A DEVELOPER'S SURVIVAL GUIDE:
A PROACTIVE APPROACH TO MANAGING IN
A DECLINING MARKET ENVIRONMENT
by
DAVID GEORGE BLOORE
B.S., Chemistry
Ursinus College, (1973)
Master of Business Administration
Harvard Business School, (1975)
STEPHEN EVERETT FOWLER
B.A., Economics
Stanford University, (1984)
Submitted to the Department of Urban Studies and Planning
in partial fulfillment of the requirements of the Degree
of Master of Science in Real Estate Development at the
Massachusetts Institute of Technology
JULY 1989
DAVID G. BLOORE and STEPHEN E. FOWLER 1989
The authors hereby grant to M.I.T. permission to reproduce
and distribute copies of this thesis in whole or in part.
Signature of Author
David G.
Bloore
Department of Urban Studies and Planning
July 31, 1989
S ignature o f A u th or
S
e h
E ._ F owl er
Stephen E. Fowler
~
Department of Urban Studies and Planning
July 31, 1989
Certified by
Gloria Schuck
Lecturer, Sloan School of Management
rhesis Supervisor
Accepted by
Michael Wheeler
Interdepartmental Degree Program in Real Estate Development
(SLEP
25 1989
{>
A DEVELOPER'S SURVIVAL GUIDE:
A PROACTIVE APPROACH TO MANAGING IN
A DECLINING MARKET ENVIRONMENT
by
DAVID GEORGE BLOORE
and
STEPHEN EVERETT FOWLER
Submitted to the Department of Urban Studies and Planning
on July 31, 1989 in partial fulfillment of the
requirements of the Degree of
Master of Science in Real Estate Development
ABSTRACT
Over the past thirty years, the real estate industry has
been subject to three cycles of increasing amplitude.
During periods of prosperity developers often find most of
their projects are successful.
Even poor development
decisions may be profitable in a strong market. However,
to avoid scrambling to survive in the downturn portion of
the cycle, carefully reasoned management responses are
necessary. This paper provides development companies with
a market
recommendations to survive
specific action
downturn.
An experiential learning model is used to analyze the
management responses of four Denver, Colorado real estate
Denver was chosen because it has been
development firms.
mired in the downturn portion of a market cycle since 1984.
experienced at least one
The firms interviewed have
complete real estate cycle, and were still operating in
The study integrates the theoretical approach
July 1989.
model, with the actual
of the experiential learning
management responses of the four development firms to
provide insight on surviving a downturn in the market.
The principal conclusion of this thesis is that companies
that follow the steps of the experiential learning model
can take a proactive approach to managing in a declining
market. They are more likely to anticipate the direction
of the market and achieve superior results. In contrast,
firms that omit any of the steps of the learning model
become reactive. Typically, they are unable to stay ahead
of changing market conditions and performance suffers.
Thesis Supervisor: Gloria Schuck
Title: Lecturer, Sloan School of Management
ACKNOWLEDGEMENTS
Our sincere gratitude is conveyed to our thesis advisor,
Gloria Schuck for forcing us to search for that ever
elusive methodology and framework. Gloria's experience,
professionalism, use of deadlines and willingness to read
version after version of our thesis was invaluable. We
also have come to know well, and love, your front porch.
Randy Nichols was instrumental in the search for companies
Without his
willing to participate in our research.
generous sharing of knowledge and contacts, we would have
had great difficulty in locating and meeting the principles
and managers of the Denver developers we spoke with.
Special appreciation goes to Joyce Conley, Richard Ford,
Mike Winchester, and Steve Patterson for the open and frank
discussions that provided the basis for our research.
Although their names have been changed their insight was
straightforward.
We would also like to thank the Urban Land Institute for
its generous funding of this thesis. We hope that our
research advances the study of this subject and is useful
to its member firms.
We would like to thank Ann and Brad Wallace, Steve's
sister and brother in law, for their insightful commentary
and editorial assistance in the writing of this thesis.
David G. Bloore
Stephen E. Fowler
July 31, 1989
TABLE OF CONTENTS
ABSTRACT.........................
ACKNOWLEDGEMENTS.................
TABLE OF CONTENTS................
iii
LIST OF TABLES and FIGURES.......
.iv
INTRODUCTION.....................
..4
CHAPTER ONE......................
Real Estate Cycles.......... ...............
The Denver Market...........
...
.4
.. 96
0............
CHAPTER TWO...................... ............
Literature Review............ ...............
Process Model and Analytical ...............
CHAPTER THREE: CASE STUDIES...... ...............
Mountain Properties......... .. 0 . .
The Southwick Company.......
Patterson and Company.......
James M. Winchester Inc.....
0...
.15
.15
.27
.29
.
.
.
.
.33
.41
.47
.54
CHAPTER FOUR: ANALYSIS...........
.62
CONCLUSION........................
.83
APPENDIX.........................
.86
BIBLIOGRAPHY...........................................91
iii
TABLES AND FIGURES
LIST OF TABLES
Table 1: New Residential Units, Denver Metro Area........7
Table 2: Historic Denver Office Vacancy Rates............8
Table 3: End of Year Vacancy Rates, Downtown Denver......9
Table 4: Average Crude Petroleum Prices.................13
Table 5: Summary Information on Field Study Firms.......31
TABLE OF FIGURES
Figure 1: Map of Denver..................................11
Figure 2: The Experiential Learning Model Diagram.......16
Figure 3: Process Model of Planning and Implementation..28
Figure 4: Levels of Management Response to a Market
Decline........................................ 69
Figure 5: Mountain Properties...........................75
Figure 6: The Southwick Company.........................76
Figure 7: Patterson and Company.........................77
Figure 8: James M. Winchester Inc.......................78
Figure 9: Conformance to the Stages of the
Experiential Learning Model...................79
INTRODUCTION
I reject get-it-done, make it happen thinking. I
want to slow things down so I understand them
better.
-Governor Jerry Brown
The
real
estate
industry is
Management will need to
and make
rapid
changes.
resist the "get-it-done" mentality
carefully reasoned responses.
real estate industry has
swings.
undergoing
Furthermore, some
Historically, the
been subject to repeated cyclical
development firms have resigned
themselves to accepting the cycles
as a normal part of the
real
planning strategies
estate business
mitigate an
rather than
unexpected downturn.
During periods of rapid or even sustained growth,
there is tendency for those who create and
operate real estate space to get overly confident
about their successes and, consequently, they may
make some poor development/investment decisions.
Even some
of the
most inept
real estate
participants can appear to be doing well when the
economy is strong. The true test of real estate
strategic
management practices
becomes more
evident when the market turns down (Green, 1988,
p.64).
The question then becomes:
Why are some companies unable to alter their...
strategies in response to market changes, while
others, when confronted with the same conditions,
to
quickly
modify
their behavior
to
achieve
continued marketplace success?
(Bonoma, 1981,
p.116)
Real estate
research
cycles are
has been
done
commonly acknowledged,
regarding the
estate development companies that
cycle.
Kolb, a
researcher
a vital
responses of
real
have survived a complete
at the
Management, believes that improving
learn is
but little
component of a
MIT
Sloan School
of
a company's ability to
successful organization.
He argues that,
continuing success in a changing world requires
an ability to explore new opportunities and learn
from past success and failures.... If managers
and
administrators
had
a
model
about
how... organizations learn, they would better be
able to enhance.. .their organization's ability
to learn. (1973, p.27)
Kolb goes on to propose a learning model to help facilitate
management responses in a changing world.
This thesis
will explore
ways to
development companies to plan
a real
estate
prescriptive
downturn.
a downturn?
This
ability of
and implement strategies for
Can
the learning
surviving a
framework for
What can we learn
improve the
model
be
a
declining market?
from development companies' responses in
thesis seeks
to answer
these questions
and produce a proactive approach to managing in a declining
market.
We
companies in
in
1989 it
downturn.
analyzed the
experiences of
Denver, Colorado.
is in
the midst
Denver was
of an
four development
chosen because
extended real
estate
This
study begins
in chapter
cyclical
nature of
look
the
at
begins
the
explains
real estate
Denver
review
Kolb's
real
learning
the
Chapter
learning
companies.
The
market.
management
model.
In
real estate cycle.
the
a historical
Chapter
two
literature
and
chapter
integrates the field
evaluate
the
thesis concludes with
and recommendations
review of
three,
we
from the four Denver development
four then
model to
with a
markets and
estate
of formal
review our field research
firms.
one
data with
performance of
the
generalized lessons
for surviving the downturn
phase of a
CHAPTER ONE
REAL ESTATE CYCLES
Real estate is cyclical. For every opportunity,
there's a problem waiting in the wings. For every
problem, there's an opportunity waiting in the
wings (Gollinger, 1989, p. 6B).
An
examination
of
real
estate
cycles
provides
information for making management decisions.
time series data on
useful
Although good
non-residential real estate markets is
limited, Wheaton (1986) surveyed real estate markets in the
United States and determined the following:
1.
Data back
to 1960
indicate a
repeated real
estate
cycle with a periodicity of approximately 10 years.
2.
last
The
amplitude of the
two cycles
cycle increased in each
indicating that
vacancy peaks
of the
had been
climbing.
3.
The market
did not
clear within
a short
time.
It
remained either soft or tight for a number of years before
clearing.
rent
In soft
markets it
concessions were
was several
offered and
In the same way, markets were
years before
absorption responded.
tight for a number of years
until rents rose enough to slow absorption.
4.
The supply
elastic
than
of non-residential
demand,
which
real estate
helped
was more
explain
market
instability.
5.
The real
short
and
economy.
estate market
long
run
Demand
was closely
cyclical
was
movements
influenced
employment growth and by
linked to
of
both by
the
the
both
macro
rate
of
the overall level of employment.
The supply side was also affected by the rate of growth of
office
employment,
demand.
but to
This caused
an
even
construction to
larger degree
than
respond more
than
office absorption, further increasing market instability.
Wheaton found that
and
be traced
1980s can
United States
much of the building boom
to
a structural
Yet it appears
towards a
not continue at
cannot, and will
pace as during
the 1970s and 1980s
is set for
and many
the
that the expansion of the
service sector
cycle,
change in
economy, namely the reorientation
service economy.
the stage
of the 1970s
(Wheaton, 1986).
another downturn in the
professionals are
the same
real estate
pessimistic about
near term future of the real estate sector.
Thus
the
THE DENVER MARKET
The Denver real estate market has experienced sharp changes
in activity
since 1960.
experiencing
rates of
a real
25%.
Denver is currently
estate downturn
with office
Therefore, Denver development
excellent resource
estate downturn.
firms as
In addition,
firms are an
of past management responses
This information
they plan management
vacancy
to a real
may be helpful to other
responses to a
downturn in
the real estate market.
Data on
new residential
area indicate
units in the
Denver Metropolitan
three cyclical peaks between
1960 and 1988.
The data illustrating the cycles are shown in Table 1.
The number
of residential
greatly over
1972,
when
the course of
total residential
the
production
includes
units produced
a market cycle.
production
turned
downward
dropped
80%.
Multi-family
most volatile
From
rose 517%.
market
everything except
annually varied
However,
years
later
production,
which
three
homes, was
single family
segment in the residential
1965 to
market.
the
Between
1972 and 1975, total production fell 97% - from over 25,000
units to fewer than 1,000.
