A Real Estate Career: Lessons Learned (2006-2008)

Background: before I graduated from Penn, I was fooling around with searches on Google, which was this new search engine that my gf (at the time) turned me on to.  Before that, I was a Yahoo! guy.

On Google, I was typing in any combination of terms I could think of, that would lead to job openings that I thought were a fit.

As you might have figured out by now, I basically failed the on-campus recruiting system process, with 0 interviews and 0 prospects.  The reasons why are a subject for another and much longer post.  So I was on my own.

Using search terms like ‘analyst’ or ‘research analyst’ or ‘economic research’, I randomly stumbled on various consulting companies, think tanks, and research shops.

The particular search terms I used also led me to a company somewhat boringly called Economics Research Associates.  Despite the dry name, ERA was a theme park, resort, and casino real estate consulting company.  They worked worldwide in exotic locations.

It looked exactly like my type of company!  So I applied.

And this is nothing but a story of persistence.  At the time, I was told there were no positions available, but over the next two years I kept in touch.

Sometimes I called them to let them know I was still interested and had “built some skills” [lol].

And other times they called me.  One time a partner called me when I was in a car with a date and I had to drive erratically around and ignore her while doing an impromptu interview.  By the end, I was sweating profusely and not surprisingly, the date did not go well.  Struggles.

Midway through the summer of 2006, a partner of the firm called me and offered me an interview.  The interview led to a job offer.  I said I would think about it (ha!), and “accepted” a week later.

On the first week of the job, they put me in a business class seat and flew me to attend a presentation in Asia; at this presentation, the governor of a large province declared that he wanted to build an F-1 track, a few casino resorts, two theme parks, and twenty-thousand hotel rooms.  Actually, he wanted more than that, and said that the original plans were too small.

So…I had entered the peak bubble zone.

Now to understand what that was all about, you have to understand what ERA did.  ERA was a staid old consulting firm with partners who were in their 50s to 70s.

ERA was started by the original economic consultant to Walt Disney when he built Disneyland in 1955, and for the next 50 years, the firm was the official consultant of choice to any developer, government, or operator who wanted to build or expand leisure real estate operations.

Our job was to validate the financials and make sure the projects would work.  To perform feasibility studies.

That meant that over the next two years, I sat in a clearinghouse of insane real estate ideas.  Again, this was peak bubble.  This meant that every week, we would be bombarded with plans, sketches, and visions of any conceivable leisure entertainment land use you could think of.

If you remember back to this time, this is when Dubai was announcing a new ludicrous project every few weeks, from the Palm and World Islands, to the tallest tower in the world, to malls larger than cities, and mega theme parks larger than Disney World.

But what is less known, is that it wasn’t only Dubai back then.  It was everywhere, from Iceland to Cambodia, Korea, Mississippi, Spain, Cabo, Kazakhstan, Russia, India, and everywhere in between.

Everywhere but China.  China’s time would come after the financial crisis.

I saw drawings of 100 square mile theme parks, sphere-shaped casinos floating in water, and plans for assault rifle-themed or guitar-shaped theme parks.  I saw 100-story buildings in frontier market cities, biofuel farms, and resorts on deserted islands in the middle of the Pacific Ocean.  Every month, someone out of our Europe/Middle East office would send a Powerpoint deck full of pictures for projects in Dubai, with question marks and exclamation points and icons of oil barrels next to them.  At the risk of this sounding like a Ginsburgian “Howl”, let’s stop here.  But you get the idea.

I often think about why there was such a theme park craze during this time.  It seemed like any real estate developer or government was planning one.  I can only posit that it’s because every place in the world had borrowed the Dubai philosophy, which had borrowed it from Las Vegas – build it and they will come.

Before, I mentioned that the Marcus & Millichap San Diego presentation from 2004 should be enshrined somewhere in the Historical Annals.

Equally, any theme park, attraction, or real estate development presentation from this period should also be nominated for the canon.

I shuffled and sat through countless numbers of these: presentations featuring glossy color renderings of buildings that defied physics, and video fly-throughs set to cinematic soundtracks, all meant to hypnotize the viewer into submission; i.e. parting ways with their money.  If you can find them, I recommend sampling the 2007 vintage, which was a particularly ludicrous year.

