Tilman Fertitta Sees and Smells a Nationwide Real Estate Crash, Starting in Houston

TILMAN FERTITTA SEES AND SMELLS A NATIONWIDE REAL ESTATE CRASH, STARTING IN HOUSTON fertitta-bloombergLandry’s CEO and purported Shiloh Club irregular Tilman Fertitta ladled out a deep bowl of bear stew from the teevee-front kitchen of his restaurant empire Wednesday, telling Bloomberg TV viewers that he smells a national real estate crash on the order of what happened in 1986, and volunteering that he “can see it in Houston right now.” He prefaced these comments to hosts Erik Schatzker and Stephanie Ruhle with a survey of the “crazy numbers” he is seeing in real estate valuations and transactions: “You are seeing it in New York probably more than anywhere else; but you are seeing it in Texas; you are seeing it in California. And . . . history always repeats itself as we always know, but I think it’s going to repeat a little sooner this time. You can just see it coming. There are so many cranes everywhere.” What’s the trigger? “If oil stays in the 70-something dollar range — where it is right now — you’re gonna see it in Houston first,” he said, adding that it might take an oil price of $50 a barrel to bring on a “total crash” like the one in the eighties that knocked Houston off its feet for a good decade. Fertitta continued his jeremiad with a few complaints about inflation, which he sees as “huge,” no matter what Ben Bernanke has to say to the contrary. [Bloomberg TV; previously on Swamplot]

38 Comment

  • Jeez Tilman. Its all right for you to open hundreds of average restaurants and casinos, and even plan your own resort on 610, but then to complain about everyone else doing it seems a little awkward.
    So its okay if you continue to spread your brands around but everyone else better watch out.
    I think everyone is aware that it seems a little crazy the amount of growth going on, but when you have as many people moving to a city, with eight years of pent up demand there will be a large number of projects going on. Money just started flowing for these kinds of projects again, and developers just like you are trying to put their product out there. Don’t be such a Debbie Downer! And don’t build your resort on 610 if you are worried.
    Way to blast your home town.

  • This guy is pretty good. I did the same when I predicted the Panic of 1819. It was in my younger years, I was 22 years old, reporting the business sections of the New York Gazette. Back then, in 1818, I accurately predicted, with enough vagueness and ambiguity that the Neo-Federalist liberals would ruin the Era of Good Feelings sometime in the near future. Boy was I right….

  • I have a hard time believing anything an ex mobster has to say. He’s one of the biggest speculator of real estate in town and throwing around wild rumors and speculations is part of his gamble.

  • I think he’s got it mostly right. The Houston Housing market is being overbuilt and overpriced – especially for common, ordinary housing. Speculators speculate and all go out to lunch as a group. By the time they notice it’s too late.
    …it’s coming, the question is when.
    One thing I do know…my taxes have gone up and they will continue to go up!

  • I think he is more right than wrong, Bob. I have no beef either way but from my end, watching 6000 new apartment units rise within 1 square mile of my home and, while looking for a new home, seeing the irrational exuberance is all around ($175K homes asking $350, etc) – it is just absolutely unsustainable. And after a natural supply/demand correction in the real estate market, if oil prices do dip too far during this timeframe, we will be looking at a firm market correction. In my opinion. What do others think?

  • I disagree- having lived through the 86 /87 crash in Houston- and having one of the few full priced home sales in the city during 1987- much of the crash was fueled by the lack of industry diversity in Houston at the time. Not the case today.

  • Oh goodness. Where to start. First, to compare price of oil now to then you have to go down to the low to mid $20s per barrel (price adjusted). Not $50. Second, the 11 million sqft of construction going on here now is still small compared to the 90 million constructed back then. So. no. Just stop.

  • He’s not wrong you know. It used to be either people were moving to the burbs or moving in town, but now Houston’s burbs have been exploding and meantime every corner has a high dollar apartment complex or condos and it’s all because of oil prices being so high and creating so many local jobs that Republicans take credit for.

    Once the oil price drops, those jobs are gonzo to more diversified cities and states. It’s hubris to think otherwise.

  • Michael bludworth,

    Residential permitting (single and multifamily) in the Houston MSA has been well below historical norms relative to population growth since 2009, (probably just reaching the historic relationship this year). That is why taxes have skyrocketed, because prices have skyrocketed, because supply hasn’t increased enough relative to demand over the last five years.


  • Yes, and Tilman is a graduate of The Wharton School? Maybe Wharton, Texas. He’s a fool, that stuck it rich with Maceo connections and money. He sounds like he’s just trying to create a panic and get his paws on some cheap fire sale Houston real estate. Uh, good luck there, dude. Is is just me or does he look 80, you’d think with all that money he would at the very least look his age.

