East Bay Developers, Deals Dwindling
- Valley Times June 2, 1991
- George Avalos
Builders confront nearly endangered species: themselves
Charles Darwin was right – and he would have been right about developers, too.
The naturalist who more than century ago determined why some survive and others vanish might find fertile ground today were he to apply his vision of evolution to developers. Darwin might have to act fast, though.
“We’re going to see a smaller real estate industry in the 1990s,” Elliot Lefferts, managing partner of the San Francisco office of Kenneth Leventhal & Co., a realty consulting firm.
For the next several years, this shrunken environment will hardly nurture the timid. Developers themselves predict they will confront nervous capital markets, hostile citizens, and wary politicians. Developments will be harder to fashion.
And that’s just fine, say several successful developers in the East Bay.
“It’s better in the sense that the competition has been removed from the market,” said developer David Martin, principal executive of Emeryville-based The Martin Group. “There are fewer are of us out there to put deals together. These are opportunistic times for people in the development business.”
These times, though, have scarred even successful developers: The Koll Co. had to relinquish a majority share of Pleasanton’s Bernal Corporate Center; Joseph Callahan has downsized operations and decided to sell his interest in several Hacienda Business Park buildings in the same city.
Other problems have been far worse. A number of developers, squeezed by wobbly rents, have surrendered office buildings to lenders who grew impatient about weak mortgage performances.
Investment in new commercial real estate has withered dramatically, according to estimates from the Federal Reserve.
Less than $100 billion will be spent this year in the United States in commercial building, the federal organization reported. That’s down dramatically from the heyday years of 1981, 1984, and 1985, each of which saw $150 billion or more spent on such projects.
Still, while some builders bemoan the loss of many sources of financing, also dubbed the credit crunch, others aren’t so happy.
“I love the credit crunch,” said Jon W. Reynolds, principal owner of Reynolds & Brown, a concord development firm. “It means only those people who are credit worthy and build worthy projects will get credit.”
Analysts warn that lenders will insist developers plow ever more cash into new projects in order to finance buildings.
“It’s going to take more capitalization to do projects,” Lefferts said. “The end result is a company will have less ability to do as many projects as it could have” as recently as 1990.
For example, Martin estimated that as recently as last year, lenders might require a down payment of 10 percent to 20 percent for a new office project. “Now they want 20 percent to 40 percent equity in the deal,” Martin said.
Stricter new requirements will be a watchword of the decade, Lafayette developer Peter Bedford told the Bay Area Council during a February speech.
“In the 1990’s you can’t start the construction of a project without all the prerequisites: the house sold; the office building pre-leased; a long term mortgage committed; and the permits in hand,” Bedford said. “Dreams, promotions, project: They won’t count.”
The result, analysts reason, is bigger developers such as Alex Mehran’s Sunset Development Co., Peter Bedford’s Bedford Properties, Albert Seeno’s Seecon Financial, Reynolds & Brown, The Martin Group and Prudential Property Co. will have the best shot to escape the anticipated tough times. Large builders will likely be bankrolled by major financiers.
“Behind those big development entities will be a financial institutional source,” said Michael Evans, a consultant with Ernst & Young’s National Real Estate Advisory Services. “It might be Aetna, Prudential (Insurance), Copley (Real Estate Advisors), Teachers (Insurance & Annuity Association), or some other major firm.”
Another source of capital has come from Asia. For example, Moraga real estate executive Clark E. Wallace has teamed with a Japanese firm for the future development of twin office towers near the Pleasant Hill BART station. In that same office hub, other projects have received funds from Asian investors including some in Japan, as well as from England.
Small developers squeezed
Small wonder, then, that one analyst offers tepid hope to smaller entrepreneurs in real estate.
“The day of the small developer is not over, but the outlook is not good,” said Louis P. Miramontes, partner with the Walnut Creek office of accountancy firm KPMG Peat Marwick. “The smaller developer will have a tough time in the future.”
Yet it’s not hopeless for smaller builders.”
“The small guys will have to find other ways of bringing in money,” said Richard Simonich, branch manager of Cushman & Wakefield Inc.’s Lafayette brokerage. “They have to look at property management, other opportunities, even brokerage.”
