Wednesday October 24 2012
Way back in 1975 I worked for Kenneth Schnizter's Century Development Corp. Kenneth erected office buildings along Kirby Drive in Houston. This culminated in the creation of Greenway Plaza. Greenway stretched from one exit to the next on the Southwest Freeway. The SW Freeway connects downtown to the Galleria and points southwest. Conoco located their headquarters in one building, Kellogg was in another and even Eastern Airlines rented space for their name on a third building. Stouffer's built a hotel to serve the new indoor stadium, the Summit where the basketball and hockey teams would play. The Energy Embargo I had Houston buzzing with energized activity, pun intended.
What could go wrong? Everything as it turned out.
Kenneth had a habit of erecting a building without tenant leases. And so the building, and the note payable at the bank, opened empty. Long story short, that won't work. The interest expense keeps mounting faster than one can lease out the building. And so the projected costs becomes higher and the break even further away, and gee those guys down the street are offering to pay a tenant's moving costs!
By the early 1980s Kenneth had lost Greenway Plaza to his creditors.
The Galleria in Houston, a dazzling commercial retail office venture was constructed by Gerald Hines. now on page C6 of today's WSJ, we learn that...
Houston based Hines and Boston Properties have announced a 1,070 tall office Transbay Tower in San Francisco, it would be the tallest on the West Coast. It should be finished by 2016. The venture hasn't decided whether it would build on speculation, meaning it would move forward without tenant commitments.
It's a great market that is very constrained for space. the managing partner at Hines said, we're very optimistic right now.
As Jeff Foxworthy says, I can't make this stuff up. Such optimism only occurs at market tops. The Skyscraper Theory posits that such projects are only concocted at extreme positions of positive social mood. If our outlook is correct, this project, if completed, will come on the real estate market as stock and real estate markets are in decline around the world. Recall the Kingdom Tower, to be the tallest building on the planetn is now underway.
I can't help but chuckle to think that the Hines organization, so successful in Houston then, would follow in Kenneth's mistaken footsteps today. How quickly they forget.
This one is a stretch. How is Hines supposed to learn from Schnitzer 30-37 years ago?
I think you are overlooking the Fed's continuous money printing. What ever happened to "Don't fight the Fed!"?
Posted by: ndmaster | October 24, 2012 at 03:39 PM
ND
One, Hines did not follow that model of building an empty structure and hoping it would fill up when he was on the way up.
Two, we are in a similar period of long term stagnation to then.
Three, the high tech sector is notorious for turning on a dime, especially with economic weakness all over the latest earnings reports
Four, Best Buy is awash in tablets, price competition directly ahead.
Five, I don't see how FED money printing would help fill buildings with occupants. Even as QE3 has begun the stock market is now falling. The FED is printing billions, the debt problem is now in the trillions.
The article did not say but I suspect they paid an all time high price for the land.
Learning from a failed business plan in a similar era is the key to survival. The costs of a building does not change when it is completed, the social mood and optimism about assuming a long term lease can change dramatically in the two years it will take to complete the building.
Posted by: Dennis Elam | October 24, 2012 at 07:03 PM