  • On the bright side, maybe my property tax bill will start going down….. just kidding, the city will raise the rates to keep revenues up.

  • he’s definitely wrong about inflation and if anything, we should be gearing up to start worrying about deflations, but that’d still have to be an extreme case from where we are now. healthcare price increases are the lowest on record thanks to obamacare, college increases are coming in near record lows (and that’s mainly just a bad consumer choice issue going on there), and with fuel to be stunted indefinitely the rest will be easily kept in check. we still have next to zero wage growth for a long time now.
    i think major price erosion is going too far, but I do think buyers looking at 2016 and beyond will be greeted with many more housing choices and lower prices due to lower labor costs/demand. the inner loops is a mixed bag though, could definitely see erosion in lots of small pockets. financing costs will be higher so maintaining demand will be very difficult without all the cash offers and flippers that have the flooded the area in recent years. i don’t see where any further price appreciation is going to be coming from in the coming years though.
    i think it all just goes to show that the typical houston adage remains true, there’s never a rush to buy in a city with no boundary limits and plenty of near-town land land to be redeveloped (even in the heights and montrose still).

  • Please don’t believe this BS he is spewing, hell if that’s the case then why is he building a 30 story hotel and conference center on the west loop.

  • Some oil shill needs to dust off the reports about peak oil in Saudi Arabia and that there is rising demand for oil by China and India. That has been good to raise oil prices several times in the past. Maybe they will have a pipeline explode in Africa. I’m sure any calamity no matter how minor would be welcomed.

  • The 80’s were more numerically extreme in terms of construction volume, that is certainly true; but Houston’s asset prices really are becoming stratospheric and anybody that’s financially locked into them is positioned to get hurt in a bad way.

    I don’t mind being the anti-cheerleader, I’m not as bearish as Fertitta. If oil were hypothetically to hit $50/bbl then I don’t doubt that Houston would bust hard. In the 80’s, Houston was going after conventional onshore and offshore oil, which is less expensive but now mostly depleted. (State oil companies in the Middle East can still draw on conventional sources, so they have pricing power that we don’t.) At $50, there’s not a single shale oil play that makes the slightest bit of sense anywhere at all and most offshore or unconventional activity is unjustified. And with shale wells depleting so much more rapidly than a conventional well, even a year-or-two blip in the E&P cycle can cause some major problems for midstream projects. At $50, it would be a very hard bust, and with or without the overhang of excess construction, there just wouldn’t be the jobs or income or wealth that would enable Houston to remain as big as it is; and as has happened in the past, it would make investors very skittish about placing money here in the future.

    I don’t think that it’ll go that low. It’d take a global recession or financial crisis to get there from here (which is not at all beyond the realm of possibility over the next three to 18 months!), but if it did play out like that then I’m thinking that OPEC would cut production to moderate the price somewhat. Nevertheless, if oil is at $70 let’s say and the non-energy economy sucks, I don’t want my money tied up in an illiquid asset sited in Houston or really anywhere in Texas, and I sure as hell don’t want it to be the sort of asset that is typically mortgaged.

  • I suppose Tilman’s prediction of a national real estate crash is why he spins off to himself all the
    valuable real estate from the chains he uses others money to buy.

  • Town homes off i10 near washington are going for $500K? I think he is right! right or wrong do yourself a favor and stash some cash to pick up some real estate rentals.

    just wondering, Anyone commenting here actually work in real estate ?

  • @ lhd: High commodity prices have been supported by expectations that the BRICs countries (Brazil, Russia, India, China), which had weathered the last recession alright, were going to continue growing at their historical pace, and for a while they did. But Austrailia’s economy got hurt very bad this year as China has reduced demand for all sorts of imported bulk commodities. China’s growth had decelerated to levels that are really very marginal and its financial system looks increasingly precarious. Russia and Brazil are already clearly in recession, and Putin is using words like “catastrophic”. Meanwhile, European and Japanese energy demand is waning and neither of those economies is healthy or has good prospects.

    As for Saudi’s reserves or their recovery cost curve, nobody but the Saudis has a sophisticated understanding of that. They keep those figures close to the vest. One thing that is clear is that they’re extensive and that they and a few other OPEC members still maintain pricing power (presuming that they haven’t indirectly borrowed against their output, the extent of which isn’t clear to me) that other nations don’t have.

    @ eric: I work in commercial real estate, but I no longer own property. Business activity remains strong for now.

