What they got wrong in 1989

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Hi {{first name | there}},

Each Tuesday, I send a short note on commercial real estate to help you be a better investor. Topics may include deal stories, how I'm thinking about risk, lessons I'm learning, and market observations as we oversee our $500MM+ CRE portfolio, serve our 1,100+ investors, and continue building Wellings Capital.

Someone recently sent me an internal Trammell Crow Company memo from 1989.

For context: during the early 1980s, easy credit, favorable tax incentives, and speculative development fueled a massive commercial real estate boom. Then came oversupply, the 1986 tax reforms, and a collapse in oil prices that devastated commercial real estate. It hit the Southwest harder than anywhere else.

At the time, Trammell Crow was the largest commercial real estate developer and owner in the country. Everything they touched seemed to turn to gold…until the market shifted.

Amid the carnage, Trammell Crow managing partner Gary Shafer asked his regional partners to write down the mistakes they'd made in four areas: strategy, personnel, administration/overhead, and individual projects.

The responses became a 101-page collection of lessons learned, covering debt, liquidity, hiring, management, and bad investment decisions.

37 years later, as we come out of another difficult cycle, it’s still relevant.

Here are five takeaways from the memo, along with how I'm thinking about them.

One partner described how years of success created a sense that the company was almost bulletproof. Leasing was strong, property values were rising, and capital was readily available.

Then it all changed.

History doesn't repeat, but it rhymes. The early 1980s look a lot like 2011 through 2022. Everything was up and to the right for CRE…and then the music stopped.

It's easy to confuse a good outcome with skill or talent when the market is helping you!

We’ve seen this play out in real life over the last four years. Consider S2 Capital.

The firm generated amazing returns during the previous cycle. But its approximately $400 million fund (which relied on floating-rate debt) raised in 2022 is losing 100% of investor capital, according to reporting earlier this year.

When evaluating an operator's track record, I want to know how much of their success came from their execution versus favorable market conditions.

One partner acknowledged that the company's culture had become focused on growth, celebrating things like the most assets, most square footage, and record leasing years.

Another offered much simpler advice: "Do fewer deals and do them better."

Historically, Wellings set annual goals for both capital raising and capital deployment. We changed that because our primary mission is to generate strong, risk-adjusted returns for our investors, not grow assets under management.

In my view, our investors don’t care if we grow our AUM by x% this year. They care if they’re getting returns.

To be clear, we haven’t solved the tension between growth and performance. We want to grow Wellings, and investors understandably want their capital working. But we also don't want to invest in mediocre opportunities just to meet a goal.

An investor recently challenged me on whether our demanding standards might be making us too selective. It's a fair question.

We’re trying to grow without compromising the quality of the investments we make. Easier said than done, especially when you have capital to deploy as we do.

One of the most candid sections came from partner Paul Silverman, who described his transition from a lone ranger to a manager as one of the hardest experiences of his career.

He admitted to struggling with hiring, delegation, supervision, communication, and holding people accountable.

Another partner wrote that a strong office manager was critical because it allowed leadership to focus on the business without neglecting day-to-day operations.

I joined Wellings as an intern in January 2015 and have done nearly every job here since. Underwriting, investments, investor relations, operations. I was used to being the person doing the work.

In October 2024, we hired Anisia as our operations manager. That was an essential step that let me step back from many day-to-day responsibilities and become Managing Partner the following month.

I'm still a bottleneck in parts of this business. It sometimes feels easier to handle something myself than to delegate it.

My goal isn't to make myself indispensable. It's to build a firm that doesn't depend on my involvement in every decision.

There's a parallel in how we invest. When Wellings commits $5 or $10 million alongside an operating partner, we look for strong leaders with a track record of managing people well and knowing which details to get involved in.

The Trammell Crow partners repeatedly came back to cash, leverage, and liquidity. One of them said: “We took on far more debt (and risk) than our ongoing cash flow and current liquidity could support.”

When markets are good, holding a lot of cash can seem unnecessary. When things go wrong, it's what gives you options.

For us, it's reinforced the importance of understanding an operator's financial condition well beyond the deal in front of us. What else do they owe, when does it come due, and what happens if the business plan takes longer than planned?

Throughout the memo, partners admitted to waiting too long to make difficult decisions. They held onto underperforming projects, delayed cutting expenses, and were slow to address personnel problems.

One partner said the firm wasn't proactive enough in asset management.

Asset management is an area where we've made significant improvements at Wellings, including:

The objective is to identify problems early enough that we can actually do something about them.

For passive investors, there's a question worth asking: what does your manager actually do after the investment is made, and who specifically does it?

Trammell Crow’s partners wrote their lessons down so the firm (hopefully) wouldn’t have to relearn them later. That’s what we’re trying to do at Wellings: turn what we learn the hard way into how we operate and try to get a little better each day.

I recommend skimming the original 1989 Trammell Crow memo here.

If something in the memo or this email resonates with your own experience, I'd love to hear it. Just reply.

All the best,

Ben Kahle

Managing Partner | Wellings Capital

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