Days of the development tycoon over?

I was reading up on Geoff Palmer's real estate career after seeing his name in the news because he's a big financial supporter of the Trump campaign, he comes from relatively humble beginnings and became a billionaire as an apartment developer on the West Coast, mainly in the LA area -- do we think the days of guys building huge net worths just by developing and holding apartment buildings is over (or substitute hotels, industrial props, etc here if you'd like)? Or did Palmer just benefit from great timing by doing most of his development in the 80's/90's?

Today it seems like you only hear about the Related's and Hines' in the world of development (not an exhaustive list obviously), while the unassuming billionaire developer is something that you see less and less of

Comments (49)

Sep 17, 2019

I don't believe so. It is becoming more institutionalized, but opportunity can be found. I think real estate is in fashion now because we've seen a huge surge of it come up. You could've bought one of the worst deals in 2013 and look like a genius now. William Poorvu talks about real estate coming in vogue and then falling out of fashion depending on economic cycles.

When the downturn comes, people won't like real estate all over again. They'll go more to tech (assuming that bubble doesn't burst first or concurrently).

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Sep 17, 2019

I would tend to agree, although it seems as if those avenues of opportunity have definitely become more difficult to come by. The days of simply identifying fairly obvious development opportunities in markets with a ton of room for growth seem to be over, but again, as you said, this perspective could just be a function of where we're at in the economic cycle

Sep 17, 2019

Was it obvious at the time for them though? I find this topic super interesting.

JDS bought Walker Tower in 2013. Everyone says, "Well duh that's a home run. They bought at the bottom of the recession!" But Michael Stern says that it was nerve racking. They were the highest bidder in the midsts of a falling market.

Los Angeles has an insane shortage of multi family. It's so obvious and everyone is talking about a full on housing crisis. Same with SF. Bit deals are hard to pencil right now. If you can buy with a lot of equity, over the long run I think anybody can do fine. Just don't aim for IRR hurdles.

Also, you're right about where we are. Low cap rages restrict things.

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Sep 18, 2019
REJB123:

I was reading up on Geoff Palmer's real estate career after seeing his name in the news because he's a big financial supporter of the Trump campaign, he comes from relatively humble beginnings and became a billionaire as an apartment developer on the West Coast, mainly in the LA area -- do we think the days of guys building huge net worths just by developing and holding apartment buildings is over (or substitute hotels, industrial props, etc here if you'd like)? Or did Palmer just benefit from great timing by doing most of his development in the 80's/90's?

Today it seems like you only hear about the Related's and Hines' in the world of development (not an exhaustive list obviously), while the unassuming billionaire developer is something that you see less and less of

Yes. There will be exceptions, of course, but the day of the real estate tycoon has largely come and gone. The game has totally changed today. When you're competing for deals with institutions with 4-5% return requirements, you can't win (over the long run--exceptions, of course, on any given deal).

Sep 18, 2019
real_Skankhunt42:

Yes. There will be exceptions, of course, but the day of the real estate tycoon has largely come and gone. The game has totally changed today. When you're competing for deals with institutions with 4-5% return requirements, you can't win (over the long run--exceptions, of course, on any given deal).

So you scale. You aren't competing with institutions for smaller deals. And once you reach a certain size, vertical integration helps capture margins and cut costs.

So no, no one is going to buy a 1,000 unit portfolio in Texas with 100% financing at a 12 cap and make a fortune anymore in one fell swoop. But to snap up 20 or 30 units here or there? And do five or six of those a year? That is absolutely possible.

All in all I think it's easy to look back with hindsight and say "those guys had it easy, it was a different world back then." And maybe some of that is true. But those folks wouldn't have said that at the time, and thirty years from now we'll see a new generation of extremely successful landlords who made 9 or 10 figures starting around this time.

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Sep 19, 2019

Great points!! The real estate tycoons of the 80s and 90s did have it easier, that era is almost dead. World of compressed cap rates, easy financing and growth from tech have helped folks make "F**K YOU $$$" in real estate.

Folks who buy 10-30 unit buildings are buying on emotion than reality, they rely on the broker to guide them to the pricing and assumptions most of the time. You are starting to have more high net worth individuals in that space buying value add which should be 15% return with a 7 to 8% return proforma because it's a long term hold and they don't like the stock market. You also have syndicators who know how to raise capital bidding aggresively on deals (think about how many instagram or facebook morons are pitching you on a value add deal with 15 to 25 percent return over 5 years for value add net of fees? those mother f**kers will be closed down in 5 years unless we continue to see compressed caprates and insane growth).

