Today, William McCahill steers a major commercial real estate operation in the New York region. Just a few years ago, he was unwinding one.
Mr. McCahill, an executive vice president at Fleet Financial Group since 1993, has shifted between lending and workout since the early 1970s.
The cyclical commercial real estate market has made his type of career- an almost manic-depressive series of highs and lows-almost commonplace in the banking industry.
Like many in his position, Mr. McCahill is sensitive to signs that the market may be souring again but confident that today's market is different- that lessons learned in the last crash will cushion the next one, at least for banks.
"Unlike the 1980s, when the (construction) cranes were everywhere," he said, "as we sit here today, that supply-and-demand balance is excellent in most major markets in the U.S."
The capital markets have provided mechanisms for lenders to invest in real estate without putting the risks on their books. And Mr. McCahill contends that the history of downturns has finally taught bankers not to make risky loans just to win business.
"The big lesson we learned in the last go-round was that you can't get caught up in the market wave," Mr. McCahill said, even when "project after project is doing well and you think you have the magic touch."
Mr. McCahill vividly remembers the early '90s as one of the darker times in his 23-year career in Chase Manhattan Corp.'s commercial real estate group. "The market just slid, almost in a free fall, until 1993," he recalled.
By 1990, liquidity and confidence had flowed out of the real estate market as fast as they had flowed in. Foreclosed real estate at the nation's 10 biggest banks grew 74%, to $1.3 billion, that year, and nonperforming real estate loans rose 29.5%, to $1.2 billion.
Disaster came to a head that April, as nearly 80 banks convened to begin the restructuring of developer Donald Trump's $2 billion of real estate debt.
"One of the major things I think we learned in that period of time was that even if you had a good property, if the borrower had a problem overall, you had a problem," Mr. McCahill said.
The idea of being strictly a "project lender" faded away, and lenders focused more on what was going on overall with an account, he added.
The banks ultimately agreed to defer interest and principal payments on $850 million of Mr. Trump's debt, and loaned him $65 million so he could avoid bankruptcy. That loan included $20 million in bridge debt so he could make interest payments to holders of Trump Casino junk bonds.
The last crash was severe, but it was hardly the first time real estate veterans like Mr. McCahill found themselves digging themselves out of trouble.
When real estate investment trusts crashed in the mid-'70s amid rising interest rates and a severe recession in the building industry, Mr. McCahill spent four years working out construction loans and lines of credit for real estate trusts at Chase.
The trusts were an outgrowth of a strong construction cycle and easy access to the capital markets in the late 1960s and early 1970s. But when the credit crunch came, borrowers could not pay back their loans. The solution was for banks to buy assets from them-swapping reductions in lines of credit for property.
As the market started to recover in 1977, banks gradually started drumming up new business. Mr. McCahill headed back to loan origination, with lessons about financing and the business capability of the borrowers vivid in his mind.
"We started to be very careful as to whom we were doing business with," Mr. McCahill said. "A lot of problems in the portfolios were (caused by) neophytes in the business, who really did not understand the risks and the problems of developing a major property and did not have the wherewithal to manage the problems."
In addition, the construction loans that had defaulted had lacked equity from the developers, he added.
By 1985, real estate nationally was booming, and Mr. McCahill was managing the regional offices that the bank had set up in Los Angeles, Dallas, and Florida. The next year, he took the helm of the bank's real estate business for the metropolitan New York area.
But as banks began a hot and heavy competition for construction loans, lending standards grew progressively easier. To win business, banks reduced equity requirements and no longer insisted on personal guarantees.
Though the solid developers exercised self-discipline and properly financed their projects, a new generation of developers came along in the middle part of the up cycle and began constructing projects.
These new players assessed projects on the basis of the estimated cash flow of the property, and an "if you build it they will come" mentality prevailed.
The real estate crash of the early 1990s hit because of the stock market crash of 1987, the tax reform act of 1986, and an imbalance between property supply and demand. Overbuilding was worsened by the entry in the early 1980s of inexperienced savings and loans into commercial real estate lending.
"Looking back, at least in metropolitan New York," Mr. McCahill said, 1987 "was the start of the real estate recession, but most of us didn't figure it out for a few years.
"Little did we know that an incredible decline and deflation in the real estate world was on its way, even for the most conservative underwriters."
It was about 1989 that corporations completing downsizing plans started to withdraw leases from projects that were being built for them.
Still, "no one came up with the idea that prices were going to go down," Mr. McCahill said. "In the worst-case scenarios, people (imagined) that prices would be frozen."
In 1993, Mr. McCahill joined Fleet, where he remains. As the economy and the real estate market have continued to recover, the Boston-based banking company has been employing a "boutique" type of strategy-"doing a lot of business with the people we want to do business with but not a lot of people," Mr. McCahill said.
He asserted that Fleet's portfolio is structured with a good buffer to ride through the next down cycle.
Part of the strategy is to project how a property will perform when the market is at least 10% worse than it is today. That involves looking closely at developers' track records, equity commitments, and development plans.
"In the 1980s, we took too much comfort in the market being at least stable and that the downside was going to be a zero gain in rents," Mr. McCahill said.
But now things are different, he contended, pointing to the unprecedented levels of equity that are supporting today's real estate market. Equity gives lenders a cushion-one that was lacking in the 1980s when lenders often supplied 100% of project financing.
Real estate investment trust stocks have $130 billion of market capitalization, and more equity is going into individual projects through joint ventures, giving Mr. McCahill some sense of safety.
But he is keeping a close eye on the valuations of real estate trust stocks, which rose much faster and higher than the value of their properties.
He also worries about competition. Because few deals are around, when a refinancing opportunity comes up for an existing property, "everyone is climbing over each other to finance it," Mr. McCahill said. That's where high-loan-to-value ratios come in, he said.
"The biggest fear that we all have is that that kind of lending mentality is going to spill over into the construction market," he added.
When some players make high-loan-to-value construction loans, he said, it pressures banks either to do the same or to get out of the business.
Though supply and demand factors are currently "in excellent shape," as more capital flows into the market and fuels construction, the possibility increases that this dynamic will get out of whack, Mr. McCahill said.
Speculative office building is already starting to percolate, with "about 50 people" who each claim to have "the best site" for development.
"That's the kind of thinking that was prevalent in the early 1980s. And people are talking about some of the same sites," Mr. McCahill said.
"If the construction starts to get heavy, we're going to start to get a lot more supply," he said, "rent levels will go down, those 95% loan-to- values are going to have some problems renewing their leases, and here you go again. Back into the same mess."
"Hopefully we learned something," Mr. McCahill said. "I have no desire to do any more workouts."