1983 saw
The expansion between 1975 and
residential production increase at
than the prior cycle.
the current cycle,
a slower rate
In contrast, the downturn portion of
which continues in 1989,
as severe as the downturn in the prior cycle.
has been just
TABLE 1
NEW RESIDENTIAL UNITS
DENVER METROPOLITAN AREA
YEAR
Single Family
Mu lti-Family
Total Units
1961 peak
9,723
9,230
1965 trough
Percent decline
5,147
47%
2,129
77%
7,303
61%
1972 peak
Percent growth
19,189
273%
25,874
1,115%
45,063
517%
1974/5 trough
Percent decline
8,102
58%
884
97%
8,986
80%
23,664
192%
9,731
1,001%
33,395
272%
5,422
77%
1,431
85%
6,853
79%
1983/4 peak
Percent growth
1988 trough*
Percent decline
18,953
(* Assumes trough occurred in 1988)
Source: Home Builders
Association of Metropolitan
Statistical Reports.
Denver, Monthly
Data on
through
office vacancy rates
1986.
illustrated in
cycles, three
Although
Table 2
are also available
the
is based
timing
of
the
on national
distinct cycles are apparent
for 1961
cycles
real estate
for the Denver
market.
TABLE 2
HISTORIC DENVER OFFICE VACANCY RATES
Occupancy
Peak
1961
7%
1966
1969
16%
3%
21%
1975
1980
1986
Source: Wheaton, 1986
occupancy
Trough
4%
27%
the most
Data from
recent Coldwell Banker
is illustrated in Table 3.
Index of the United States
data
for the
downtown Denver
reached in
the
1987 when
market has
been
office market
The
indicate the
cycle occurred in 1981 when the
peak of the current market
vacancy rate was 0.1%.
Office Vacancy
The trough of the current cycle was
hit 30%.
vacancy rates
recovering slowly
and
Since then
had a
26.1%
vacancy rate in March, 1989.
TABLE 3
END OF YEAR VACANCY RATES
DOWNTOWN DENVER
Year
Rate _(%I
1978
6.1
1979
1.8
1980
0.3
1981
0.1
1982
8.3
1983
23.0
1984
23.7
1985
26.0
1986
29.7
1987
30.0
1988
26.4
1989, March
26.1
Source: Coldwell Banker
Office Vacancy Index
United States, March 31, 1989
of the
OBSERVATIONS OF CURRENT CYCLE FROM FIELD SOURCES
Our
fieldwork concentrated
managed
office space
on
in the
firms
downtown Denver
Denver markets
during the
downtown space
in Denver is tightly
contrast
to
the
that developed
1980s.
Like most
or suburban
markets, the
focused.
However, in
of
pattern
sprawling development
and
many
suburban markets, suburban space in Denver also tends to be
concentrated,
in this
South of
case
the
City near
the
intersections of 1-25 and 1-225, (see Figure 1).
According to our field sources, in 1980 the downtown Denver
market
office space,
while the
few million.
By 1989, the
million
9 million
contained approximately
square feet,
square feet
suburban market contained
of
just a
downtown market had grown to 27
of that
with most
growth occurring
between 1980 and 1985.
While growth in the Central
early 1980s
even faster.
Business District (CBD) in the
was quite rapid, the
Of eighteen
business parks featured
Denver Business Journal's 1989
before 1980.
suburban market expanded
in the
Map, only three were opened
Between 1980 and 1989
suburban office space
increased from just a few million square feet to 24 million
square feet.
both the CBD
halt.
However, by
1989, construction
and suburban markets had virtually
activity in
come to a
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Many developers
the building
prices
believed that
boom was sharply
increased, domestic
prices
were forecasted
range,
synthetic
to
fuels
fuel industry
In
their
the early 1980s, when oil
appeared
because of
As oil
producers expanded
reach the
well positioned
impetus behind
rising oil prices.
oil
research on synthetic fuels.
Denver was
the primary
$40-$50 per
economically
to benefit from
barrel
feasible.
the synthetic
the large concentrations
of oil
shale in the region.
To exploit
the perceived opportunity, oil
relocating
exploration
area.
and
Legal, accounting
support
staff.
functions for
to
production personnel
and
the
companies began
other
oil
firms that
companies also
the
provided
increased
Consequently, according to a Coldwell Banker survey
(March, 1989), the downtown vacancy
rate fell from 6.1% in
December 1978 to 0.1% for all four quarters of 1981.
The
market
tight
buildings to
caused
increase rapidly.
were between $30 and $35 per
suburban
rents
rents
suburban office
were
and
prices
At the peak,
for
office
gross rents
square foot in the CBD, while
slightly lower.
space reached $130 per
Sales
prices
for
square foot, while
construction costs were just $90 per square foot.
Needless
to say, development activity increased dramatically.
By 1982, oil prices were declining and the oil-induced real
estate "boom" had begun to
unravel (see Table 4).
Vacancy
the CBD rose
rates in
above
rates,
20%
above 10%
1983.
by September
concessions in
the
in March 1983,
To
form of
and were
maintain face
free
rental
rent and
allowances for tenant improvements became the norm.
TABLE 4
AVERAGE CRUDE PETROLEUM PRICES ($/bbl)
Year
Price($)
1970
3.18
1975
7.67
1976
8.19
1977
8.57
1978
9.00
1979
12.64
1980
21.59
1981
31.77
1982
28.52
1983
26.19
1984
25.88
1985
24.09
1986
12.51
1987,
Source: U.S.
preliminary
Energy
15.41
Information
Annual Energy Review
Administration,
large
The development firms interviewed
prices
drove
market.
The
the
data also
oil prices and
When oil
expansion
demand for office space
all recognized the
downturn?
help
others?
the
declining
How
the varying
made to the market downturn.
did
estate
worked in reverse.
office space
rose almost immediately.
The learning model
to explain
real
relationship between
importance of oil prices,
recognize
than
Denver
demand for additional
ceased and vacancy rates
earlier
in the
indicate the
prices fell,
developers
believed that rising oil
real
developers
If they
why did some
estate
market
react to
the
outlined in chapter two will
reactions development
firms
CHAPTER TWO
LITERATURE REVIEW AND ANALYTICAL FRAMEWORK
The right organization structure for a given
enterprise
is uniquely
determined by
four
different
inputs,
which include:
(1)
the
requirements for competitive
success in the
business;
(2) the objectives and plans of the
enterprise;
(3) the "givens" of the present
situation; and (4) tested organization theory
(Daniel, 1966, p.99).
Daniel's
argument, taken
article,
describes
Kolb's
Kolb, in his research at
created
process
from a
experiential
learning
model
is
Review
learning
model.
experiential
MIT's Sloan School of Management,
the experiential
of
Harvard Business
learning
from
a
four
model
past
step
to enhance
experiences.
dynamic,
learning model; it is illustrated in Figure 2.
the
The
iterative
FIGURE 2
THE EXPERIENTIAL LEARNING MODEL
CONCRETE
EXPERIENCE
OBSERV ATION &
REFLEC TION
ACTIVE
EXPERIMENTATION
FORMATION OF ABSTRACT
CONCEPTS AND GENERALIZATIONS
In
the Kolb
concrete
model,
the learning
experience that
situation.
This
concrete
changes
third
stage
of
formation of abstract
concepts
which
and
model
model
are the
observations
experimentation
into
the
basis
successful firms
for
involves
strategic
theories
the
These
options
to
make
The final stage
of Kolb's
utilizing the
strategic
options developed in new situations.
iterative, and
operational
concepts and generalizations.
solve problems.
is active
a
second stage of the model.
learning
generalizations
integrate
decisions and
the
starts with
the normal
experience is
observation and reflection, the
The
process
The learning model is
will continue
to monitor
the new experiences and objectively reflect on them.
The
first section
of this
chapter reviews
articles that
discuss ways to improve a firm's reflection and observation
skills.
Literature on
marketing, product differentiation,
growth niches and product quality are reviewed to assist in
the generation
literature
of the
specific to
establish strategic
market.
strategic options.
estate field
the real
options for a firm
Finally, implementation
also review
We
to further
facing a declining
literature is reviewed to
help firms more effectively implement the strategic options
generated.
The second
the
section of this chapter
literature
to
develop
an
utilizes concepts from
analytical
framework,
a
revision of Kolb's experiential learning model.
This model
of
companies'
will
be
used
experiences, and
later
in
the
analysis
to make action recommendations
facing a declining market.
for firms
REFLECTION AND OBSERVATION LITERATURE
with a historical experience.
Experiential learning begins
was recognition that
changing market,
the
in
step
second
real estate market
a downturn in the
was either imminent or in progress.
of
a
could
learning
Kolb's
experience
the historical
firms,
Denver development
For
Only after recognition
to
the
reflection
and
move on
firm
model,
observation.
are
we
Until
in?
What business
question for management is:
The fundamental
you
a
have
understanding
full
of
exactly what commodity you produce, or service you provide,
understanding
is
impossible.
This
real
estate
Leinberger
(1987,
for
relevant
especially
example,
For
companies.
development
is
experience
the
to
responding
p.48) states the obvious when he says, "we define ourselves
as being in the development business... this implies that we
will only be active during the good times".
Failure to
understand your
results.
Levitt
have devastating
business can
argues
(1960)
that
a
number
of
industries have declined because they were product oriented
rather than customer oriented.
better served by probing deeply
their
best
industry is
way
to
expresses the
trying to
fulfill
same idea
them.
He adds that firms would be
into the basic human needs
satisfy and
Thurston
by suggesting
determining the
(1983,
a firm
p.
168)
ask itself
"what are
which my
need
to
the central competitive ideas
and competence on
business rests"?
Real estate
development firms
determine whether
they
development
in the
are
business (i.e., they only develop new property) or the real
estate
business
provide
they
(i.e.,
a
of
range
new
development and post development real estate services).
the
believes
Thurston
If you
do not know what your
and particularly what it is now,
understanding of
reflect upon
of your
its
Once a firm has a
business, it
the experiences it faces.
start with a review
company has been,
you may be planning in an
environment you do not fully understand.
thorough
strategic
determining
with a thorough understanding
alternatives begins
business.
process of
to
can move
Reflection should
and restating of corporate objectives.
In the case of Denver, these objectives will help guide the
development firms' responses to the market downturn.
corporate goals remain fixed
At times,
competitive,
firms
must
be
To
changing.
constantly
environment is
business
while the external
able to
remain
focused
remain
on
long term objectives while staying flexible enough to solve
the day to day problems in this changing environment.
is the
challenge Denver developers face
to remain
crises they
flexible to
face in the
respond to
today.
the daily
This
They need
problems and
weak market, but still
need long
term objectives to properly position the company to survive
the downturn (Isenberg, 1987).
STRATEGIC OPTIONS LITERATURE
Once
management has
business and determined corporate
develop
a
strategy
identifies this
objectives, they need to
Kolb
objectives.
the
achieve
to
their
components of
the
identified
stage as creating concepts
that integrate
observations into logically sound theories that can be used
to make decisions and solve problems.
One
strategic option
classic
that
article, Marketing
marketing.
complex
that
usually
"what
Marketing,
process, gets
selling
focuses
declining
marketing capabilities.
improvement of
market is
in a
to firms
available
gets
Myopia,
Levitt (1960)
a
being
more
ignored" (p.
on
the
not
sophisticated
and
34).
needs
argues
selling,
is
emphasized
In his
Levitt
of
the
argues
seller.
Marketing, in contrast, focuses on trying
to create value-satisfying goods and services
buy.... Most
to
want
will
consumers
that
important, what it offers for sale is determined
not by the seller but by the buyer. The seller
takes his cues from the buyer in such a way that
of the
a consequence
product becomes
the
marketing effort, not vice versa (p. 38).
Hanan (1974) reinforces Levitt's
is
no substitute
for market
argument by saying "there
orientation as
the ultimate
source of profitable growth" ( p. 63).