The biggest challenges to be a real estate tycoon today are access to capital and finding deals that pencil for sophisticated investors. Buying in a shit hole neighborhood that turns into the next Williamsburg or another hot spot 10 years later is luck than being a tycoon (anyone that holds real estate for 10 to 15 years will make $$$). Also, you have to own a large portfolio today to see synergies from operations or get discounts from insurance, payroll, etc. and also have access to cheap funds with some luck to score home run.

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Sep 18, 2019

Yes, the days of being able to finance 100+% of development costs are long gone. That is how a lot of guys with no net worth were able to build sizable net worth in the 80s. This led to overbuilding and a massive correction. A lot of these guys lost their shirts and never recovered, but the ones we still talk about today weathered the storm.

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Sep 19, 2019

Plus, many of the guys like Trammel Crow ran around and took on as much recourse debt as they could get their hands on because he knew in a crisis the debtor holds all the cards if they are large enough and the bank needs them to execute the business strategy so they don't get hosed.

My boss always tells me that a developer should pursue one of two strategies - take on zero recourse or borrow with recourse everything you can get your hands on so the recourse collateral is way too stretched to prevent lenders from going after it.

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Sep 30, 2019

An old employer/mentor of mine who made a shitload of money in the 80s and now has a portfolio worth +/-$300 million once told me a story about a bank calling him up and offering a foreclosed office deal they had. They were willing to let him assume the existing debt at 100% LTV and give him another 20% as a 2nd for Reno. I can't imagine such a thing happening now.

Sep 30, 2019

These deals are only offered to the banks best customers. Occurred more often during the GFC, when banks were desperate to get rid of properties.

A rather large suburban hotel was given back to the bank. The bank spoon fed this deal to another bank customer who owned maybe a dozen other hotels in the area. They gave the property to him for 100%LTV.

My assumption is, this was in the banks interest. Giving the property away for free was allowed the bank to show a performing note on their BS, avoid pumping cash into the property, and/or having to sell the note for .30 cents on the dollar.

The property was in dire need for a renovation and bleeding money. The new owner was willing to take the property. However, on the condition the bank was willing to renegotiate the loan when times where better. Well the bank ended up going under. The new owner never got the loan mod and had to pump a small fortune into the property, to keep operations going. He had the cash flow and balance sheet to stay afloat for +/- 10years.

In the end, it all worked out for the owner, The Municipality the property is in, offered to buy out the owner(at a nice profit) since the property resided on prime real estate, the village was tired of the eye sore and could easily redevelop the property to increase revenue.

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Sep 18, 2019

Depends on how you define a "tycoon" I suppose. I know some guys in the $200MM range who are lauded in the industry - are they less of a tycoon because they aren't billionaires? I doubt they seem themselves as failures...

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Sep 18, 2019

I've noticed this site tends to not see the success of people with substantial net worths unless they reach that holy grail billion dollar + level.

There are plenty of people who achieve $5MM - $50MM net worths. For the most part, those people never really have to worry about money if it's good, cash flowing property. It's not exactly passive, but it sure is a hell of a lot easier than showing up somewhere every day. It really doesn't take a genius to do this. You need to know a lot, leverage the people around you, lever you money intelligently, and be able to MAKE THE JUMP and TAKE THE RISK.

I know you're full aware of this @CRE , just replying to you because it goes with your comment.

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Sep 18, 2019

Yeah "tycoon" is obviously a pretty vague way to put it - I guess I just set the bar at billionaire as I was reading about and referencing Geoff Palmer.

Generally I think even this $100mm to $300m range has become significantly more difficult to achieve over time, especially if you don't come from a well-off family to begin with - just wanted to hear some other thoughts on it

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Sep 18, 2019

The older guys I know who are worth a few hundred mil+ all made their money in easy times. One was a developer who got 100%+ construction loans and another two bought apartment buildings at 10+ caps with 0 of their own equity and had the best country club split ever: 7% pref, 50/50 all other cash flow (and that's not after a return of capital). They passively cash flow $5-10MM/yr/person.

The game has changed and very few small developments pencil anymore. It's will continue to become increasingly institutionalized in large part due to the challenges in permitting deals. You need really deep pockets.

