How will the financial sector fallout hit Vail?
EAGLE COUNTY Kent Logan hasnt been calling his friends on Wall Street lately. He doesnt want them to think hes gloating.Logan, a Vail resident and former town council member who spent a career in investment banking, saw the current train wreck on Wall Street coming a couple of years ago. As of Tuesday, the Dow Jones Industrial Average was down more than 3,000 points from the all-time high set last October, and the Standard & Poors 500 average was trading at levels not seen since 2005.The subprime mortgage meltdown of last year was, in fact, just the first domino to fall in a steep and widespread decline in financial stocks. The latest domino to fall was the Lehman investment company, which filed for bankruptcy protection Monday. Insurance giant AIG is in trouble, too, and is seeking as much as $75 billion in new capital. This happened just a couple of weeks after the federal government stepped in to save Fannie Mae and Freddie Mac, which together hold nearly half of all the countrys mortgage debt.What the heck happened?Its the old saying: When things look like theyre too good to be true, they are too good to be true, Logan said.Credit was way too easy to get, and asset values were appreciating at unprecedented rates, Logan said. It wasnt sustainable. We had the boom, and this is the bust, the unwinding of leverage.No one is sure where the bottom of this bust is. And, for now, no one has a clear idea how the Vail Valley will be affected. But the ripples from Wall Street will be felt locally, and probably sooner than later.One of those ripples hit Tuesday, when the Associated Press reported that Wachovia Capital Markets cut its rating on Vail Resorts stock to market perform from outperform. Company analyst Jeffrey Donnelly sent a note to clients that Wachovia is less confident in the resort companys performance due to rising unemployment in the financial services sector, as well as a strengthening dollar and higher air travel costs.Vail Resorts stock closed Tuesday at $39.65, off 3 percent from Mondays close.Real estate ripplesWhile local real estate set a record for sales volume in July, transactions for the year to date are only 57 percent of what they were through July of 2007, and many of those sales are in places such as the Arrabelle at Vail Square.I think the market feels better than it is, Logan said. If you adjust the figures (to throw out the new units), real estate has dropped sharply. I dont think the Vail market has adjusted yet.Part of the problem is that a lot of people with money have decided to wait out the current downturn, and arent spending on much of anything.E.B. Chester, former chairman of Vail Banks, which sold two years ago to US Bank, said a friend of his in New York is one of those people.He told me ‘Im not going to do anything for a while, one way or the other,’ Chester said. I think theres going to be gridlock for a while.In this case, gridlock means that investors arent going to move their money, and banks arent going to loan it.Lehman had $30 billion in commercial loans and no buyers, Logan said.Gary Miller is the managing partner of Vail Capital Partners, the private equity company that bought the River Run apartments this year. Miller was taking a break from a private equity conference when interviewed for this story. Of course, the conferences agenda changed quickly in the wake of the Lehman bankruptcy.Theres still money out there, but the dynamics are changing, Miller said. The biggest dynamic, at least for the foreseeable future, will be tougher lending standards, Miller said. The first time buyer probably wont be able to get financed, he said. Miller said Vail Capital Partners is actually in a good situation with River Run and the current market. The original plans called for taking as long as three years before starting a redevelopment project on the property in Dowd Junction. By that time, Miller said its likely the financial markets will have straightened out and loans will start being made again.But were being very selective in what were doing right now, Miller said. We dont know where the bottom is yet.Local lendingAt Millennium Banks, vice president Scott Proper said loans are still being made. But he added, that banks underwriting policies stayed fairly strict even through the easy-credit days of the last few years.We stuck to out underwriting discipline, which for a lot of people was easier said than done, Proper said. But were still working with clients, maybe with a little finer critique of deals.For someone with a plan for a spec home, were doing to dissect that with a fine-tooth comb, Proper added. But for normal things, were still doing it.But as the financial markets continue to teeter, Miller and Proper said theyre still confident in the long-term strength of the economy.We havent been in a financial meltdown like this since the Great Depression, Miller said. But the good news is the fundamentals of the economy are still very good, and this will pass.Proper said hes buying stocks right now.Noting that the Standard & Poors index is now where it was three years ago, Proper said thats an opportunity.Was the last three years all fluff? he said. Thats what today is telling us, and thats emotion. And when emotion is driving markets, thats where the opportunity is.Logan said the bottom may be in sight, and thats when buyers are going to start buying again. But no one can sell anything right now, Logan said. Thats the spiral were in.Business Editor Scott N. Miller can be reached at 748-2930, or email@example.com.