Levitt (1977) believes that:
An organization's principal marketing policies
organization's
that
affect
strategies
and
and
policies
corporate
overall
principal
strategies. That in all this variation...there
and logic, no
is a persistent... orderliness
matter how much things seem to be different or to
This is the logic of the marketing
change.
The market calls the tune and the
concept.
players had better play it right (p. 113).
The
way
marketing
the
for
advantage,
especially
Bonoma
downturn
simple step
(1981) believes that one
the market is
upper management's attention to
to redirect
competitive
a
competitive
a
in
an
provides
managed
establish
to
companies
opportunity
environment.
process is
to simply encourage contact between managers and customers.
This is easily accomplished by getting out in the field and
with
interacting
marketing
can help
demanding
and
market-driven
firms might
identify
produce
firm.
In
the
products customers
are
for
the
a competitive
the case
to
commitment
renewed
A
clients.
advantage
of Denver,
development
accomplish this by contacting
existing office
what it is they look
for when making
tenants to determine
occupancy decisions.
A second
strategic alternative
to
available
declining market is product differentiation.
that
all products
are
differentiable
attaches value to a product
ability to
firms in
a
Levitt argues
since "a
customer
in proportion to its perceived
help...meet his needs" (1980,
p.
84).
Bonoma
(1981) expands on this idea:
for change,
flexible and prepared
To stay
what
ask itself
must regularly
management
"augmentations" of existing products or service
lines might be added for competitive purposes
(p.120).
Differentiating your product to go beyond what is minimally
"expected" by customers can enhance performance and provide
program
competent marketing
Furthermore, a
competitive benefits.
information needed
provides the
product
to make
or service differentiation successful.
options to the downturn
Additional strategic
in literature
can be found
Hamermesh
on stagnant industries.
and Silk
(1979) stress that
it is essential for managers not to let wishful
thinking color their view. Instead, they must
accurately assess the long-range prospects and
face the problems of competing in a stagnant
acceptance of the
Management's
marketplace.
is a
a continuing slow demand
reality of
prerequisite for developing successful strategies
(p. 162).
In
addition,
markets
than it
comes
growth
competition
more
the
intense
ones
in growing
is
at
is
because one
of
expense
in
their
stagnant
firm's
competitors.
Hamermesh and Silk found there were
three common characteristics of the strategies of
in stagnant
have succeeded
businesses that
industries: they identify, create, and exploit
growth segments within their industries; they
emphasize product quality and innovative product
improvement; and they... consistently improve the
efficiency of their production and distribution
systems (p. 163).
Real
estate is
generally acknowledged
to be
a localized
commodity, and the existence of small growth areas within a
largely
Harrigan
stagnant
and
metropolitan
Porter
(1983)
"niche" which will have stable
marketplace
recommend
is
searching
common.
for
a
demand or decay more slowly
as a
the market
than
stagnant areas by
growing.
objective is
The
whole.
that is still
competing in a sub-market
Finding
a
niche
requires
an
that looks beyond the
creative management
to avoid
innovative
and
obvious problem
Nevertheless, utilizing niches to improve corporate
areas.
performance is
For
markets.
a proven
strategy for
surviving declining
development firms,
Denver
this
mean
may
avoiding the CBD office market and concentrating on certain
or on product areas that
suburban areas with strong demand
are not well served.
Hamermesh and
Silk also found that
are successful responses to
higher product
that
return
on
emphasizing
itself
stagnant
further
even
of the
in
a higher
firm
is
By
markets.
able to
place
prevalent in
innovation takes
the product
by improving
stagnant
price competition
Product
markets.
Their research shows
associated with
products, a
quality
above some
decline.
quality is
investment,
innovation and quality
and setting
it
a
step
it further
above the competition.
Harrigan and Porter (1983) summarize:
Companies that can view an industry's decline as
an opportunity rather that just a problem, and
can reap handsome
make objective decisions,
rewards (p. 120).
Leinberger outlines
specific alternatives in
his article
in the National Real Estate Investor:
The downturn
development cycle is the
23
best time
troubled projects, position the
to pick up
company with land purchases or options...and/or
It is
concentrate on third party fee business.
the time to get one's company ready for the good
development times.
It is also the time to buy
(rather than make) existing real estate products
to create value through better financial terms,
better management or Just a good purchase price
(1987, p. 48).
Green
(1988) conducted
Anchorage,
important
Alaska
a survey
to
of development
determine what
for surviving
in a
factors
firms in
were
volatile economic
most
climate.
The responses indicated the following survival strategies:
1.
Maintain high equity
falling
rent
and
position to protect against
property
carefully along with prudent
off
portions
of
use
values,
leverage
market timing, and sell
your inventory
during
prosperous
times.
2.
Have
a strong
property
or
two with
seasoned
cash flow.
3.
in
Concentrate on
demand in
quality properties
declining
markets as
as they
well as
are
strong
markets.
4.
Maintain the ability to expand the company during
prosperous times and contract it during a downturn.
5.
Horizontal
diversification
management, leasing
such
and other third
as
property
party business,
was helpful.
In
summary, the
literature identifies
both specific
and
estate
that
strategic options
general
firms
facing
a
can be
declining
implemented, it may be possible
utilized by
market.
real
Successfully
to profit from the decline
and emerge as a stronger, better positioned competitor.
IMPLEMENTATION LITERATURE
Machiavelli wrote in The Prince,
it must be considered that there is nothing more
difficult to carry out, nor more doubtful of
success, nor more dangerous to handle, than to
initiate a new order of things.
Yet firms
facing a stagnant
market need to do
just that,
initiate a new order of how they operate their business.
Greiner (1967) believes that
approaches most often used to
introduce change are on a power continuum distribution.
The center
authority.
shared
approaches while
approaches to
most successful
commitment
rely on unilateral
are those approaches that
the far left
to
change.
of
on
The
is occupied
the continuum
the far
right are
shared approaches
changes because "individuals
action
when
they
decisions that affect them" (p.
have
121).
To
a
by
delegated
produce the
develop more
voice
in
the
Furthermore,
the overarching goal seems to be the same: to get
toward
redirected
psychologically
everyone
solving the problems and challenges of today's
business environment (p. 120).
Therefore, the shared approach is best.
Another
key to
successfully implementing
25
change lies
in
one common mistake managers make is
overcoming resistance.
"to
approach change
is
Kotter and
to
point to the right
does not force
them in it.
see why
the change
propose
Schlesinger
similar
continuum
recommend choosing a
This point
and implementation of
the design
making
decision
often help people
and
addition, involving the potential
In
successful.
also
Education
112).
the new ideas
change is necessary.
resisters in
p.
1979,
Schlesinger,
communication of
incremental way
disjointed and
a clearly considered strategy" (Kotter
that is not part of
and
in a
Greiner's,
a
and
on the continuum.
change on people,
but involves
They conclude by stating,
Change efforts using the strategies on the right
side of the continuum can often help develop an
organization and its people in useful ways (p.
113).
Testing
implementation
and
learning model.
the
changes
process.
the
experiential
However, the management challenge does not
end with implementation.
observe the
complete
new results
implemented
Real estate professionals need to
and experiences brought
and
continue
the
about by
learning
THE PROCESS MODEL AND ANALYTICAL FRAMEWORK
This thesis
compares management theory and
experiences
of four
development
companies.
Denver,
We
firms took in response to
Colorado
the real world
based real
will analyze
estate
the steps
these
the market decline, determine if
they fit our process model - an adaptation of Kolb's model,
and
finally
make
recommendations
for
better
ways
to
implement management change.
The process model has four
recognition of a concrete
firm.
The second
observation.
the
is reflection
consider the
establish
goals that
and
implications of
will guide
the
The third stage is creation of strategic options
stage
of
in the
the
strategic responses.
firm
the model
firm must
be implemented
fourth
The first stage is the
experience that has affected the
stage of
experience and
response.
to
The
stages.
needs to
monitor
new environment.
model
is
Finally, the
implementation
After implementing the
the results.
of
changes, the
These results
become the concrete experience for the next iteration.
process model is illustrated in Figure 3.
the
then
The
FIGURE 3
PROCESS MODEL OF PLANNING AND IMPLEMENTATION
OF RESPONSES TO A REAL ESTATE MARKET DOWNTURN
CONCRETE EXPERIENCE I
Recognition of market decline
CONCRETE EXPERIENCE II
Results of post downturn strategy
IMPLEMENTATION OF
POST DOWNTURN STRATEGY
OBSERVATIONS
&REFLECTION
post decline strategy
define business
set corporate &
personal objectives
FORMATION OF
STRATEGIC OPTIONS
marketing focus
differentiation
growth segments or "niches"
quality and innovation
wise land purchases
third party business
diversification
CHAPTER THREE
CASE STUDIES
a
in
Surviving
explore new opportunities and to
requires a willingness to
learn
from
past
environment
business
changing
rapidly
2,
In Chapter
actions.
presented
we
literature and a learning model to help frame and guide the
process.
to study past actions to
However, we also intend
properly utilize
the learning
model.
Case
studies allow
one to learn by studying the experiences of others who have
already faced
of a real
the downturn stage
estate cycle.
The lessons these Denver development firms provide may help
others prepare for the day their market slows.
In selecting subjects for the case studies it was necessary
to choose
firms from a
major metropolitan area that
with
an
criteria.
office
rate of
vacancy
In addition
to
The opportunity
about
25%,
current market
the
Denver also experienced a sharp
1980s.
Denver,
the real estate cycle.
experiencing a downturn in
was
met
these
downturn,
"boom" period in the early
to study
development firms
in a
market that had experienced strong peaks and troughs in the
decade of the 1980s provided
an opportunity to compare our
learning model with the way
in which change was handled in
the "real world".
We
deliberately
sought to
development companies.
included: 1)
1980s,
with
several types
also
development, 2)
specializing in
heavily
involved
one national
office
of
Accordingly, our four subject firms
a local commercial developer,
was
regional
speak
in
who during the
in
residential
commercial developer
Denver,
3)
high quality suburban
a
local
with a
developer
office development,
and 4) a local developer specializing in land development.
All four
and
development firms
were well
respected
had established
in the
surviving the
market, the
local firms also
have
been
The
altered at
Denver marketplace.
current downturn in
addition to
cycle in the 1970s.
track records
endured a sharp
In
the Denver
real estate
names of the firms and principals
their
summary data for each firm.
request.
Table 5
provides
TABLE 5
SUMMARY INFORMATION ON FIELD STUDY FIRMS
Mountain
Southwick
Patterson
Winchester
Location in Denver
S. Suburban
Downtown
S. Suburban
S. Suburban
Person Interviewed
Title
Joyce Conley
President
Richard Ford
Vice President
Steve Patterson
President
Mike Winchester
President
Types of Development
Office
Office/whse
Residential
Office
Office
Commercial Land
Commercial Land
Office
Residential
Lease negotiations
more difficult
Rents fell
Large tenants
left market
Supply/demand
imbalance
1984/5
1984/5
1983
1982
Market Decline
Concrete Experience
Date Recognized
Number of Employees
1980 - 1981
40 - 50
1985 - 1986
60 - 70
1989
* Not including third party management business
100
The
research
technique
face-to-face interviews.
employed
for
Prior to
his or
each person was informed of
of the
learning model
with the presidents
case
of
president
only
viewpoint
in charge
of the
methodology
actual interview
illustrate
downturn,
as
her interview,
We
spoke directly
as
company,
company was
it
questions are
a
could
each
well
as
weakness of
to the
provide
in
a
the
limited
downturn.
included in
firm did
vice
Interviewing
provide
cover each stage of
what
and in the
to the
Denver office.
company response
The case write-ups
to
development
per
was
the topic of our research, and
being utilized.
the national
on the
study
of the Denver based firms,
one individual
research
this
The
the Appendix.
the learning model
response
additional
to
the
background
information on the firm.