  • I can’t imagine what his motivation is. My guess is he’s trying to buy some big property and wants to jack with the seller by spewing this crap. He wouldn’t be building all his stuff if he thought that was the case.

  • Yes, probably half

  • Well if things get as bad as he predicts here in Houston I think I will take a play from his book and just offer some shrimp with every showing on my properties.

  • I hope Fertitta is wrong, but I fear that he may be right, at least in the multifamily housing market. A lot of developers seem really eager to build huge new apartment complexes – almost all of which are aimed at the upper ends of the market, and many of which take the place of more affordable units. The real question is: how much demand is there, honestly, for $3,000 a month apartments in Houston? More, or less than the supply these guys are bringing online? My bets are on less.

  • I totally agree! It’s so easy to forget what happened in the 80’s! To the comments below, who think a crash is not possible must be really delusional!! It’s funny how people forget that no one predicted the bust in 2008!!! I believe every decade there is a recession at some point. This really will affect Houston if and when oil drops! I heard through the grapevine that BP might be laying off soon if oil prices continue to drop. Prices in Houston are getting crazy high!! My parent’s home who they purchased for $25,000 back in the 60’s is now appraising for 1.2 million in the Heights. Crazy!!! My folks are not selling!! I’am seeing so many apartment complexes being built like crazy! My hope is that there is a crash so that I can buy my first home when people foreclose at a bargain price! Oh and buy stock like crazy!! The rich keep getting rich by being smart and investing in the right times!! ;-)

  • Re: Tilman’s motives, some people have big mouths. He might just be incapable of not being bombastic and calling it like he sees it. Maybe. Seems unlikely, but its a possibility.

    Another possibility: the general partner on a development project is sometimes getting very favorable terms in order to be the project manager on behalf of the limited partners, and its often in his interests to build, build, build, and spend as much money as his limited partners or the bank will allow him to. If he’s already got everything lined up for himself as a GP on his current slate of projects and sees the writing on the wall for the near future, then there’s absolutely no reason to keep quiet. It’s in his interests to go ahead and spook the markets sooner and later to try and close the window on any competing hospitality developments that are trying to arrange financing. And then, whatever is going to happen in the real economy is just going to happen and if it unwound sooner than later, that’s probably better over the long term. So yeah, that’s another hypothesis about his motives; but you know, it could be quite a bit more complex than that or startlingly simple. The fact is, we don’t know.

  • One of the signs of a bubble, from what I’m told, is that people seem convinced that “this time is different,” that somehow we’ve become immune to crashes. So I think you’re right, Ian. I don’t think it’s every ten years though. From what I can see it mirrors Presidential election cycles: every 8 years.
    That said, I’m not as worried as I could be about the coming crash – at least as it will affect the building industry. It is entirely by accident, but we’ve actually set ourselves up to follow a Keynesian economic model of government spending coming in to replace private spending in a down turn.
    Think about it: there were billions of dollars of bonds floated for school and community college construction in 2012 and 2014. All of those projects are either on the cusp of starting construction, or still in design. Then there’s the Grand Parkway project, which is huge. So when the multifamily work stops, a lot of contractors can simply go across the street and work on a school or a road. Architects and engineers, too.

  • ZAW: I’d be worried if I had a portfolio of nothing but high end class A. You’re going in *expecting* a low CAP/return at best and need everything to line up perfectly to even do okay.
    I still like the lower cost basis class c stuff that is in or near demand areas. If there is a downturn, your low cost basis allows you to weather the storm. And a downturn that has everyone looking to save on housing means you are the ‘net’. On the flip side, an upturn means nice capital improvements that can be supported by higher rents can be done (which is why most smart ownesprs in Montrose have fixed their old places up nicely. There are people who will pay the extra to have it)
    I think the people that are going to be worst off in a downturn are people paying class A cap rates for old class C stuff in Montrose. They have no upside and no protection against a downturn. (IMO)

  • @ Cody: The nice thing about new Class A properties is that they will fill up and stay full. They’ll give three-month concessions and free big-screen televisions if they have to (as they did in the wake of Enron), and pull customers from Class B apartments. And then the Class Bs will turn around and concess and pull from Class Cs. It’s entirely possible that a lot of those that were financed at the top of the market could end up in receivership, but even as that happens they’ll continue to pull your tenants by any means necessary. And even if you’ve fixed up your properties so that they’re C+ in a C and D submarket, you’re still fucked. You won’t have anywhere to turn that you would want to turn, and you may be faced with the unenviable choice of enduring high vacancy for potentially a number of years versus poisoning your tenant base with low-credit tenants and then having to gradually re-tenant and renovate once the storm has passed. This process is called a flight to quality, and it’ll take the edge right off of your high margin. Worse still, to the extent that there is any demand from the marketplace in the aftermath of a bust, that money is going to target the highest-quality assets in the best locations. You may find yourself suck with an illiquid portfolio. I still say that now is a good time to exit. And then you can come back into the game after the fact and pick up better assets. Yes there are transactional costs; pay them.

