A More Beautiful Question: How Real Estate Developers Think

This post is the mashup after reading two of most beloved books this year so far to me (the best is Antifragile by Nassim Nicholas Taleb since I consider it as my contemplation upcoming years in life, business and investing.)

I tell myself always: “T, you need to be independent. You must be both a thinker and doer. Three adjectives define myself are: Fresh, Helpful and Sophisticated.” And the book A More Beautiful Question is the one supporting me living that ethos.

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Since it is very well-written, short and condensed with precise questions/ideas, I just retype/post some images excerpted from the book and hope those reading this introduction would choose and read it in the pleasing way as I did:

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What I like most about this book is critical thinking is a skill I think everybody should have and should practice it everyday for makeing better decisions. I’ve known the topic Design Thinking by chance by reading this material: An Introduction to Design Thinking – Process Guide prepared by Institute of Design at Stanford. To me, it is one of rare practical guide about this topic and I’m thankful to learn alot thanks to reading it. And now, with A more beautiful question, I am not only practicing asking Why and What if, it also teaches me regard the How questions. This is one of the most beautiful part in this book to me. According to author, if we combine by challenging and continuing asking Why, What if and How, we are about to make big things, especially improvements and leading to innovation.

Always question the status quo, not settle with what we have and aim to solve big problems – That are all spirit I have learned through reading A more beautiful question.

And now the second book: How Real Estate Developers ThinkIt is a very exciting great beginning for persons like me who used to get ignored the real estate sector and now realizing it is permeating all facets the economy, my work and my growing interest.It helps me understand more about the commercial real estate sector and real estate developers. I’ve learned about their thinking and doing and I see a lot of lessons applicable for our use under the perspective like site development for cinema circuits in malls/commercial buildings (There is a special case regard this one in the book as the P/S I included) and for buyer/investor in this sector and whom you should pick to buy house/condo or invest in them/their companies.

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Below are some my favorites from this book. Hope you enjoy it!

1.      “Like orchestra conductors and movie producers, developers are generalists who bring a lot of other people together to create something. “And at the end of the day,” says Fogelson, “when you put together a development you have to think about all of the people who are going to be around the table—the architect, the land planner, the construction people, the marketing people, the finance people, and all of the others. They are all coming at things from their own perspective or point of view, pushing for what they think is going to be best for the project based upon their own role or persuasion. But the developer is the one who is sitting there at the head of the table, and he has to sort through all of the information and all of the voices and make a decision.”

2.      Ruttenberg concludes that “much has been made of the ‘three L’s—location, location, location’—but something that is equally as important that gets talked about less is ‘value, value, value.’ You can have the best location but if it is overpriced then you have to hit the market just right or else you are out of luck. You always have to assume that it is going to go bad,” says Ruttenberg, “and so the question becomes, how do I differentiate myself for when that happens? Once again, ‘cautious risk taking.’ That is how we managed the risk on this project—by designing a product that we could complete and get to market faster and that would be a value even after the market turned down.” And when Ruttenberg talks about “we,” he is including his main partner on the project, Michael Supera. “Michael is the son of Louis Supera so 600 Lake Shore Drive was like a fifty-year reunion of the Ruttenbergs and Superas working together.”

3.      So while they are sometimes portrayed as generalists who are “a mile wide but only an inch deep,” developers must possess deep knowledge in a broad range of subjects—they must be a mile wide and a mile deep. They must also know when to bring in specialized expertise in those instances when they are less knowledgeable. And they must know how and when to approach these many different tasks.

4.      “Developers must understand not only design, but finance, land, legal, and a host of other things. They are the synthetic glue, and when you work with developers you really begin to see where they make their money.”

5.      Developers are entrepreneurial people who are capable of spotting opportunities that are unseen by others and of envisioning and creating new and different physical environments in the future. They are optimistic and have the confidence to push through and complete a project in the face of countless difficulties. Because they want to succeed, they are flexible, creative, open to feedback, and willing to constantly adapt their vision to reflect new information. And through that continual process of adaptation and refinement they skillfully sell their constantly shifting vision to a growing number of stakeholders, hoping to build a base of support for a project. Developers create, produce, and sell products that we want and need, and they know that design matters but they also know that design must be reconciled with economics. And they know that good design is in the eyes of the buyer first and that a good design is a design that sells out. How a project sells, however, is directly related to when the product goes to market. Developers know that it is very difficult to “time the market” and that the best hedges against a turning market are lower levels of leverage and a good product that offers value to the buyer. They also know that when the marketplace becomes crowded opportunities disappear, risk increases rapidly, and it is time to get to the sidelines. And all developers are in the business because they hope to earn large profits but successful developers know that profits flow from hard work and from bringing all of their knowledge, experience, confidence, and a larger sense of purpose to each project. Much of what we think of as real estate may look like undifferentiated stock product but developers know that no two deals are the same. Price, product, location, and timing are always different and each project is unique. That is why developers must tinker and innovate at the margins, going two degrees left or right, and refining the product with each new project. In some cases developers innovate enough to create new products and over time the sum of all of this innovation is what we know as our urban environment. In providing products that we want and need, developers influence and shape our society and culture and how we live, work, shop, and play.

