meetings that we were talking about that you don't get if you're a work from home. But then you go out from that, and you need a worker. You need somebody that has this specific skill. In that type of environment, it's a very deep pool that you have to choose from. Likewise, if I'm looking for a job, I have a number of employers, not just one or two, to choose from. And so that draws other people which draws other people. And then you get out to the service providers. And one of my favorite examples is the people that make radios for cars were located in Detroit just like the car manufacturers were located in Detroit. Why? Because that's where they sold their goods. Lawyers. If you are a lawyer in Silicon Valley, you have your pick of companies that you can establish a very niche practice. I don't know what's going to happen with this whole theory of agglomeration economies because it is so deeply rooted in our economic system. I mean, it's not just Silicon Valley. It's why cities grow to begin with. That's why we have cities, because of the collocation and the advantages of collocation. It will be interesting to watch in the future.