Our
goal
wanted the
in
conducting
each interview
interviewee to tell
was
us the story of
simple:
we
how their
firm realized the market had entered a downturn and what it
did in response.
MOUNTAIN PROPERTIES
Joyce Conley, President
Company Background
Mountain Properties
management
branch of
Conley established
1958.
As
was the land development
Conley
Construction Company.
the contracting
the company grew,
and property
company in
he developed a
Paul
Chicago in
close working
relationship with a local partner of a national real estate
development company.
construction
Conley
services, and
Construction provided turnkey
the partner
handled the
land
development and leasing.
In the
early 1960s,
Conley moved
Soon after, Conley entered
Denver area.
the company
to Denver.
the development business in the
He initially concentrated on office-warehouse
and small office park
projects.
Like most developers, his
business went through a sharp downturn in the Denver market
during the
general
Midwest,
mid 1970s.
However, the
contracting operations
plus
a
development
combination of having
in multiple
company
areas in
insulated
Construction from sharp swings in the Denver market.
the
Conley
Pre-Decline Strategy
handled the development
Mountain Properties
from
Construction
Conley
and
leasing
land
of
management
operations of
through
acquisition
projects.
the
to
Conley
Construction handled the actual construction of all company
the
of
Leasing
projects.
development
projects
was
accomplished by a combination of in-house leasing staff and
with
cooperation
local
the
community.
brokerage
The
tenants in the warehouse and office projects were generally
local companies
distributors or
wholesalers,
general office
of
the property
Mountain also handled
space.
in need
management duties for all properties retained by the Conley
family.
Development projects were concentrated south of Denver near
the
highways,
1-25
the
of
intersection
and
two
1-225.
metropolitan
main
Mountain
began
area
residential
housing development in response to the strong market of the
early
As
1980s.
with
acquired the land, Conley
and Mountain
with
projects,
commercial
Construction built the projects,
marketed the finished product
However, due
local brokers.
Mountain
housing business, Mountain also had
to the
in cooperation
nature of
the
to take on many of the
final construction tasks and warranty work.
Expansion into
residential development led to a rapid growth of Mountain's
organization.
employed
sixty
At
its
employees
peak,
and
the
residential
was the
main
division
impetus
of
Mountain's growth to
a low of
seventy five employees from
eight in 1980.
Recognition of Market Decline (Concrete Experience I)
negotiations toughened.
had
market
1985
early
and
1984
in
significantly
commercial
the
realized
Mountain
softened
lease
when
able to
Although the company was
maintain nominal rent levels, often because of requirements
by
free rent
lenders,
to close lease deals.
letters quickly became necessary
the
residential division,
dropped sharply.
sales traffic
Home sales
In spite
pre-decline prices.
In
projects
at the
stopped as buyers
balked at
of the soft market, Mountain
of the
was the last year
believe that "this
continued to
work
attractive tenant
more
and
decline".
Reflection and Observation
When
Denver
the
had
Mountain
underway.
market
both
and
commercial
Since Mountain
downturn
entered the
residential
considered
in
1984,
projects
itself primarily
a
commercial developer, the company decided to get out of the
residential
development business
and
concentrate on
the
area it knew best, the commercial market.
Mountain had acquired land for
funded
to
start
construction
35
new office projects and was
when
it
recognized
the
and their
out"
the
cash
projects, so it
meet expenses and complete the
on hand to
complete
had sufficient
believed it
Mountain
projects.
Mountain should
agreed
bankers
still "penciled
the deals
Nevertheless,
decline.
market
believed there was no need for immediate, drastic action.
Construction and
Conley was
Paul
this time,
During
market decline lengthened and
as the
mounted, Paul
Conley recognized the
believed
Conley
president.
an
professional would bring experience
the
problems
Conley spent
was not
immediately
In 1986,
problems facing Mountain.
brought to bear on the
firm.
the
facing
Conley
construction company, his
decades
three
of almost
experience
Since
Mountain Properties.
his time overseeing the
most of
of both
head
problems at Mountain
need for a
seasoned
full time
estate
real
and a fresh outlook to
Conley
hired
the
new
president in late 1986 and he joined Mountain in 1987.
Although
Mountain
projects
continued
receive approval
had
recognized
to
be started.
the
New
of five people
from any
market
decline,
projects
could
(the president,
Paul Conley, Joyce Conley, or two of Conley's sons who also
worked at the company).
Project managers would often seek
approval from all of them, hoping that one would say yes.
Formation of Strategic Options
Since
home
sales
at
its
36
residential
developments
had
virtually
stopped,
it
Residential staffing
was
important
was reduced
to
cut
as quickly
costs.
as possible.
Mountain planned to continue to meet its obligations in the
residential projects, and where possible, to transfer tasks
to subcontractors.
Historically, Mountain had operated under the philosophy of
"worry
about
dollars."
believed
making
Now that
it
billed
president,
major
the
important
don't
market
to watch
worry
about
had softened,
expenses
directly
to
the
more
improvements
system did
not provide
costs and
the financial
Mountain
its accounting
to
closely.
now would
Joyce
tenants.
that
also indicated
saving
management
Mountain had previously absorbed,
Expenses that
be
money,
Conley,
needed to
system.
make
The
old
on operating
accurate information
various development
condition of
projects.
Other
options Mountain
projects, and
and
expansion outside of its
office-warehouse
believed
considered included
it was
development
pre-leased or pre-sold to
addition, since
a logical
management and
step to
traditional office
projects be
its own
heavily
In
properties, the
third party management contracts
take
at this
time.
fee development work could
to help cover overhead.
Mountain
products.
reduce the development risk.
Mountain managed
company believed pursuing
was
that new
important
build-to-suit
Third
party
provide revenue
of
found commitment
that,
having
than
better
it is
"...
new
by Joyce
space was evidenced
to leasing
statement
Conley's
Mountain's
abilities.
and leasing
its marketing
was enhancement
Mountain focused
on which
A final option
nobody, that is how you make your decisions in this type of
third
services
additional
brokers from
to
clients, act
for
taking customers,
other
prevent
and further
the
provide
would
It
business.
management
party
outgrowth of
a natural
be
Brokerage would
market."
increase cash
flow.
Implementation of Post Decline Strategy
several internal problems began
As the decline lengthened,
to
First,
surface.
development
the residential
staff,
which accounted for 65% to 75% of corporate overhead became
a large cash
drain.
were coming
Second, accrued expenses
due and Mountain did not have a cash flow accounting system
to
accurately
company could
forecast
not manage its
the pro
on line were
forma rental
Consequently,
needs.
cash needs or
were consuming.
much money its projects
projects coming
cash
determine how
Third, commercial
renting at less than
rate, and the
the
cash flow
50% of
from these
projects could not service the debt.
Mountain
implemented
a
number
However, due to management's
of
corrective
actions.
belief that the decline would
be short lived, these actions
were not taken rapidly.
The
actions implemented fell into the following categories: get
out of unprofitable
to sell
new
or lease
products
businesses, increase marketing efforts
existing inventory of
in
the
Denver area,
products, produce
and
produce
current
products in new markets.
To
reduce cash
losses, Mountain
began to
curtail its residential development
were
started
unless
they
were
cut staff
effort.
No new houses
pre-sold.
Prices
brought in
houses
were
to
sold
augment the
off,
existing
Mountain
were
Sales closers
reduced on existing inventory to spur sales.
were
and
team.
reduced
As
overhead
the
by
subcontracting marketing and maintenance services.
The first commercial development
speculative development.
projects that
Instead,
were pre-sold
Mountain developed only
or heavily
to develop a small
led the company
with
response was to cease all
This
retail shopping center
Mountain undertook
a partner.
pre-leased.
the deal
only after
raising the equity capital to cover the cost of the land by
pre-selling
stores.
a
number of
Another
managers employed
pads
for
free standing
response, undertaken to keep
was to search out
retail
the project
new markets.
Through
the construction company, Mountain was able to get involved
with
office-warehouse projects
in Baltimore
and Orlando.
Like other new development projects, these were pre-sold or
substantially pre-leased.
Another
management response
management
managed
effort.
to
occupants.
was to
Existing
attract
new
improve the
properties were
tenants
and
property
intensively
retain
existing
To increase cash flow, Mountain began to manage
and lease property for third parties.
Despite the
improved management
properties
fell,
and
Permanent loans on the
Mountain had
loans were
had
to
be
properties were non-recourse, hence
successfully renegotiated,
lenders.
but in
revalued to current market
reducing
flow from
renegotiated.
considerable leverage with its
properties were
greatly
loans
services, cash
Mountain's
net
worth
All
the process
prices thereby
and
ability
to
Mountain Properties
in
finance new projects.
Joyce
Conley became
president of
1989, succeeding the former president who had quit in 1988.
Joyce
remained
opportunities in
optimistic
about
the Denver area.
future
She
development
indicated that the
downturn had taught Mountain many lessons which would stick
with
the
following:
company.
Mountain
an
maintain
would
improved
structure projects to limit risk,
earned
rather
increase equity
than
roll
concentrate
on
accounting
system,
the
take profits as they are
them over
levels in all future
into
new
projects,
development projects
to 20-30%, and stay out of residential development as it is
too
capital intensive.
Joyce
indicated
that they
"are
regrouping
now"
and
"maintain
will
until
things
[the
market] change".
THE SOUTHWICK COMPANY
Richard Ford - Regional Vice President
Company Background
The
Southwick Company
was
a family
owned, full
service
national development firm concentrating on investment-grade
office buildings.
These
properties were generally located
in or near major cities and often served as headquarters or
regional offices for Fortune 500 companies.
western
regional
office
of
responsible
firm,
the
Denver was the
for
development and operations west of the Mississippi River.
Pre-Decline Strategy
Southwick entered
develop
a
location.
full swing,
were
major
in the late
the Denver market
office
tower
at
a
premium
1970s to
downtown
According to Richard Ford, "with the oil boom in
many large national
clients,
were making
Denver." Southwick
plans
wanted to be
companies - some
to
of whom
move operations
a part of
to
its customer's
plans and be ready to serve their clients' future needs.
was divided into two groups -
The office staff of fourteen
marketing and
leasing, and project
the marketing
staff concentrated on marketing
project and
Southwick's downtown
in third
project management team was
tightly focused on
However,
property.
under contract, but when
Land was put
locations.
in
buildings
the
locations.
southern suburban
and in
midtown area
building neared
at other
for office
considered
were
as that
to look
Southwick began
completion,
Denver
did not engage
Like the marketing
the downtown
Proposals
and leasing
activities.
party leasing or brokerage
staff, the
Initially
management.
the market downturn
began, these projects were abandoned.
Both
national firms with an
were
often
with clients
local
and local
leasing
agents.
directly
since
was, of
course,
Southwick
its property
However,
if
When
to
sales people
would
was
needs.
done
office.
the Denver
marketing personnel
to meet the clients'
clients
brokers.
Denver, national
clients
bring those
There, national
tower.
as
ongoing relationship with Southwick
space in
looking for
would
downtown office
Southwick's new
tenants for
sought
were
local firms
and
clients
national
would work
Prospecting for
by local
Southwick
approach local
not
outside brokers
clients
listed with
other
approached
them,
Southwick would consider the deal.
