By: Harold Levy
One of the most captivating opportunities in real estate is bringing a blighted property out of the doldrums and into a state of prosperity. There is no clearer creation of value. Neighbors, politicians, tourists, businesses, passersby, everyone can see it. No real estate expertise is required to contemplate the misfortune that exists in a grungy, overgrown or dilapidated site.
But how does one value this state of misfortune? How does a group of people, with different skills and motivations, apply their resources, knowledge and capability to transform the awful to the excellent?
Real estate is an intentionally slow moving industry. It is a get rich slow business. A business plan that can be completed, start to finish, in 3 – 5 years is considered “short-term.” Some of the wealthiest landlords hold properties for decades and others for generations. Market timing is also vastly important to success. The same business plan, coming to market in 2009 or 2013 will have strikingly different results.
Patience, timing and expertise all must come together for the transformation we are seeking. As we have established, everyone can recognize the eye-sore end envision what should be in its place. Therein lies the first hurdle. Building consensus. The city planner, neighborhood activist, savvy investor, elected official, trade group, union representative, potential tenant; everyone has a point of view defined by their own incentives, experiences and skills. Consensus building is methodical, slow and arduous. It is not for the meek and naturally weeds out the impatient and rushed. In this corner of the real estate industry, it is an effective and organic separation of those who can lock arms over the several years that are undoubtedly ahead and those who must walk away in frustration or misalignment of interest.
So how do organizations with the mandate to create risk-adjusted returns for investor’s retirement accounts and college tuition funds, justify spending years participating in concept and entitlement, versus focusing resources on the many other competitive investment opportunities that exist? Timing.
During a bull market general contractors are busy, city planners are backlogged, labor and materials are expensive, vacancy is low and rents are high and, maybe in more traditional cycles, inflation and interest rates are creeping up too. This is the perfect time to build up your organization’s development pipeline. Invest the mind share in assembling the right coalition. Community buy in takes time, and support from elected representatives, as well as residents and organizers, can be a huge asset for a project. Contractors and architects appreciate a runway to thoughtfully flesh out estimates and design elements. The right project can also strategically market to a complimentary tenant mix and find capital relationships that align with a projects timeline and return profile. During a peaking economic cycle your organization has the benefit of reinvesting gains into building up deal flow.
When markets slow down financing becomes difficult to obtain and tenants are hesitant to grow their businesses. These are two of the biggest challenges to development during a period of economic headwinds, however if the time was effectively spent building a deep roster during the bull market, and with a little bit of luck, the chess pieces have been placed and are stalking the opportunistic moment. Building in a struggling market has its challenges but also enormous upside. If the timing is really perfect a project can open during a recovery and benefit from momentum and growth. During slower economic times, deals can be made with builders and consultants that benefit both sides. Conversely revenue centers are typically positioning themselves defensively and those savings will likely be passed on in the form of rent incentives. At the same time, if the business plan is executed effectively operational partners will all participate in the strong performance.
It can be a great luxury to look ahead, across cycles, and hold onto the conviction of preparing a transformative project for its new future. Organizations have an obligation to their investors, employees, and partners to generate success in the short-term. Some must look to the here and now to keep the lights on and generate mandated returns. However, those with the rare long-view and perseverance to assemble deal makers in the short-term for the opportunity of the long-term will be rewarded.