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Sep 18, 2019
Non-PC Broker:

The older guys I know who are worth a few hundred mil+ all made their money in easy times. One was a developer who got 100%+ construction loans and another two bought apartment buildings at 10+ caps with 0 of their own equity and had the best country club split ever: 7% pref, 50/50 all other cash flow (and that's not after a return of capital). They passively cash flow $5-10MM/yr/person.

The game has changed and very few small developments pencil anymore. It's will continue to become increasingly institutionalized in large part due to the challenges in permitting deals. You need really deep pockets.

I'd bet good money this is something people always say, in every generation. Yes, there were reasons it was easy to make tons of money in real estate in days past. That doesn't mean there still aren't ways to make money - you just can't do it in the same way.

Plenty of NYC developers made tens of millions, if not hundreds of millions, of dollars buying land and property in Brooklyn from 2005-2010 and either developing it or sitting on it. It's simple enough to sit here now and say "no one can make money doing that anymore," and that's true, to an extent... but there is always going to be another area that sees that kind of growth, another product that is undervalued, etc. Once you've seen a crop of developers/owners make a ton of money, it becomes impossible to replicate. Because there isn't any risk in it anymore. I know at least two guys worth ~100mm who made their money in Brooklyn, and they weren't starting out with huge family money. They bought a couple MF buildings in 2006/7, didn't overlever, and came out the other side of the recession and bet on the Williamsburg/Downtown Brooklyn market heavily, and killed it. Yeah, I can't do that now... but I could try it in the Bronx.

Honestly, the subtext of a lot of these posts seems to read as "I want a guaranteed way to make $250mm in the next ten years, and it sucks that I can't replicate exactly what other people did to get there." You have to take a risk, and deal with uncertainty, and that by definition means trying a path not yet trod.

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Sep 18, 2019

I completely agree with you here.

I think both sides of this are absolutely correct. The people who say it's impossible are correct, the people who say it's entirely possible are correct.

Those who think they can and those who think they cannot are both correct.

Sep 20, 2019

I'm working on deals in the Bronx right now. I know what they're penciling to, and it's certainly not easy money. The reason investors are flocking there is because they think it will be the next Brooklyn. So unlike early Brooklyn, a lot of that has been priced in from the start.

I was giving two examples of how it's vastly different. There are plenty of ways to make money today.

John McNellis had a funny anecdote in his book on real estate development. Since he develops in Silicon Valley, someone once told him that there's a big difference between real estate rich and tech rich. I think younger people today, of which I am one, see tech money and compare it to real estate and think "how do I get there". In that respect there are much fewer paths because real estate is a more mature industry, but becoming generationally rich is still attainable through a variety of means.

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Sep 18, 2019

I think they the thing that gets overlooked about the wild west days in development in the 80s when you could finance 100+% of costs is how many guys went under when the market turned and never recovered. Was not a riskless strategy at all.

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Sep 18, 2019
Gerry_Garner:

I think they the thing that gets overlooked about the wild west days in development in the 80s when you could finance 100+% of costs is how many guys went under when the market turned and never recovered. Was not a riskless strategy at all.

This is exactly right. Most of the posts here aren't accounting for survivorship bias. To make huge money in any business requires an insane amount of risk. A quarter of a century later only a very small slice of the most successful folks are around and hyper wealthy. No one seems to be thinking that for every Stephen Ross, there are hundreds or thousands of developers who started in the 1970s who either flared out and went bust, or are still struggling along, worth enough to be comfortable but not 8 figures or anything.

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Sep 19, 2019

I think the next development tycoons are gonna be developers who can someway take advantage of new technologies (ie 3D printing)

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Sep 19, 2019

The amount of available information and data has changed the game, just like what happened to the stock market. Groups like CoStar, Real Capital Analytics, and Yardi have eliminated market inefficiencies in a major way.

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Sep 19, 2019
InVinoVeritas:

The amount of available information and data has changed the game, just like what happened to the stock market. Groups like CoStar, Real Capital Analytics, and Yardi have eliminated market inefficiencies in a major way.

Sure, but shouldn't that have been the case in 2006 if you were a hedge fund manager? Information may be perfectly efficient but human beings are as flawed and biased as ever, perhaps more so given how much info is out there. There will always be opportunities when your counterparty is another person.

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Sep 19, 2019

There's still more inefficiency than the stock market, but way less than 20-30 years ago. Development spreads have steadily dropped.

Sep 19, 2019
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Oct 1, 2019
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