Recognition of a Changing Market (Concrete Experience I)
getting out
of hand.
also began
Concessions
trouble.
was in
the market
knew
Southwick
rapidly,
dropping
rents began
when
1984,
By
and law
such as accounting
Tenants
firms that had been expanding fast and demanding more space
at
became
before
and
attractive packages
space.
attractive deals of their own.
area fell from
years
of lower rent,
free rent
tenants into
often
would
landlords
Current
as two
landlords
lure new
to
tenant improvements
much
better
Prospective
expired.
leases
existing
would offer
space as
expensive
and less
they
Suddenly
looking for
began
They
price sensitive.
quality
growing.
stopped
prices,
ever higher
empty
counter
with
Gross rents in the downtown
a peak of $30- $35 per
square foot in 1982
to $10-$12 per square foot in 1985.
According to Ford:
When oil prices began to fall in 1982, major oil
anything
leasing
had been
that
companies
Then, they
available vanished from the market.
began to transfer Denver based personnel to other
it became
sublease space as
locations and
available.
Reflection and Observation
Southwick's
management in
Southwick's
before
asking
Options
presented
regional
office and
projects
in other
to
the
chairman
a
for
chairman were:
leave Denver,
western
many options
Denver considered
1)
2) pursue
cities, 3)
decision.
close
the
development
expand into
third
party
management and
brokerage, and
4) establish
a real
estate consulting practice.
Since the chairman believed in
the long term prospects for
the Denver market, he chose to
keep the office open and establish Southwick as a committed
member of
the Denver
market.
Subsequently,
he refocused
the Denver office on four areas:
1)
Enhance the leasing effort for the downtown office
tower,
2)
Locate
and
properties
acquire
with
either
cash
flow
portfolio, or distressed
investment
for
the
grade
Southwick
properties that could be
turned around,
3)
Explore development opportunities in other western
cities, and
4)
Establish
third
party
management
and
leasing
relationships.
Formation of Strategic Options
Southwick's
number
downtown building.
one
priority
lease
the
new
Cash flow had to be increased enough to
make the office self supporting.
been leased,
was to
Only after the tower had
could Southwick's strengths in
property management
be applied
brokerage and
to the general
market and
thereby generate additional cash.
Acquiring
additional
properties,
either
for
long-term
market offered
A declining
well
until the
portfolio
to acquire
at
distressed
property could
Such
prices.
many possibilities
locations,
in good
property,
built
second priority.
turnaround projects, was a
investment or
be
held
market recovered,
in the
Southwick
and then
it could
be sold.
New projects outside of Denver would have to be started, or
staff would have to
project development
Increased travel and customer contact might
other offices.
property acquisitions that met
lead to
be transferred to
the new objectives
for the group.
Expanding into third party brokerage and management offered
First was the chance to
Southwick two major opportunities.
diversify and
contact with
gain additional revenue.
Second, increased
produce leads on
customers and brokers could
for the
distressed property
property or
investment grade
Southwick portfolio or new development projects.
Implementation of Post Decline Strategy
Southwick's
downtown
project
more
were
Since
Floor
divided and
other
market
intensively.
tenants were courted two or
expired.
to
was
move
first
brokers
were
45
existing
Prospective
large
more years before their leases
plates that were designed
built-out
its
to
for large users
attract smaller
constantly
trying
tenants.
to
steal
keeping
retention
tenant
tenants,
became a
Much
occupied.
the building
more attention
was
leased competitive
keeping the space currently
focused on
in
factor
critical
with alternative space in other buildings and with sublease
space in Southwick's own building.
into new
to branch
also began
entered the
own
had 800,000 square feet
Southwick
building,
and brokerage
third party property management
The Denver
business.
its
leasing
in
Building on
and other investors.
for the Southwick family
success
office looked
The
areas.
properties and turnaround properties
into investment grade
its
Southwick's Denver office
began to lease up,
As the tower
successful and
office was
in 1989
of third party management business
and 200,000 square feet of third party leasing contracts.
Since the Denver office market
development efforts in that
because
Denver was
United States,
the
was in decline, all further
regional office
for the
office development projects in
western cities could be considered.
noted, "the
However,
area were abandoned.
oil bust affected
western
other major
Unfortunately, as Ford
most of the
We
southwest.
looked in Seattle too, but no feasible deals were found."
When the
tower was complete, the
The office which had been
was transferred out of the area.
staffed
marketing
with 14
people in
and leasing
1981,
people
project management staff
was reduced
by 1985.
to just
However, as
6
the
third
party
brokerage
successful, the
and
management
office gradually
effort
added people.
became
By 1989,
the office was back up to a staff of 14 and was profitable.
As Ford reflected
eight years,
on the lessons he learned
three things
homework and know
exogenous
market.
came to
your market.
factors such
Finally,
as the
use outside
your market and check
mind.
over the past
First,
Second, keep
price
in mind that
of oil
resources to
your assumptions.
do your
can kill
a
help forecast
"Maybe there were
some signals out there someone else might have seen."
PATTERSON AND COMPANY
Steve Patterson, Jr., President
Company Background
founded Patterson
Steve Patterson
Kansas
its
City.
In
1970,
headquarters to
Denver.
parcel.
company
Patterson
with the
Analysis
1967 in
relocated
of properties
in
to purchase a large tract of
suburbs of Denver.
The company
development of an office
park on that
the southeastern
concentrated on the
and Company
Patterson
the Denver area led Patterson
land in
and Company in
was
ability
a
fully
integrated
to handle
development
everything from
the
acquisition
and
development
of
raw
land,
to
tenant
build-out.
on its own, it
acquired the land
While Patterson
willing to develop it without equity partners.
office
buildings were
venture
addition,
partners
developed with
who
provided
Patterson constructed
clients who purchased the
approach
equity.
In
buildings for
large
buildings upon completion.
Patterson's
reduced
Speculative
institutional joint
"patient"
two
was not
development
risk
This
while
achieving the build-out of the office park.
Pre-Decline Strategy
When the Denver office market
Patterson was
well positioned
buildings were in the
buildings and
quality
stages of build-out
planning stages.
In
developers, Patterson differentiated both
contrast to many
its
The company's
to benefit.
was in the early
suburban office park
and additional
expanded in the early 1980s,
office
commercial office
park by
developing the
environments.
Steve
finest
Patterson
stated the objective:
to create office environments of unsurpassed
to offer distinctive
beauty and efficiency,
designs that capture the eye and the imagination,
and to make a lasting contribution to Denver's
business community.
Patterson
was
successful
at creating
these
distinctive
was
it
and
projects
awards
several
rewarded with
for
excellence in architectural and landscape design.
To enhance the office park's contribution to the community,
Patterson and Company incorporated an outdoor art museum on
the
buildings in
its
grounds of
weekend
Patterson
office
business
trips.
In
constructed
The
park.
office park.
The
popular attraction for school outings
outdoor museum was a
and
the
an
addition
to
open air
amphitheater
in
its
music
to
the
brought
amphitheater
community
and
was
the
art
a
by
operated
museum,
national
entertainment company on Patterson's behalf.
Marketing and leasing activities were conducted by salaried
in-house
personnel.
Company involved not
tenant finish
but also the
only the leasing agent,
management department
tenant's needs.
Patterson believed
an integrated service package
the real estate
Patterson and
marketing space,
division and property
to fulfill prospective
in providing
When
needs a tenant may
to satisfy all
have, thereby creating
maximum real estate value for its customers.
Recognition of Market Decline (Concrete Experience I)
In 1983,
Steve Patterson knew
when "large
tenants vanished".
large blocks of
the market had
The major
spaces had been the oil
regional telephone company created
turned soft
tenants leasing
companies and the
by the breakup of AT&T.
When those
users left
the market,
there were
not enough
smaller tenants to fill the space coming on line.
Reflection and Observation
Patterson
decided
development
to
of high
maintain
quality
addition, management
its
commitment
suburban
to
the
office space.
In
wanted the company to
remain a fully
integrated developer and to offer additional services where
appropriate.
Finally,
since the Denver office
market was
declining, Patterson believed it was wise to diversify both
geographically and by product mix.
Formation of Strategic Options
Patterson
planned to
follow a
reduce market and financial
conservative game
risks.
plan to
A market decline would
be avoided and profits would be locked in by selling assets
that would
reduced
bring a
by using
property
and by
development
additional
pursued
the proceeds
utilizing
projects.
risks
speculative
projects
good price.
current market.
financial
The
company
buildings.
and development
as a
to pay
by cancelling
office
source of
Financial risk
of
off debt
partners in
would avoid
all
plans
However,
new product
new development
would be
on other
future
assuming
to start
new
build-to-suit
types would
projects in
be
the
New geographic areas would be explored for
opportunities to develop office space.
Projects underway followed a strategy based on designing to
upscale
market needs.
level of
quality and
Patterson's
customers.
premium
tenant
innovation that
buildings
Thus,
rent
maintaining
This objective
the
levels
higher rent
allowance
costs
and
and
value
could
property
levels
a high
would differentiate
provide
properties
and
focused on
for
maintain
values.
would require
lead to
a
its
their
However,
additional
longer
lease-up
period.
Expanding
into
third
party
Patterson's commitment to
office
products.
insure quality
standard
In-house
tenant fit
construction and control
in that
fit
into
developing high quality suburban
Branching into cleaning services
high
businesses
area
up services
would
during build-out.
would let Patterson set a
and
give customers
another
reason to renew their leases.
Patterson also
believed that
overhead expenses had
to be
reduced.
People that did not fit would have to leave.
by others.
would be absorbed
Their duties
Increased efficiency and
the elimination of
non-essential tasks would keep the ongoing work
If
a skeleton
staff.
load
manageable by
additional help were required for a project,
contract employees would be hired as needed.
Implementation of Post Decline Strategy
Soon
after
the
market
softened,
Patterson
sold
its
headquarters
building
staff, which
had grown during the
to
was reduced to earlier
a large
levels.
corporate
user.
The
market expansion years,
Design efforts became more
focused on "designing for the market place".
In spite of
reduced rental rates in
maintained
lease
rates
in its
believed the level of quality
justified.
However,
declining market
To
provide
the market, Patterson
buildings.
company
was such that the rents were
maintaining
the lease
slowed the leasing
additional
The
value to
rates
in
a
process considerably.
new
tenants,
Patterson
increased the value of tenant improvements.
Tenant retention also received renewed focus.
surveyed
periodically
to
identify
and
Tenants were
correct
deficiencies.
As
dates, tenants
were offered competitive upgrades
current
leases
approached
any
expiration
to their
existing space to encourage lease renewal.
To
further
product
enhance
base,
Principle among
the
office park
additional
amenities
those amenities
and
diversify
were
was a new
its
provided.
athletic club,
developed by Patterson, which was located near the entrance
to the park.
Membership was
the general public.
led
Patterson to
available to park tenants and
The success of the
explore
clubs in other areas.
the
athletic club has
development of
additional
Patterson
was
during
the downturn.
office
buildings for
office park and was
projects.
that
The company
were not
large
its
clients within
looking to do additional build-to-suit
by
in
several
Patterson
learned of
an
able to take
opportunity
After
bust.
midwestern
cities,
in Cleveland.
over a downtown
a
other geographic
the oil
impacted
opportunities
was at
in Denver
development
decided to explore
examining
company was
work
build-to-suit
constructed two
large corporate
Since office
standstill, Patterson
areas
in finding
successful
The
office project,
secure approvals and begin construction on the city's first
new office tower in ten years.
When
asked
what advice
he
would
give other
developers
facing a declining market, Patterson said:
Always build the best product for the market
place within your budget. Always use equity
unless you have a credit tenant with a long lease
so that you can ride out the cycle. Have other
operations for cash flow. Only have a skeleton
where possible, use
staff: sub-out projects
employees.
contract
JAMES M. WINCHESTER INC.