After all, Darwin’s theories favored the fittest, not always the biggest.
“I don’t think it’s by size, “Mehran said. “I think it’s by attitude. This is a hands-on business. Anybody who thinks you can get by without being hands-on is dead wrong.”
Even in 1991, there are examples of smaller builders who discovered that the niche can be everything.
Roger Hartley of Walnut Creek-based Trident Corp. has a modes-sized but robust business park in Pleasanton, and Oakland builder Michael O’Neil will soon construct what’s expected to be a busy discount shopping mall of manufacturers’ outlets in Livermore.
Niches don’t have to be small, though. Take The Martin Group, which redeveloped a large industrial chunk of Emeryville into a busy retail and office complex and is seeking another Goliath-sized niche by creating a new downtown for Pleasant Hill.
“We pick harder projects, but if the project is harder up front, when you get the thing built, you’ll have a better time, said Michael Covarrubias, a Martin partner. “If you can see cows across the street from the project you want to and it’s easy to build the project, then five other developers can do the same thing.”
The Martin Group is applying the same strategy to its ambitious undertaking in Pleasant Hill. It’s not a forgone conclusion the project will be built, but if it is, it won’t be duplicated.
As Martin put it: “How many downtowns will there be in Pleasant Hill? One. And we’re building it.”
In San Ramon, Alex Mehran might well pos a similar questions – how many Bishop Ranches will there be? It turns out there was only the one and it has evolved into that community’s dominant business center. Bishop Ranch also is the only project on which Mehran’s Sunset Development Co. is currently working.
Despite the success of this project, home to a number of big companies, Mehran opined that developers should simplify operations.
“Back to basics” is one of his key suggestions. “That means conservative financing and conservative buying, both n terms of land acquisitions as well as acquisition of construction materials,” Mehran said.
Mehran also noted that he has kept his staff of partners and executives small so that when margins dwindle in tough times, it’s not necessary to furlough employees.
Sunset Development, Reynolds & Brown, Bedford Properties and a number of other builders also have intensified efforts to retain tenants. The thinking goes that it’s far more expensive to attract new tenants than to retain an existing one.
Said Mehran: “After you sign a lease at Bishop Ranch, that’s just the start of the relationship.” Results appear to have backed up the words. Tenants rarely exit the project.
“The strategies for survival for us are to focus on existing buildings,” Reynolds said. “I get a kick out of this new awareness of being nice to your tenant and being nice to your banker. Our tenants are family and we treat them as family. Our bankers are our partners and we treat them carefully.”
Reynolds, though, believes the tough times are something any industry must endure if it wants to survive through economic evolution.
“If you have a wound on your knee, the first step is to pour alcohol on it and cleanse the wound,” Reynolds said. “It hurts like hell but you’ve got to do it. Real estate has had 10 years of wonderful, explosive growth, but now that growth is catching up to us.”
‘Stayin’ Alive’ is now developers theme
Michael Covarrubias figures he and other developers all have to have hard noses for the 1990s.
Covarrubias quipped that the firm he works for The Martin Group, has a really high tolerance for pain.
“We’re sort of on the edge of being masochistic,” Covarubbias said.
Yet Martin likes to specialize in projects that can be headaches at first. These include an Emeryville project and the proposed creation of a Pleasant Hill downtown. Company chief David Martin figures such projects are worth the trauma because they can’t be imitated.
Big East Bay developers suggest a variety of approaches for a turbulent decade.”
- Executives at Sunset Development, which consciously specialized by concentrating on a single business park (San Ramon’s Bishop Ranch), believe having good relationships with tenants and other key components of real estate could be the leading approach to success.
- Concord-based Reynolds & Brown is concentrating on its existing buildings, but it also has become active in developing discount retail centers in the East Bay.
- Lafayette-based Bedford Properties has diversified into ventures that are not strictly real estate, including broadcasting, community newspapers, restaurants and hotels. Bedford also has cut its development-related work force.
The changes mean diversified ventures now account for “about 10 percent” of the Bedford firm’s business, estimated by Timothy Preece, senior vice president.
“The buzzwords in the development community today are cover your overhead, fee development, property management and stay alive ‘til 95,” Covarrubias said.