6.      Developers must therefore concern themselves with both subjective style and the wants of their potential buyers. To succeed, a developer must not only balance these potentially conflicting views of good design but also resolve them within the context of a more important concern: who will buy their product and at what price. Good design adds value but that there are limits based on economics. “For example, to make a building attractive, you will want to do a lot of articulation and stepping back of the façades. But given the reality of the city codes and regulations and the related land costs, you will also want to do everything to max out the allowable density on the site—the floor area ratio, or FAR—and use every buildable square foot you are entitled to. This means using a simple rectangular or square volume that may not be attractive but will be efficient and will maximize buildable area. Otherwise, the project will not be feasible and you will be leaving money on the table.” This is because urban land is priced based on buildable area, so if you don’t build the maximum, you must spread the same land cost over fewer units —which means charging more for the same unit as that of a competitor who does max out their site. “Most architects are just trying to build beautiful buildings, and we all agree with that, but saying it and doing it are two different things because everything you add to make it pretty costs money and makes the project more expensive and begins to affect the economics of the deal. There are some architects who really do understand the process, don’t get their egos involved, are trying to build attractive buildings, and who understand the idea of compromise—with these kind of architects you can generally get a good-looking building.”

7.      On Market Cycles, Leverage, and Timing: From “Location, Location, Location” to “Timing, Timing, Timing”: “Real estate is an interesting business and it can be very rewarding if your timing is good but the only way you can make sure your timing is good is to think in terms of the long haul and the idea that Rome wasn’t built in a day.” Thinking long term also offers  advantages when working with the community, says Hollo. “Instead of being dictatorial and shoving something that you want down the throats of your buyers, if you have the time you are able to have a dialog with the community and to listen to what they want, not just because they are the neighbors but because they reflect what the market wants.” Thinking long term also helps when it comes to financing and Hollo’s most important rule: “Don’t overborrow.”

8.      Many developers provide basic tried-and-true products that serve market demands—from retail centers to housing and office space—innovating at the margins over time. Some developers, like Craig Robins, operate at a larger scale and with a vision that goes beyond individual properties, using art, architecture, preservation, and urban design to create whole new districts and cultural centers. Robins also envisioned the future direction of growth and then stretched geography, successfully making the case for the Design District as an extension of South Beach, even though it was on the mainland.

9.      Identifying Undervalued Property: “My knack has always been identifying which areas were going to become popular because these were areas where trendsetting artists and cultural people were living. My typical formula was to buy things that were in the hands of people who had held them for a long time and had made few changes. People used to joke that all of my friends were at least seventy years old, and in some cases it was true. The reason was opportunity. People who hold  something for a long time view that asset in one way, so if you paid them a good price based on how they were looking at it, you could present the holder with a good opportunity. But you could also look at the property from a forward-looking  perspective, identifying the property’s future potential, and then the property would have a totally different value.”

The applicable part is how the real estate developer has leveraged the value of building by factoring seriously cinema in house:

Business Transactions Are About “What Is Best for Me”

In the late 1980s the Ruttenbergs started several new construction projects farther west, beginning with one important purchase. A college friend of Ruttenberg’s called to let him know that his factory—the old Butternut Bread factory at Clyborn and Webster—in the core of Lincoln Park might be for sale. The Ruttenbergs bought it, demolished it, and redeveloped the site into a retail center. By this time, residential density had increased in the city but retail had not followed, so urban dwellers had to drive to the suburbs to shop at the mall. The importance of being able to park in the city had grown too, and in housing projects the Ruttenbergs were providing off-street parking for one and even two cars per unit. So the Ruttenbergs decided to borrow the model of the suburban shopping mall and bring it downtown. The two-story, 150,000-square-foot Webster Place shopping center was the first new retail center in Lincoln Park. It was anchored by eight movie theaters on the second floor and supported by seven hundred parking spaces. The movie theater was one more case of “breaking the rules.”

At the time downtown theater owners had agreements with the movie distributors that gave them exclusive rights to show first-run movies in a zone that included the downtown core and all of the north side, which included Webster Place. The only place downtown to see a first-run movie was at a four-screen theater at Water Tower Place, a seventyfour-story, mixed-use tower on Michigan Avenue, but a moviegoer had to brave congestion and expensive parking to get there.

So the Ruttenbergs gambled that bringing in a new theater in a suburban-style mall on the North Side with free and easy parking would increase the market for first-run movies in the city but they had no guarantee that the movie distributors would create a new zone. “At Webster Place, parking was free and you could tell right away from the parking lot whether the movie you wanted to see was showing, rather than paying for parking and then taking the elevator to the seventh floor of Water Tower Place just to find out what was playing or to find out that the movie you wanted to see was sold out.” The theaters at Webster Place opened “with secondary stuff,” says Ruttenberg, “but all 1,600 seats were full within a week and the movie distributors realized that two zones might be a good thing after all, since they would ensure more seats and more revenue for first-run movies. “Business deals are about ‘what is best for me,’” says Ruttenberg, “and what was best for the movie distributors was the creation of a new zone. It was a perceived barrier but to me it was obvious.” Webster Place went on to become a big hit. “And with the success of Webster Place, our expertise—without any long-term plan—continued to grow, and as it grew, we gained more access to capital.”

Regard my investment lessons I’ve learned this year, I list them here to remind me for the challenging exciting year 2018:

1. Catalysts, catalysts & catalysts.  It’s not only about the gems (moats). It needs also to be polished to be shiny by catalysts. My investments need catalysts well-researched to guarantee the expected outcomes.
2. It’s all about expectations – Delivering consistent profitability, keep low promise but over-deliver. I need also observing the moves/behaviors of the market to evaluate continuously my investing.
3. Know what’s my context is and what the world is offering/heading to and where I should stand. Can I keep patient and wait? I need to be honest with myself all the times.
4. Focus on ignored downside risks. It’s all about it? – which I often hear them preached while I am breaching it.

I hope you enjoy this year and welcome 2018 with joy and happiness!

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