Mike Winchester, President
Company Background
James
His
Denver.
in 1954
his company
established
M. Winchester
the company in
son, Mike, joined
in
1976, soon
after graduating from college.
Winchester's
land and zoning the
subdividing the
them
to
lots, Winchester sold
the
constructed
1960s and
in
the
were held
in
the family
approximately
After
parks.
actual
The company also developed approximately 350
units
apartment
units
who
developers
office
improvements.
office
and
buildings
office
suburban
for
development
was land
business
primary
These
1970s.
and by
portfolio,
were owned
200 units
early
free and
1989,
clear.
The
complexes was a major element
cash flow from the apartment
in the firm's conservative financial structure.
Risk
management
development
equity,
low
was
strategy.
debt
key
a
concept
financial area.
the
Winchester deliberately
deals.
"Leverage only
markets with inflation." The company
the
of
company's
did
works
high
in
hot
did not take risks in
Winchester would
accept the
timing
and marketing risks inherent in land development, but would
not compound those risks by
taking on high levels of debt.
to avoid
the desire
Mike illustrated
debt when
he said,
"people do desperate things when debt is big".
What
debt the
note on the
venture, a
construction
in a
to the
venture,
joint
company would contribute the land free and clear.
case, if a project
in either
not sign
land would be subordinated
Sometimes
loan.
a
into a joint
If Winchester entered
personally.
for loans
structured in
his father would
Mike and
conservative manner.
was
did utilize
company
the
However,
got in trouble there
was no
recourse to the company or to the Winchesters.
Pre-Decline Strategy
the early
During
development.
It anticipated
the Denver real
growth of
land close
them,
By
Winchester had
ready for construction.
of
acquired raw
estate market and
to Denver shortly before
reached that area.
and rate
direction
the
land
concentrated on
1980s, Winchester
the construction wave
the time development demand reached
the
land
subdivided, approved
and
sales were used to pay
Funds from
off debt or to buy additional land.
When
Winchester
than
justified by
bids to
often
believed
office rents,
acquire the land.
out
that land
bid them.
As
it would
Consequently,
a
were
prices
result, the
not raise
its
other developers
company's
purchases slowed down as the market heated up.
55
higher
land
Occasionally,
Winchester
would
joint
building development and construction
who
would also
be the
office
with a money partner
prime tenant.
total of 350,000 square feet
venture
In this
manner, a
of office space was developed
by the firm during the early 1980s.
Winchester
also
development
land
entered
field in
development,
individual
single
early
Winchester
subdivided
in
participate
of its
the
By
residential
land
joint venture
utilizing
into
with a
then sold to
build
did not
Winchester
partners,
commercial
pre-sold, the
Any remaining lots were
homes.
infrastructure
residential
Like
could be
in a
residential developers.
speculative
family
1980s.
If homes
construct homes
general contractor.
other
the
house lots.
company would
the
the
was able
Winchester
development
staffing
while
to
keeping
overhead low.
Recognition of Market Decline (Concrete Experience I)
the
building frenzy
Winchester
believed
unheard of
prices being paid
indicated an imbalance in the
respects it was
to be true.
and
for land in the
previously
early 1980s
real estate market.
a "gut feeling" that things
In some
were too good
on the
area was
the Denver
how dependent
company recognized
that the
Mike indicated
He understood
oil industry.
that the economics of the synthetic fuel industry were such
that
oil
prices of
$45
barrel were
per
Therefore,
synthetic fuel production.
necessary
for
when the OPEC price
accords began to unravel in 1982, Winchester became wary.
A second indicator of an impending decline was the "frenzy"
activity and
of building
According to
land acquisition.
Mike Winchester, "developers were building office space for
and selling it for $130 per
a total of $90 per square foot
the
prices paid
developers
were
Winchester
did
pro formas you
of
expect
not
would
wanted to see" thereby
activity
which
materialize.
Mike
allowed you
that "computers
acquisition
that
rents
higher
on sharply
betting
By examining
became obvious
also
land, it
for
Winchester believed
frenzy
good to be true".
This was too
square foot.
to build
contributing to the
and to
the
problem
of
overbuilding.
Reflection and Observation
Winchester's primary business since
commercial land development.
its inception had been
Management believed that well
located land
would be
a profitable product,
the inherent
risks in
land acquisition.
believed the
"reward window
open a very short time, and
but realized
Mike Winchester
[the opportunity to
sell] is
as a result management of debt
and overhead really is
risk
by
limiting
acquisition.
funded
key".
the
Equity
internally
Winchester tried to minimize
level
of
debt
used
for
used for land acquisition
or
raised
from
was either
wealthy
investors.
In addition,
the
company
speculative
development,
but
would
land
individual
did not
undertake
develop
pre-leased
commercial structures and pre-sold homes with joint venture
partners.
Winchester deliberately
tried to limit overhead
by forming partnerships and utilizing its partners staff to
complete a project.
Formation of Strategic Options
Winchester had a conservative philosophy, and believed that
detailed market
knowledge was
land
Winchester
business.
critical to success
had
to know
economic and geographic expansion in
in advance
of development.
diversifying
considered
management
did not
As a
its
trends in
local
order to buy raw land
result, Winchester never
into
markets
The Winchesters
believed
operations
know well.
in the
they "needed to know their backyard" and they could only do
so in Denver.
Mike
Winchester
philosophy
maintained.
a basic
and
had
the
believed
served
it
well and
The Winchesters
fundamental
Winchester also
company's
that
long
it
standing
should
be
believed land development was
business that
believed there
they
was a short
understood.
market window
In fact, the Winchesters
down debt.
taken and used to pay
to taking
was equivalent
a loan
paying down
believed
profits should be
When the window appeared,
for selling.
a
profit, even though the cash went to the lender.
also
Winchester
pyramid.
company believed quality
The
of
a
quality
was a key
to real
the concept
in
believed
estate and that better quality products have the ability to
up
pull
market.
the
high
believed
Winchester
quality
projects would be successful even during the downturn phase
of a
consider such
willing to
cycle and was
real estate
development opportunities.
Implementation of Post Decline Strategy
In
the
response to
and
began
market.
The
entirely
development
residential
home
portfolio of
commercial office
feet
50,000
to
institutional
used to
free and
excellent
partner.
pay down
used their
square
debt.
profits to
clear.
assets
and
feet
was
out
get
from these
to
its
sales
were
land inventory
viewed its land
to
its
the Winchesters
of their
willing
the
350,000 square
selling
by
of
reduced
company
this method,
make much
The company
to
space from
Proceeds
By
office
Winchester stopped
downturn,
hold
holdings as
onto
them
indefinitely.
An unanticipated
opportunity arose
when a
local property
management
third
company
party
bankrupt.
management
additional fee
acquired
went
was
an
company's
staff
Initially, Winchester managed over
space and had a
the third party management
Winchester's
and
the
abandoned.
stay
party
out of
so Winchester
and client
base.
However,
business proved to be volatile.
client sold
the properties
business
had
experience, Winchester
the third
earn
one million square feet
management
After that
to
profitable operation.
major management
third
believed
opportunity
revenue during the downturn,
the bankrupt
of office
Winchester
party management
to
be
decided to
business in
the
in
the
future.
had
Winchester
development
apartment
nature,
of
the
what
project.
it
In
believed
keeping
entered the
the company
the
believed
Winchester
high
product would succeed even in
project
participate
was
with
a
high
its
quality
and
quality
conservative
a partner.
project with
nature
a weak market.
construction
was under
to
opportunity
of
the
In 1989, the
Mike Winchester
was
extremely optimistic about its prospects for success.
Winchester continues to believe
for
the
continue
Denver
estate market.
real
to proceed
in the long-term prospects
in
a conservative
concentrate future development efforts
component of
into the
the market.
same businesses
company
will
fashion and
will
The
on the high quality
plans to
get back
it pursued previously,
but will
The company
wait until it believes the timing is right.
CONCLUSION
From
the
four cases
recognition of
to 1985.
presented
the decline varied in
that
that
timeliness from 1983
incomplete to a reaffirmation
Firms considered
and policies.
of long-term company goals
options
see
we can
reflection about corporate goals
Observation and
and philosophies ranged from
strategic
above,
focused
on
a
well
known
and
understood "backyard", to a nationwide search for projects.
Implementation of
the post
firms in business, but some
their responses
decline strategy kept
firms prospered as a result of
to the downturn, while
be struggling.
61
all the
others appeared to
CHAPTER FOUR
ANALYSIS
The analysis begins with a
consideration of what each firm
did at each stage of the experiential learning model.
indicates
market
how companies
downturn,
weaknesses
of
planned
their
illustrates
and
firms at
various
responses to
the
strengths
and
the
stages
This
of the
learning
model.
Case Study Analysis Within the Experiential Learning Model
Recognition of Market Decline (Concrete Experience I):
Real estate
declines.
developers must
Early
recognition
effective decision making
new strategies.
be able to
indicated
The four firms we
that
The fourth
critical
to
interviewed recognized
stages.
their primary
decline came through changes in
to 1985.
is
and successful implementation of
the market decline at different
firms
of change
anticipate market
Three of the four
recognition
of
the
the leasing market in 1983
firm recognized the
imminent market
change in 1982, before it affected the leasing market.
For Mountain
Properties, the
first noticeable
tougher negotiations followed by a
to
close deals.
Southwick did
until the lease rates at
both
firms
change was
need to offer free rent
not recognize
the change
its project began to fall.
recognized the
decline
only
when it
Since
became
generally known, neither firm was able to avoid the ensuing
sharp declines in property value.
Patterson recognized
reflected
The
in the
company
space.
the impending
leasing
focused
When the
actively leasing
on
market or
supply
demand from
would
recognized the
it was able
and
space in its suburban
drive
prices
decline before
in building
demand
large users,
dry up, Patterson knew that the
pipeline
decline before
it was
values.
for
office
who had
been
projects, began to
supply of new space in the
down.
Since
rent levels
to sell one of its office
the
company
were affected,
buildings before it
fell in value.
Winchester recognized impending change
before
it was
market.
As
reflected
a land developer,
supply and demand of
land being
supply of
the
amount
exceeded
of new
prices
or the
the company focused
leasing
on the
Winchester recognized that the
land.
purchased by office
space
office
the anticipated
experience,
in land
in the land market,
it would
demand for
Winchester knew
that this
developers, and
support,
office space.
far
From
fundamental market
Since
vacancies.
lower
Winchester
to sell
was able
rates and
rental
the
recognized
its office
85% of
higher
decline
were affected,
and rent levels
estate prices
before real
it
lead to
would
imbalance
space before
it
declined in value.
Our
research indicates
recognition of
that early
a real
estate market decline requires looking at indicators of the
estate segments.
Since land development is
of the production cycle,
of
future
building
activity.
An
understanding
of
the
sales activity coupled with an
demand
potential
of
the beginning
it provides the earliest evidence
supply implications of land
understanding
various real
and demand in
between supply
future balance
provide
can
early
recognition of the future direction of the market.
Reflection and Observation
and observation indicated two
The literature on reflection
key
considerations: carefully
setting
defining your
To some
company objectives.
firms considered what businesses they
not
all established
extent, all
of the
wanted to be in, but
stated corporate
clearly
business and
objectives
and philosophies.
Mountain decided
development
it wanted to
business because
However, it did not sharply
get out of
it had
the residential
become unprofitable.
focus on a specific market and
product segment, but focused on
can
be seen
in
the need to produce.
Mountain's goal
of
keeping its
it believed
development opportunities in what
seeking out
were stronger
markets.
project
objective by
The company pursued this
managers employed.