  • I find it odd some folks on here think housing prices say 175K for place in the mid 90s should still be 175K. Those days are over. Houston is in a correction to catch up to rest of the country. Accept it or not, we are becoming a major urban city.

    And also Texas is part of the new rust belt or America’s factory. We have about a generation of boom before it moves elsewhere and we are left with delepeted and polluted infrastructure. People like Tillman are betting big corporate money on this but most of their families and personnel family wealth is slowly moving out of Texas to areas with higher quality of life expected in the future.

  • Cody: you know more about returns and multifamily investment than I do, but my understanding is that people are making money developing Class ‘A’ apartments; not investing in existing apartments. They’re capitalizing on the delta between what it costs to buy land and build a new complex, and what you can get if you sell a new complex. As you pointed out, the people left holding the properties when the market crashes, are the ones who will lose their shirts. So the goal for these guys is to sell as quickly as possible.
    That said, I fear for neighborhoods when the market does crash. Places like Montrose and Midtown (hot Inner Loop neighborhoods) will see rent corrections, and that will actually be a good thing. This might be the case for places like EADO and Eastwood (up and coming Inner Loop neighborhoods). But I am VERY afraid for areas along I-10 and the Energy Corridor. Think about it from a tenant’s standpoint. You live in a new apartment complex out by I-10. The market crashed and you managed to keep your job. Rents come down and you can now get a similar apartment, for the same or less rent, in a better neighborhood (Midtown, Montrose). Thousands of people will be in that situation, and they’ll move. Thousands more will be out of work and leaving anyway. The I-10 corridor, in Tillman Fertitta’s crash scenario, will look like Alief in the late 1980s.

  • Zaw: “My understanding is that people are making money developing Class ‘A’ apartments; not investing in existing apartments… As you pointed out, the people left holding the properties when the market crashes, are the ones who will lose their shirts. So the goal for these guys is to sell as quickly as possible.”

    No disagreement there. The people building know what they’re doing. I’d be afraid to be buying. Again, you’re buying based on rosy projections and those projections still give you a low return (due to perceived safety). Thus any blip and you’re hosed.

    TheNiche: I get what you’re saying re: flight to quality, but I think the reverse happens (speaking of renters, not investors). If you’re in at a substantially lower cost basis, you can weather the storm. You can lower your rent to where it needs to be to hit occupancy targets. Some of these class A guys (or people paying class A prices for old class C stock in Montrose) HAVE to have high rents just to debt service. Sure they can lower rents to attract tenants in a downturn but most have financials that won’t support it. So they will be hurting while waiting for the upturn. If you’re paying $20k/unit for a property, you can go to $300-$400 rents and be 75% occupied and still chug along. Where on the Class C montrose stuff, they need $1000/month to break even. They bought it with low-mid single digit CAPs — based on proforma. I’ve ran the numbers and a buyer, seller, and operator many many times.

    But hey, there is something for everyone. There is a market for 0% government bonds, a market for higher (but still low) muni bons. A market for corporate paper. A market for blue chip. Small cap. OTC stock. Something for everyone based on their risk tolerance and more importantly, perceived risk. What I do is try to find where I think the market has gotten the risk/reward wrong. That was Montrose (it was under priced). Now it’s areas just outside. Anyway… At the end of the day it’s all just my opinion. I might be wrong.

  • I also wonder who is renting these spankin new Class A apartments? The amenities are nice, but, you still have only 850sf and windows on one wall.
    For $1600/month.
    Are there really that many young professionals in the oil and gas industry to sustain these developments?
    And what level of occupancy in these properties is manageable without lowering rents?
    How quickly will the downward rent slide occur where management needs to increase occupancy by lowering rents?

  • Well, there are certainly diminishing returns when it comes to printing money (aka “liquidity trap”). So they can’t keep relying on that anymore. An implication of this is that all asset bubbles, not just energy bubbles, will burst at the same time. So it’s not a case of printed money perceiving a diminishing oil price and then fleeing into high end real estate or modern art. The political class is going to have to prop this one up politically, which they rather glibly pretended to do in 2008-9. I hope Houston, and Texas in general, has some seriously “shovel ready” projects – the kind that can add a type of value that isn’t easily quantified and which leaves enough unresolved into the future.