According to my humble estimate, the total amount of mirages projects being proposed in this manner, coming through our doors alone, totaled more than $100 billion.  Just in Korea, where I was flying almost every month, more theme park projects were being proposed than existed in Orlando.

All this dreaming wasn’t free.  The cost for our services was in the six-figure USD range, so people were dedicating real resources to these projects.  And where was the money coming from?

Who knows.  It was like a spigot in the sky was turned on and the whole world was drinking from it.

Which brings me to the first thing I learned, which was a reinforcement of what I’d been learning since Marcus & Millichap.  Which is that once in a while, the world goes mad.  Actually, the world is probably always insane, and it’s your ability to recognize the lunacy that ebbs and flows.

Also, that there’s no one really in charge.  You think the adults are in charge, but they’re not, they’re nowhere to be found.  No one knows anything.

When I did the analysis for these projects, most of them simply couldn’t work.  It was impossible, unless you extrapolated out economic growth of 10% indefinitely, or you assumed population growth would double, or similar types of leaps of faith.

But, clients simply refused to believe us.  Entire teams of developers had bought into the notion that their fantastic visions were valid, and that they were going to make spectacular sums of money from it.  They had dug in already.  They had hired teams of analysts and drivers, rented out expensive office space, and already spent millions of dollars on designs and licenses and studies.  This is when I truly saw the fallacy of sunk costs at work.

So sometimes clients received our reports and turned it into a negotiation session.  Because they were going to present the report to the government and investors, they needed to juice the numbers past our single-digit return figures.

And it was during this time I realized the truths about Excel that I wrote about in the previous post.  Because they were being used on me.

All clients in some way would argue with us, but some more than others.  One client in particular, in response to our report, sent back a fifty sheet Excel workbook that had reverse-engineered the logic from the study, and plugged in so many variables and cross-linked assumptions that it took me a day to figure out that what they were really trying to say was: the project would make money in the 20%+ range, unlevered, because it would sell out enough villas and golf course memberships in the middle of nowhere, to fund a billion dollars worth of construction costs.

From the outside in, you could see the lunacy.

But maybe from the inside, it’s hard to just reel it all back in, isn’t it?  More on this later.

Also, again, money: money amplifies, it buffers, it can shield and hide a lot of things.  And during a bubble time, money expands like a balloon into cracks and allows you to ignore reality.

Everyone is making extravagant claims, and money allows you to delay the moment of truth.  Another thing I learned related to this.  Times like those breed a lot of crooks and swindlers.  But you don’t know who they are, because during bubbles they can keep financing their schemes and extravagant claims.  As Warren Buffett says about the tide and that only when it goes out can you see who is swimming naked.

It’s only when the bubble pops that you see it clearly.  Anyway, two of my clients from this time went to jail.

Don’t get me wrong.  I think more clients than that went to jail or got in trouble in their home countries.  But these are the only two I interacted with.

I think the common thread between them was that they were both good talkers.  Good talkers and sellers sometimes start believing their own…exaggerations.

Having interacted with both of them for extended periods of time, I don’t think either set out to commit crimes.  But when you start talking about visions that are outside your reach, and money is widely available, things happen.

Your exaggerations spawn fractally, and so do your promises.  It slowly creeps into the future, first one year, then five years, then ten years.  Your sums grow from 5%, 10%, to 50%.

In your own enthusiasm, hallucinating from your IV drip of capital, you start making promises you want to fulfill.  Not promises that you know you can.  It’s a fine line.

After all, what is a Ponzi scheme but an infinite daisy chain of claims that stretch far into the future?  It’s sustained by nothing else than belief, and sold by sellers who can persuasively sell others on their visions of the infinite future.  And cheap money delays and delays.  That’s one of its primary characteristics.

And that’s all I can say about that.

Personally though, about two years into the job, I hit a wall.  The work was not making sense and I was getting metaphysically anxious.

Beginning in 2008, I could see stirrings of economic fallout.  Bear Stearns had failed, and some of the economic news I’d been reading about mortgage brokers made me uneasy.  I had no idea what was going to happen, but I couldn’t help but think that this stuff was not going to last.

It’s hard to express my sentiments during that time.  I keep writing this, don’t I?  In 2007, it seemed like we were having an End of World Party.  Then in 2008, we started seeing the fault lines.