This
Rather than determining
a company
goal or philosophy to pursue, Mountain chose to concentrate
on familiar products that had been profitable in the past.
inability to carefully reflect
A major cause of Mountain's
As
on company goals and philosophy was lack of leadership.
was discussed in the case, the chairman, Paul Conley, spent
the majority
left the
of his
time running Conley
supervision of
children - none of whom
strong,
historically
Mountain Properties to
his three
had absolute authority.
Without a
Mountain
leader,
focused
successful,
Construction and
reverted
to
rather
than
familiar practices
reflect on market changes and innovate accordingly.
Richard
different
Ford,
position
regional vice
the company or
President
Vice
than
of
other
the
president without
of alternatives and
to set
an ownership
in
a
As
a
interest in
the position to
He could propose a set
recommend a course of
goals for
was
executives.
the project, he was not in
set corporate goals or philosophy.
authority
Southwick,
action, but the
the corporation
and regional
chairman.
Thus, Ford was prevented
from using his personal knowledge
of the market to reflect
office rested with the
upon and optimize
the strategy of the Denver
65
office as if
were
an
independent
company.
He
proceeded
from
the
concrete experience stage of the learning model directly to
the formation of
strategic options.
drawback
of
regional
operations
national
real
are
This appears
estate
forced
firms.
to
to be a
Individual
suboptimize
their
strategies to accommodate the goals of the corporation.
In contrast, Winchester and Patterson had strong leadership
and were sharply
market.
focused on the needs and
This was reflected
stated corporate
For
Patterson,
commercial
In
the case
of Winchester,
developing land in the
it
was
office
developing
environments.
demonstrated
by
architecture
and use
philosophies
were the
determine the
by an established, and clearly
philosophy.
the philosophy was
health of their
Patterson's
the
in its
result
of
finest
quality
was
clearly
This
commitment
of art
direction of
path of growth.
to
distinctive
developments.
These
repeated reflection
each business and
to
guided both
companies through one or more market cycles.
Strategic Options
Each
of the
additional
four firms
speculative
and Patterson planned to
office development.
planned to
development.
planned to
Mountain
cease
and
curtail new residential development,
Winchester planned to
while Southwick
indicated they
In
stop speculative
addition, Winchester and Patterson
sell office buildings
and use the
proceeds to
pay
down
existing
designed
to take
debt
levels.
profits before
These
decisions
the market
were
declined too
sharply and to minimize financial risk.
In an effort to
continue development activities during the
downturn, Mountain
income would
buyer,
fee
and
project
company,
pursue build-
development offered
advantages: development risk would
three major
the
Build-to-suit
opportunities.
to-suit
to
and Patterson planned to
be
development
be shifted
generated
teams
would
for
the
be
kept
employed.
Denver market no longer
Since the
teams active, Mountain, Southwick,
to keep the development
decided to expand their
and Patterson
to
nationwide
develop
to
find
office and
planned to
markets
in
which
for an outstanding development
focusing on development
it
could
Southwick
opportunities west
Patterson, on the other
look
to
planned
office-warehouse products.
explore development
Mississippi river.
to search
strong
development efforts
Mountain
areas.
geographic
other
offered enough business
of the
hand, planned
opportunity.
By
projects, Patterson could consider
niches within larger markets that were generally thought of
as
unattractive,
were
but
less
competitive
and
potentially more profitable.
Three of the developers interviewed planned to look for new
products to
develop and
services to offer.
Mountain and
Southwick planned
to enter the third
leasing
in
business
the
Denver
customer
were not
that
and a
facilities,
need for
athletic
club,
and
high quality
maintenance and
developed an
maintenance
in-house
expanded
served.
quality athletic club
result, Patterson
As a
custodial services.
look for
adequately
being
a lack of high
Patterson discovered
also
Southwick
planned to
Patterson
possibilities.
needs
area.
income producing properties or
planned to acquire existing
turnaround
party management and
and
custodial operations to include third party business.
firms decided to increase efficiency
Finally, three of the
by enhancing
move
serve
would
or
profits
would
their management systems and
two
cut losses
position
the
to
Patterson
planned
marketing
capabilities.
control
over costs
Patterson
planned
strengthening
during
the
concentrate
Mountain
by improving
its
increase
would
2)
downturn, and
more
it
profitable
Mountain, Southwick and
expansion.
to improve
it
faster,
for
firms
growth during the next
1)
purposes:
This
controls.
on
improving
systems.
its accounting
management, maintenance,
gain
to
also planned
depth
their
of services
and tenant
by
design
and build-out capabilities.
The planned
management responses represent four
priority; they are summarized in Figure 4.
levels of
FIGURE 4
FOUR
MANAGEMENT
LEVELS OF PLANNED
RESPONSE TO A MARKET DOWNTURN
LEVEL ONE
*
*
*
Reduction of market and financial risk.
Sell some of existing holdings.
Curtail further speculative development.
LEVEL TWO
*
*
*
*
Shift market risk to buyer with build-to-suits.
Seek development opportunities in better markets.
Geographic diversification.
Find new product types unaffected by market decline.
LEVEL THREE
*
*
*
Horizontal product diversification.
Third party management and leasing.
Third party maintenance and tenant improvement work.
LEVEL FOUR
* Improve internal systems and operations.
The first level was reduction of market and financial risk.
market value, developers
To minimize
losses in
properties
before
recognized.
Consequently,
some of their holdings
before values
to be used
market
the
declined.
decline
is
all four firms planned
must sell
generally
to sell
and curtail speculative development
Net proceeds from
to pay down existing debt
risk to the company.
69
the sales were
and reduce financial
and
reducing market
After
level
risk, second
financial
responses concentrated on continuing development operations
with a
lower degree
market
risk
to the
developments.
A
of risk.
by
buyer
strategy was
One
moving into
build-to-suit
seek development
was to
second strategy
to shift
opportunities in markets with an acceptable level of market
The firms planned to accomplish the second objective
risk.
through
into stronger
geographic diversification
into new product types
and expansion
markets
that were unaffected
by the decline in the Denver market.
Third
businesses
most
to
was
response
common
into
new
activities.
The
diversifying
with current
closely aligned
expand
third
into
business for its
seek third party
party
of one firm
A secondary response
leasing.
management and
was to
involved
strategies
level
maintenance and
tenant build-out operations.
responses concentrated on
Fourth level
operations
their
marketing and
was intended to
lease
Three firms
and systems.
its own
improving internal
planned to
leasing capabilities.
This activity
improve each company's ability
products,
and
improve its third party services
for two
of
as well.
payroll expenses
by a
to reduce
layoffs, transfers,
employees or subcontractors.
70
to
In an effort to
costs, three companies planned
and use of contract
to sell or
the firms,
control overhead
combination of
enhance
Finally,
effort to
in an
firm planned
its accounting
reorganization of
a complete
flow, one
and cash
improve cost control
operations.
Implementation of Post Decline Strategy
four
All
firms attempted
development and
area.
However,
developers.
cease
this was
not
possible
Properties was
Mountain
the Denver
of
for all
in the midst
the
of the
could not
The infrastructure was
houses were
speculative
place,
speculative
project and
a residential
simply abandon or sell the project.
in
all new
projects in
complete existing
phase of
production
to
finished,
additional
units were under construction, and units that had been sold
required warranty work and other
result,
over a
span of
Nevertheless,
its construction activity.
Mountain sold
four years,
the inventory,
and finally
sales and marketing effort,
subcontracted the
As a
efforts and
its sales
to intensify
Mountain had
maintain much of
post sale services.
subcontracted the warranty and maintenance work.
Southwick, which had several additional office developments
in the planning stages, abandoned the proposed projects and
let land options expire.
development
building
plans
within
its
curtailed
and
activity even
pre-sold homes.
Winchester stopped all commercial
though it
only had
been building
stopped speculative development
Patterson
office
residential
further
park
71
and
concentrated
on
other
activities.
In addition,
both
Winchester and
Patterson
were successful at selling existing properties and used the
proceeds to reduce debt.
Mountain and Patterson
pursued build-to-suit opportunities
in the
but only Patterson
Many
of
Denver market,
build-to-suit opportunities
land.
Patterson,
established office
Patterson
require prior
its
land
two
large office
for major corporations.
ownership
holdings
park, was well situated.
completed
office park
with
was successful.
in
an
As a result,
buildings
Mountain
in
the
did not own
land in existing developments and was unable to attract any
build-to-suit work.
Three of
the firms had planned
to
development
find
projects in
finding
opportunities.
deals,
overbuilt.
Mountain
successful
at finding
states.
and
as
attractive
market
that
On
development
had
been
the
cities
were
were
both
Patterson, however,
in other
known growth markets and found
development opportunities that it
an
many of
examined
unsuccessful at
development opportunities
Mountain went into
pre-sell or pre-lease.
Southwick
cities, but was
many western
attractive
geographic diversification
was able to successfully
the other hand, Patterson found
in
opportunity
overlooked by
other
Cleveland,
real
a
estate
development firms.
All four firms
entered new businesses in
the Denver area.
Mountain and Southwick took the path of expanding a current
business to
a new set
area.
market
Southwick
in
experience
successful
captured a
in its
off
leveraged
and
leasing
and went on
downtown tower,
Mountain
party management contracts
of third
modest amount
suburban
of customers.
its
its
managing
to capture major
third party
leasing and management contracts.
entered an
Patterson
quality strategy
its high
new
entirely
The company
new market.
to a
adapting
business by
developed an architecturally distinctive athletic club near
with its office
As
its office
park.
refused to
compete on price,
strategy, Patterson
but chose to deliver
a high
quality product in an area without similar competition.
management business
Winchester
of business.
from the
defunct firm, retain
party
management firm
when a local property
went out
third
entered the
Winchester
unplanned,
Although
was able to
the client base,
hire staff
and enter
the new business with few start-up costs.
by
improving
Southwick,
and
marketing
and
1989,
their
business
leasing
and financial
these
systems
Mountain,
practices.
successfully
Patterson
to
capabilities
Mountain also
competitive.
accounting
the market decline
firms chose to respond to
Three of the
made efforts
improved
their
become
more
to improve
forecasting systems,
were
still
not
but as
operating
its
of
to
and
resources to
enhanced its
only
capabilities, but
management
property
those
Patterson
satisfaction.
management's
partners.
The company also
build-out
capabilities
to
applied
by Patterson
properties owned
asset
or its
strengthened tenant design and
bring
Additionally, Patterson actively
and build-out business in other
that
work
in-house.
sought third party design
buildings both in and near
its office park.
Analysis of Fit Within The Learning Model
The subject
firms followed the stages
learning model
stages.
