It’s lunch in a Scottsdale restaurant. The attendees are mainly retired scions of industry, professionals, and business. I came because the group is having a presentation by one of the largest real estate developers in Arizona, and I’ve come to hear the story of a “typical” Arizona entrepreneur.
Mark Sklar, one of the three original (and still intact) partners at DMB was originally from Wisconsin and studied history. He has the midwesterners’ value system and sense of engagement.
He and his wife moved to Arizona to strike out on their own in 1971. For seven years he was in the travel business before becoming partners with Bennett Dorrance and Drew Brown to form DMB, a company known for its excellence in real estate development and community engagement. As he runs down the list of boards he is on, from arts advocacy to Alzheimer’s centers to camps for special needs children, he tells us the company credo: profitability, legacy, partnership and fun.
DMB was formed in 1982 out of some land syndications. Drew Brown was Mark’s lawyer, and Bennett was Drew’s client. They spent a long time getting to know each other, trying to understand if an enterprise among the three of them would make sense. Mark, Drew and Bennett are entrepreneurs who started off by buying and selling land, using money they raised from syndications.
In 1989, the Resolution Trust Company afforded them an opportunity to buy a bunch of stuff from defunct savings and loans. No one else would invest, because no one knew where the bottom of the market was. Sound familiar? So they bought a lot of property, including the famous blue building on Alma School Road in Mesa, Arizona. Of course they had the means to do it. It’s not a strategy for everyone.
About fifteen years ago, the company took a philosophical jump into the planned community business. They view themselves as developers, planners, and zoners and marketers of planning communities: large communities (like Verrado and DC Ranch) with lots of different product, and recreational communities for people who want vacation homes (Forest Highlands).
DMB also has a significant amount of investment in California: in Orange County at Madera Ranch. They also have a property in San Francisco Bay that is currently under water; it was formerly a salt mine owned by Cargill.
DMB prefers to do joint ventures with landowners rather than buy property. They’re a project-centric company that pushes authority down into the field into each project’s General Manager.
They have done quite a bit of succession planning, including diversifying their capital base outside Bennett Dorrance’s personal capabilities. They now have two financial partners from the Bay Area, a board of directors, and a real plan to allow the company to succeed them without a sale or liquidation.
And now…about the market. Mark’s guess is that it won’t turn around before Q3 of ’09 or have righted itself until 2010.
We have an oversupply of single family residential, which will create a longer time to recover this time around. It was fueled by easy money, and the idea that single family residential could be an investment. Two and a half years ago, DMB was so concerned about this that they hired a team to knock on every door in Verrado and see if someone was living in the home. They found that about 25% of the homes were investor-owned.
Arizona has a worse oversupply of single family housing than California, because it has strong employment, a right to work state, and it is easier to bring a product to market here than in California, so that encourages inmigration.
167,000 homes were built in 2004-2006 in Arizona, where there is a need for 35-40k a year based on inmigration. The oversupply will be with us for a while. Here’s why:
1)We have had a dislocation in the financial markets that has been unprecedented. Sklar is seeing a lot of institutional lenders do really stupid things; they are handcuffed because they don’t know what their portfolios are worth, and they are walking away from sound, underwritten transactions. They just don’t know when the regulators will come in.
Bill Gross’s newsletter for the past two years has been talking about the shadow economy — large scale transactions that have been securitized and sold to people who didn’t understand the underlying value of the assets. The result of this continues to affect the real estate markets.
2)Huge increase in commodities costs.
3)Recession
4)Interdependence with everything that happens in the national economy.
How does he feel? Negative for the short short term. The economy is one problem for Arizona. Employee sanctions laws are another. The inability of people to sell homes elsewhere slows the state’s inmigration. (2006 102,000, 2007, 67,000 people.) DMB has taken their land of the market to discourage more building for right now. They have no wish to contribute to the oversupply. They are also tightening budgets, lengthening timelines, and have laid off twenty people. But DMB is optimistic for the long term. With the business and political leadership we have now, he thinks Arizona has a rosy future.
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Permit me to be the rude bastard who points out the turd in the punchbowl. The wonderful “entrepreneurs”, “businesspeople”, “investors”, and other such euphemisms, are the speculators and profiteers who have brought our economy to its knees.
During boom times they buy up endless amounts of residential real estate and force prices to artificially inflated levels. Speculators buy from speculators and sell to other speculators. Prices spiral ever-higher. The speculators harvest money while producing nothing. Families who want housing for such unimaginative purposes as living in it, are priced out. That is what the complaint was in the housing market during most of the past few years, was it not?
The crash that follows is inevitable because housing prices are supported by neither value nor utility. When the turndown comes, the speculators, having no reason to keep the property they bought solely for appreciation, all run for the doors at the same time to unload their now-declining-in-price properties. There is an immediate glut on the market and prices plummet. Real homeowners now get stuck with houses worth less than what they owe on them. They are faced with either being unable to sell or taking a huge loss if they do.
These disastrous fluctuations achieve exactly the opposite of what a free market governed by supply-and-demand is supposed to achieve. Instead of supplying a life necessity at a price corresponding to people’s demand for housing and industry’s ability to supply it, it penalizes and endangers home buyers and home sellers, precisely those whom it is supposed to serve.
Speculation so distorts the market that we find economic waste and absurdity such as one-fourth of the housing in Phoenix standing empty.
The reason for the distortion and instability is not hard to find. The government has given favored tax treatment to homeowners and made our mortgage interest deductible. Congress did that because it is a generally shared view that home ownership is to be encouraged. That a large number of Americans should own their own homes is generally agreed to be in the public interest.
However the homeowners interest deduction has been extended to speculators. What public interest is served by encouraging speculation and speculators? Speculation in housing is about as much in the public interest as selling cigarettes in schools.
If the government can intervene in the housing market with a tax policy to encourage home ownership, it can intervene with a tax policy to make speculation unprofitable.
It would be as simple as eliminating deductibility of mortgage interest for more than one residence. Which is what the law actually was until a few years ago when the speculators bribed the Republicans under Reagan to change it. (Campaign contributions aren’t bribes? Dream on.)
It isn’t just the president who is up for election this fall. Every congressman and every third senator is up for election as well. McCain has already said that the Republican policy will be more of the same. It is time to turn the rascals out.
In the meantime, if you meet one of Francine’s “investors”, spit on his shoes.
Calm down. That’s exactly what Mark Sklar said. :-) In fact, as planners of large scale communities, they refuse to sell land to a builder right now to discourage the building of new product. And they don’t build themselves. In your haste to rant, you have misread my post. But it’s good to see someone so fired up.
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