Simultaneously, ERA was getting acquired.  Talks for it started in 2007, and rumors were circulating about the implications.  Mostly about the bad implications, like restrictions and new evil overlords.

So during the summer of 2008, exactly two years after I began, I made the decision to leave and go independent with some partners.

I didn’t know that in the week I quit, Lehman would go under.  Sigh.  We’ll continue with that in the next installment.

To close this out though, let’s talk about what happened to the company, because I learned a lot from it.

After ERA was taken over at a high multiple, and the financial crisis happened, 29 out of 30 partners either quit or were fired.  The once-proud, established firm then just became a carcass of its former self within 2 years.

From the outside, I could see it disintegrating in slow motion.  Inexorably, but still happening.

Honestly, I was quite surprised when I left, and no one else left with me.  This is not me applying 20/20 hindsight.  You could see that 90% of our work was for clients who were chasing clouds.  You could see that there were cracks appearing in the real estate markets, everywhere in the world.

I didn’t know where I was going, but I knew I didn’t want to see what happened, so I left.

A few years later, I worked with an older investor named Larry who mused, often, that companies are hard to kill.  It’s hard to kill a company, he would say, shaking his head, as he talked about his failed businesses.  When he said this, I would always think of ERA.

I left because I thought the company would blow up.  But it didn’t.  It took a while. a year or two, before it all fell apart.  Companies are groups of people, and groups of people who are not nomads don’t just pick up and leave overnight.  Even when from the outside it looked like there was no way this company could survive the Lehman fail and the resulting financial crisis, people still hung in there.

From the outside, it looked like people were huddled.  Maybe out of fear.  Maybe because this is all they knew, and it was a family.  Maybe because from the inside, there was a sense of comfort in seeing that the same people in familiar surroundings.  In peoples’ heart of hearts, maybe they knew – but they didn’t want to face the reality.  Familiar chord, isn’t it?

It took a lot longer to disintegrate than I thought it would.  But its end came, and it was a long, sorry fall.  In its corner of the amusement park industry, ERA was a giant, a monopoly.  And because it was a monopoly, a lot of things had happened to the company over the years.  For one, there was widespread complacency.

For a company that charged McKinsey-level rates, I couldn’t believe that the company still didn’t have a central database or repository of knowledge.  There were relics in our office that again, I should have saved or asked for, because they should be enshrined in the Annals.

Typewriters from the 1960s.  Dewey-decimal card systems for a physical library of brochures, books, encyclopedias, and reports, many of them terribly outdated by decades.  Brochures from World Fairs during the 1960s and 1970s.  Reports and relics from failed Japanese theme parks of the 1990s.  Secretaries who took down dictations of reports and emails/letters by older partners.  On typewriters.  Older partners who off the top of their head could dictate 5 to 10 pages at a time.  Slide rules.  11×18 spread, sheets.  If you don’t know what that last one is, think a notepad of graph paper-like cells in them, except wider – basically like a physical version of Microsoft Excel.  And partners who would take a No. 2 pencil, do a cash flow, and do the sensitivity analysis by writing a different variable at the top and erasing/replacing each individual cell on the rows below it.

The office was a hybrid of a Mad Men set and a modern workplace.  The first day I joined, I introduced myself to a 70-year partner who guffawed, slapped me on both cheeks, and said it was good to have some young blood in the office.

But I mention all this because if nothing else, the company is a case study for the power of a brand.  Having a brand that was present at the creation myth (Disneyland) of the entire industry gave you immense value.

The value helped the company coast through a decade or two in a state of inefficiency.  This was the beginning of when I began to realize things about companies.  Like the fact that a larger a company gets, the more latitude there is for inefficiency.  Again, companies are groups of people.  Is it harder to kill 2 people working out of a garage or a band of 100?  Probability-wise, unless you’re a company like Instagram, I’m choosing the latter.

A brand markets for you while you sleep.  A brand allows you to charge hundreds of percent premiums.  A brand allows you to coast and smoothes over suboptimal product quality – although you shouldn’t do this.  But always do try to build a brand.

But, probably because of its brand, the company had become complacent.  Some of the analyses were trash, frankly speaking.  Some of the partners had checked out, a long, long time ago.

And maybe that was the biggest lesson of all for me.  And when I think about it, it’s perhaps the real underlying reason I left – seeing that complacency in a lot of the people, I realized it’s not what or where I wanted to be.

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