  • Economic indicators certainly extrapolate a foreshadowing of prescient correction in the market…anybody awake? Now try reading 30 lines of that? Brevity, people and quit trying to sound like MIT economics professors, this is a blog not an economics summit at Cambridge. The point is nobody really knows what’s going to happen, the future not the present nor the past. Certainly the past can be a predictor of the future, however many have lost everything betting on that. Are we over saturated? Will the energy corridor turn into the Aleif Ghetto? Time will tell.

  • @ Shannon: Doesn’t Swamplot have a Twitter account? If you don’t like the open-ended web format, then why don’t you just go on and migrate over there and I’ll stay right here?

    @ Cody: Shannon does have a point that I’m laboring the issue. I know that I could communicate this more concisely to you, but it’s a public forum and there are laymen in the audience. I’m speaking to them too. Bear with me.

    The flight to quality concept applies to BOTH the rental market and the investment market in the same way. I could see your argument panning out if what is anticipated is a minor downturn; and then yes it is easy to reason that an apartment operator should offer concessions on a temporary basis but endure a period of high vacancy with the expectation of being able to return to normalcy over their investment time horizon. They shouldn’t risk poisoning their tenant base by pursuing a policy of short-run profit maximization (although that does sometimes happen in B and C properties that become financially distressed) because it destroys upside when the market comes back and puts them at a higher cap rate when they want to sell.

    But here’s the thing… Although I wouldn’t bet on a bust of 80’s proportions, I don’t think that we’re talking merely about a minor little economic hiccup such as Houston has become accustomed to over the last fifteen years.

    If the downturn is severe then it won’t matter whether the Class A operators that have bought or aggressively refinanced during the last couple of years are unable to endure lower rents. They’ll default. Whether those deals get restructured or they get set up with the bank’s special servicer, the next operator will get set up so that they aren’t financially constrained by debt service. First they’ll give concessions and then they’ll very reluctantly mark down the rents. (An aside: Unfortunately, most research firms do not track concessions as a component of historical rental rate data, so to the extent that this has historical precedent, their published data under-report the price sensitivity of the market to shocks.) Class A will take the most creditworthy part of the market and the price effects will cascade throughout the rest of the marketplace.

    I suspect that the new-new normal will look a whole lot like the old normal and that long-term real effective rent growth in a city with so few geographic of political barriers to entry should return to the neighborhood of 0%.

    Okay, so you can weather the storm. That’s good, you’ll stay creditworthy. But should you weather the storm or steer clear of it altogether? There are a fair number of deals in every asset class and subcategory that are structured conservatively enough that they won’t default outright. IMO, that doesn’t mean that folks in that situation shouldn’t sell right now. Y’all are all price-takers, both as landlords and as sellers. If the market corrects then y’all stand to lose a lot of cash flow, equity, and liquidity, and to gain a lot of day-to-day headaches — even if you do get to keep your properties. Wouldn’t you rather sell sooner, keep your good credit, have no obligations, be holding USD, and then be in a position to snap up better properties in a better market for a discount? If you accept the premise of a severe downturn, then why not position yourself to trade up?

  • Lols. Why would anyone ask (or rely on) this idiot about the economy?

  • TheNiche: I can answer briefly:
    1) Properties I have in markets I think are overpriced, ARE being sold. The same reason I don’t buy in some markets anymore, is the same reason I’m selling in those markets.
    2) Properties in markets I think are underpriced and have upside (or very little risk of downside) are still targets to buy.
    3) I don’t sell and convert to cash for two reasons:
    a) cash gives (nearly) no income. So the opportunity cost of selling properties and given up their current income would quickly kill any possible benifit of buying back later for less (even if that would happen, which I’m not sold on)
    b) properties are my inflation hedge. I’m more worried about sitting on what could become worthless dollars than sitting in what could be worthless properties. Again, if you buy smart at the right cost basis, your downside is mitigated. And if inflation kicks in (how could it not?), assets go up as well, and the befits of leverage get exaggerated
    But, as always, I could be wrong.

  • It’s not that I’m a “layman”, I completly understand what you’re saying, I’m just saying don’t make it so long and deadly dull, you read like a bad Henry James knockoff crossed with an economics textbook written by an Adjunct Professor at the University of Phoenix. Perhaps it’s you that could use the forced brevity of Twitter, I’m cool.