By Martin Melaver
Recently, I’ve been reading with my son The Hitchhiker’s Guide to the Galaxy. We’re at that point in the story when our travelers arrive on the planet of Magrathea. Magrathea, you may recall, made a name for itself millions of years ago by specializing in building designer planets for the super-wealthy. Then, out of the blue, a severe economic recession hit the galaxy and demand for Magrathea’s high-end product vaporized. The citizens of Magrathea decided to mothball the planet until market demand returned. Fast-forward five million years, and the Magratheans are still waiting. Talk about an allegory for our time.
In a recent webcast, Stephen Blank, Urban Land Institute’s Senior Resident Fellow for Real Estate Finance, expressed what many in real estate already know and fear: that the downturn in residential real estate in 2007-8 was nothing compared to the tsunami coming at us in 2010 in the commercial sector. Values are likely to dip to 40 percent from three years ago, a commercial resurgence is not likely to occur until 2012, and the financial markets will continue to remain frozen except for the vulture plays stepping in with all-cash, low-ball purchases of distressed assets. Of the total $3.5 trillion in commercial debt out there, $900 billion is held in the problematic CMBS market. Thirty-nine billion dollars of that debt will be due in 2010; $150 billion by 2012.
The pace of foreclosures is uncertain. So, too, the pace at which distressed assets will then subsequently be written off at a discount, sold to vulture funds, and then stabilized over the ensuing years. What is certain is this: Want to build a nice upscale hotel in some touristy area? Forget it. Looking to pick up a piece of dirt on the cheap and build some cool office or retail development? Good luck.
Probably best to take a page from Magrathea’s playbook and mothball your empire-building business plans. It ain’t gonna happen any time soon. Which leads to some deeper lessons from Magrathea: probing into the viability of a business model that ignores a cosmos’ true needs.
My own company, Melaver, Inc. has not been immune from the general woes facing the real estate community. And this, despite a long-term commitment to sustainable practices. We, too, got caught up in the throes of building too many conventional developments, developments that are now dead in the water. What has been our salvation, and I mean that literally and spiritually, has been a focus in recent years to leverage our experience doing more conventional cutting-edge green projects and adapting them to that segment of the market that needs it most: mixed-use, mixed-income (read: affordable housing) in urban core areas crying out for such stimulus.
Years ago, when we started down the road of our first green mixed-use development (one of only two or three LEED HUD projects in the nation), we felt pretty good about ourselves and spoke in the language of “giving back to the community.” Such hubris. What I realize now is that the community has given back to us in ways almost impossible to enumerate. We convened and then became enveloped by a vast array of community stakeholders who have taught us, among other things, that our very viability as a business is inextricably linked to the community we’ve helped make more vibrant. Oh, and by the way, the only real estate stuff really getting funded out there in any substantive way are projects that hit the Venn-diagram intersection of green, job creation, energy efficiency, and affordable housing. It’s a lesson not lost on the very largest companies around, as GE seeks to retool itself by tapping in to federal stimulus funds.
In the early days of the American republic, a company needed a charter to conduct its business. It was a charter limited both in scope and duration. A business could only continue on to the extent that its practices lent itself to the enhancement of the general polis. My company’s recent experiences in the green affordable housing arena is testament to the rightness of such a charter. It forces us to earn our stripes every day.
Perhaps, a la Magrathea, we real estate enterprises simply need to mothball our operations for a good long time. Alternatively, rather than wait around for the next wave of high-rollers to come knocking on our doors, we might consider rolling up our sleeves, addressing needs our social order is clamoring for, and make ourselves relevant for a change.
Martin Melaver is CEO of Melaver, Inc. and the author of Living Above the Store: Building a Business That Creates Value, Inspires Change, and Restores Land and Community.