Figures
5 through 8
taken by the firms at each
of the four
to differing degrees.
indicate the steps
of the experiential
FIGURE 5
MOUNTAIN PROPERTIES
Concrete Experience I
lease negotiations toughened
free rent concessions needed
Concrete Experience II
four years to get out of residential
have stayed out of spec. comm. development
successful geographic diversification
no build-to-suit work
successful pre-sold retail project
marginal third party mgmt. contracts
internal systems need further improvement
;1
Strategy Implemented
Reflection
& Observation
got out of residential
geographic diversification
pre-sold retail project
third party management
accounting system upgrade
improved marketing abilities
prevented by
leadership problems
Strategic Options
N
get out of residential
4l-
ceased spec. comm. development
geographic diversification
build-to-suits/pre-sold development
third party management
improve internal systems
enhance marketing abilities
FIGURE 6
THE SOUTHWICK COMPANY
Concrete Experience I
lease rates fell
rental concessions increased
tenants start lease negotiations in advance of need
\
Concrete Experience II
increased occupancy rate in downtown project
successful third party mgmt. and leasing contracts
no new spec. development
no development opportunities in new markets
purchased
properties
turnaround
or
no investment
Strategy Implemented
Reflection
& Observation
stopped spec. development
explored new cities
for devel. opportunities
sought third party
mgmt. & leasing contracts
sought investment &
turnaround property
enhanced marketing of
downtown tower
not done locally
Strategic Options
stop new spec. development in Denver
seek devel. opportunities in new western cities
acquire investment & turnaround property
expand into third party mgmt. & leasing
lease up downtown tower
76
FIGURE 7
PATTERSON AND COMPANY
Concrete Experience I
large tenants disappeared
Concrete Experience II
still not doing spec. comm. development
sold headquarters building
1988 Detroit project started
two successful build-to-suits
athletic club reached member capacity
improved maintenance and tenant
improvement operations
Reflection
& observation
Strategy Implemented
ceased spec. development
sold headquarters building
office project in Detroit
two build-to-suits
developed athletic club
maintenance and tenant
improvement operations
strengthened
long term philosophy
of high guality, arch.
distinctive design
Strategic options
stop spec. development
sell assets
geographic diversification
build-to-suit office development
improve quality of operations
77
FIGURE 8
JAMES M. WINCHESTER INC.
Concrete Experience I
supply and demand imbalance
development profits "too good be true"
"building frenzy"
recognition of market dependence on oil prices
Concrete Experience II
owned land free of debt
owned 200 apartments free of debt
1989 - high quality apt. proj. started
lost third party mgt. business
Reflection
& Observation
Strategy Implemented
sold 85% of office space
paid down debt
got out of resid. development
stayed in known (Denver) mkt.
started high quality apt. proj.
third party management
renewed commitment to
owning well located
land
renewed commitment to
conservative
financial strategy
Strategic options
sell office buildings
pay down debt
stop residential development
stay in known (Denver) market
consider only high quality development
be complete without considering how
The analysis would not
well each firm's management responses followed the steps of
the learning model.
there is a
"success".
It will be interesting to determine if
the model and
direct correlation between using
The degree
to which
followed the
each firms
learning model is illustrated in Figure 9.
FIGURE 9
CONFORMANCE TO THE STAGES OF THE
EXPERIENTIAL LEARNING MODEL
5
4
Mountain Properties
43
Patterson & Company
The Southwick Company
1
2
43
3
James W. Winchester Inc.
1
4~
5
5
2
3
3
Mountain Properties undertook steps in the first, third and
Although Mountain did
fourth stages of the learning model.
did
company
business
arrival
its
recognize
company
early
stages,
when
it
the
affected
Management
market.
general
the
and
its
in
downturn
the
recognize
not
realized that it needed to make changes and began to plan a
little
did
Mountain
attempted to implement
options and
successful
only
corporate
numerous
strategic
or implement
but was
most of them,
general,
In
number.
to the
its responses
In addition, late recognition of the
downturn effectively.
precluded
limited
a
with
not plan
Mountain did
downturn
identified
Management
philosophy.
a
set
to
reflection
problems,
leadership
of
because
However,
strategy.
strategic
many
options.
Mountain's
approach appeared to be more reactive than proactive.
Southwick
Since
it
developer,
office
regional
had constraints
recognition of
After
have.
a
was
the
other
of
a
national
firms did
the decline with
not
the general
market, Southwick generated strategic options for submittal
to
Denver
As a
office.
the home
office
was
not
corporate philosophy
chairman.
by the
its strategic
response.
of
policy and
Southwick
to
like Mountain,
on
implement
recognition of
general market severely
80
reflect
philosophy was
attempted to
all the options planned,
Southwick's
fit local market
and make changes to
options, but
with the
the decline
position
in the
Overall corporate
conditions.
set
regional office,
limited its
Southwick was only
and leasing
It appears that being a regional operation of a
contracts.
a
impedes
concern
national
party management
gaining third
successful in
to
ability
company's
be
proactive in a changing business environment.
In
contrast,
included steps
The
in
changes
response
in all four
stages of the
the
recognized
company
on
sell assets
decided to
Patterson
to continue
the finest
then
proceeded
market.
company.
before prices
dropped,
go
as
of building
utilize conservative
After clearly stating
its goals,
options.
Patterson
numerous strategic
to
noting
a
to
and to
quality projects,
listed
Patterson
by
company philosophy
following the
financing arrangements.
learning model.
leasing
the
and
options, Patterson spent time
wanted
it
where
proactive
early
decline
characteristics of
the
Before considering strategic
reflecting
was
Patterson's
successfully
of
all
implement
its
strategic options.
Like
Patterson, Winchester
capable
of
independent
was a
local development
response also utilized all stages of the model.
reaffirmed its
future
This
commitments to owning
expansion, and
philosophy helped
Winchester
considered.
provided time to
fell.
Winchester
Early
path of
project financing.
strategic options
recognition of
reflect, plan, and act
successfully
Winchester
land in the
to conservative
shape the
proactive
Its
decision making.
firm
that
the decline
before the market
implemented
all
of
its
planned options
and even
capitalized on
an unanticipated
opportunity to get into third party management.
CONCLUSION
There are people who make things happen.
There are people who watch things happen.
There are people who wonder what happened.
-Anonymous
The stated purpose
of this thesis is
using Kolb's experiential learning
ability
companies
of development
to determine whether
model could improve the
to
implement
plan and
strategies for a real estate downturn.
The results of our field data indicate that the firms which
adhered
more closely
strategies
that
were
to
the
learning model
implemented
The
explanation
more successful.
seems clear, two of the four firms carefully reflected upon
past experience
and corporate goals, and
thereby produced
superior planned responses to the downturn.
The field
data indicated
Patterson,
Winchester
and
supply and
demand in
when potential
Kolb's
that the most
successful firms,
analyzed the
the Denver market.
supply exceeded anticipated
terminology, this
was
balance
between
They recognized
demand.
their concrete
Using
experience.
Since they recognized the impending decline early, they had
more generally
market decline was
act before the
time to
recognized.
This enabled them to
to
a clearly stated corporate
commitment to
philosophy.
philosophy
the corporate
utilized
then
reconfirmed
Patterson
and
After careful
the company.
to lead
Winchester
reflection,
firms
determine what businesses they wanted
and where
be in
and
objectives.
and
corporate goals
on
reflected
Patterson
downturn, Winchester
impending
recognizing an
After
to
their
The
shape
appropriate responses to the downturn.
Implementation efforts by Winchester and Patterson appeared
focused than the
more coordinated and
to be
usually
on unsuccessful ideas.
was spent
Less time
expertise.
When new
considered,
market
product or
Efforts were
company
geographic markets
and due
research
each
where
areas
on
concentrated
other firms.
had
were
preceded
diligence
entry into the market.
After
implementation
Winchester
and
of
Patterson
their
strategic
monitored the
responses,
After
results.
observing the results, they began the learning process anew
with additional reflection
did
not
model,
model.
consciously
their
actions
and observation.
utilize
followed
the
Although they
experiential
each stage
of
learning
the
Kolb
of the learning model to be
Firms need to follow all steps
proactive.
Remaining proactive allows a firm to stay ahead
of changing market conditions and achieve superior results.
If a
stage
of
learning model,
the
become reactive.
the
omits, or in
firm sacrifices,
ability
performance
Once a
of
responses
management
the changing
Utilization
suffers.
bypasses any
firm becomes reactive,
ahead
to stay
its
any way
of
the
it loses
market
and
experiential
learning model, in conjunction with the survival strategies
and four levels of planned
management response to a market
downturn, will produce superior
operating results during a
market downturn.
Firms can
gain a competitive advantage
learning
ability.
Kolb
states
his
by improving their
belief
in
importance of learning:
or
manager
successful
highly
Today's
administrator is distinguished not so much by
any single set of knowledge or skills but by
his ability to adapt to and master the changing
demands of his job and career, i.e., by his
true for
same is
The
learn.
ability to
Continuing success
successful organizations.
in a changing world requires an ability to
explore new opportunities and learn from past
successes and failures.... Learning should be an
explicit objective that is pursued as consciously
profit or productivity.
and deliberately as
Managers and organizations should budget time to
specifically learn from their experiences.... In
my experience, all too few organizations have a
climate which allows for free exploration of
questions like "what have we learned from this
(1973, p.40).
venture?"
the
APPENDIX
INTERVIEW QUESTIONS
SECTION 1
0) Could you give us a brief history of your company?
1) What was
decline?
your
business
strategy
prior
to
the
market
a) products?
b) locations?
c) market segements?
1. customer type
2. customer size
3. location
d) promotion
1. how did you sell or lease your product?
2. compensation of sales force?
3. motivation of sales force?
e) define your marketing effort
1. selling vs. marketing
2. did you use (post) occupancy surveys to
increase knowledge of customer wants
3. did you use professional econometric forecasts
in your planning effort?
2) How was product produced?
a) "greenfield development" or rehab?
b) purchase existing property?
c) in-house development or turn key?
d) what production expertise was in-house?
e) how were production people organized?
f) where did your
process?
firm add
value in
the production
3) How was the company financed?
a) equity
b) debt
c) partners/partnerships
4) How were properties/projects financed?
a) equity
b) debt
c) partners/partnerships
5) How was your
decline?
Staffed?
company
originally organized
prior to
the
a) size
b) organizational concept and structure
c) key employees
d) ownership of company and projects
e) planning system/process
6) What do you think caused the market decline?
SECTION 2
1) How did you add value prior to the market decline?
2) Did this give you a competitive advantage?
How?
3) How have you been adding value since the market declined?
4) Do you feel you currently have a competitive advantage over
other firms? How?
SECTION 3
1) What is your business strategy post market decline?
a) products?
b) locations?
c) market segments?
1. customer type
2. customer size
3. location
d) promotion
1. how do you sell or lease your product?
2. compensation of sales force?
3. motivation of sales force?
e) define your marketing effort
1. selling vs. marketing
2.
(post) occupancy surveys
do you use
increase knowledge of customer wants?
to
3. do you use professional econometric forecasts
in your planning effort?
2) How is product produced?
a) "greenfield development" or rehab?
b) purchase existing property?
c) in-house development or turn key?
d) what production expertise is in-house?
e) how are production people organized?
f) where does your firm
process?
3) How is the company financed?
a) equity
b) debt
add value in
the production
c) partners/partnerships
4) How are properties/projects financed?
a) equity
b) debt
c) partners/partnerships
Staffed?
5) How is your company currently organized?
a) size
b) organizational concept and structure
c) key employees
d) ownership of company and projects
e) planning system/process
6) Where do you think the market is going?
SECTION 4
1) What was the stimulus that prompted change?
a) external?
b) internal?
2) How was your strategy for change chosen?
a) who decided and had input?
1. unilateral
2. delegated
3. shared
b) was there outside help?
3) How was your new strategy implemented?
a) timeframe
b) was outside help used?
1. facilitator or consultant
2. is facilitator/consultant
still involved with
your firm?
c) which internal people were involved?
d) what was the implementation process/strategy?
4) Do you feel
implemented?
the
new
strategy
has
been
successfully
a) why?
b) why not?
SECTION 5
1) Did reorganization (changes) change the company
the following ways?
in any of
a) make it stronger?
b) make it more competitive?
c) make it more customer oriented?
d) make it more profitable?
2) Are you planning any additional changes?
a) why?
b) what are the current stimuli facing the firm?
1. external
2. internal
3)
In the process of
most....
change or
reorganization what
was the
a) difficult thing?
b) easiest thing?
c) rewarding thing?
d) frustrating thing?
e) surprising thing?
4) If you were to do it again what would you do differently?
90
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