Recession and Commercial Real Estate and Lauth Property Group and Development/Redevelopment and Economy and Real Estate & Retail

Developer pulls back on growth to survive precarious economy

March 31, 2008

The CEO of locally based Lauth Group Inc. says most people he knows in the business, even the steely types who always project optimism, are privately nervous about the economic morass that began with a collapse in subprime mortgages.

Lauth sees trouble ahead in credit card and home equity markets. He's worried about record used-car inventories. And he's spooked by the notion, revealed in a USA Today poll, that 59 percent of Americans believe the country is entering a depression that could last several years.

Lauth also has found reason for worry closer to home: Two-thirds of his company's $1.6 billion U.S. development pipeline is on hold temporarily or indefinitely, thanks to the credit crisis. So far this year, the privately held company has slammed the brakes on its growth and let go of more than 100 employees. And since peaking last year, Lauth's publicly traded development peers have shed 13 percent (Simon Property Group Inc.), 46 percent (Duke Realty Corp.) and 23 percent (Kite Realty Group Trust) of their stock-market value.

"I'm seeing things I've never seen before," Lauth, 56, said in an interview. "We're still incredibly bullish on this company and our people, but I am not bullish on the short term from an economic perspective."

'Crystal ball'

Lauth Group nearly quadrupled its revenue and added more than 200 employees from 2004 to 2006. In that span, it moved into some of the nation's fastest-growing markets, including Denver, Dallas and Charlotte, N.C. Its $592 million in 2006 projects helped the company snag the 13th spot on Commercial Property News' 2007 list of top U.S. developers, a ranking the firm held onto in 2008.

But with two rounds of job cuts this year, Lauth has pared its head count about 25 percent, to 300 employees, with 230 of them based locally. The company had projected it would build $575 million in projects in 2008, up from $408 million in 2007. Now it looks as if Lauth will do about $475 million.

The volume of work just didn't keep up with the number of employees, Lauth said. The company is spending millions of dollars on generous severance packages and working with employees to make sure they land elsewhere, he said.

"I don't regret the growth," Lauth said. "What I do regret is we had to send some good people home. Had I had a crystal ball, we could and would have done things differently."

Not just Lauth

Many other development and construction companies likely also will cut jobs soon as demand drops off, said Jeff Henry, managing principal of the local office of St. Louis-based Colliers Turley Martin Tucker.

Brokers at Colliers already have seen a slowdown in retail leasing. Yet Henry expects the commercial downturn to be much less severe than the one in residential. Central Indiana's market has avoided the fits of over-building more common in other areas.

That doesn't mean there won't be pain at local firms, many of which do work around the country.

"Real estate development and construction companies are probably all going to cut back to some extent, some more than others," said Henry, who worked for Lauth in the late 1980s and 1990s. "When we hit certain events in the commercial real estate markets that cause demand to decrease, it's just not unusual for people to have to cut back."

Credit turmoil has disrupted business at Duke Realty, CEO Dennis Oklak told Wall Street analysts in a January conference call. Lenders retracted loan commitments for four properties the company had put under contract, throwing off the firm's earnings guidance.

In a February conference call, Simon CEO David Simon told Wall Street analysts that the company's malls are resilient and should be able to withstand a rough economic cycle. Simon--who described the economic scene as "a little wacky"--said retailers are "hunkering down" in 2008.

"Most of the retailers we're talking to understand these cycles happen, are pretty well-capitalized, and are just being extra cautious," he said. Later, Simon added: "Now if it gets to where we're in a deep recession, all bets are off for us and anybody else."

A new strategy

In the last several years, Lauth Group had sought to diversify evenly in its four development types: medical, distribution, office and retail.

These days, Lauth is updating that strategy. Among the changes: a heavier focus on health care properties and reduced exposure to retail and office--areas that could see deeper dips from a recession. The breakdown now is roughly 40 percent health care, 30 percent distribution, 20 percent office and 10 percent retail, Lauth said.

The shift already appears to be paying off: The company was ranked this year as the nation's eighth-largest health care developer by Chicago-based trade publication Modern Healthcare.

The company still puts most of its resources into growing markets such as Arizona, Florida and North Carolina. (About 90 percent of the company's projects now are outside Indiana.)

Lauth also is in a strong position financially, Bob Lauth said. It owns $1.2 billion in properties, and the firm works with stable and loyal lenders such as Bank of America, KeyCorp and Wells Fargo.

The current recession will make the last one, in 2001, look like "a cup of coffee," Lauth said. He said it could last well into 2009. But that doesn't mean the company will be sitting on the sidelines: Lauth just paid $40 million for Belleview Tower, a 12-story office building in Denver, and is looking for more opportunities to buy low.

"We'll be buying all the way down," Lauth said, "and if we get lucky, we'll get some at the bottom."

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