is only made worse by having small floor plates at the top.” Further, the longer it takes to get to the top the more the market can change in terms of tastes and the more time your competitors have to supply more product and saturate the market.
Figure 9. Buzz Ruttenberg’s two-tower design for 600 Lake Shore Drive, Chicago. Courtesy of Pappageorge Haymes Partners.
Second, Ruttenberg’s conception for two towers rather than one allowed for smaller floor plates and more exterior perimeter for the same amount of area, which meant more windows in the units. But more important, by placing two towers perpendicular to the lakefront, Ruttenberg’s floor plan allowed him to arrange his units so that they all had lake views, whereas a single tower parallel to the Lakefront would have had many units on the back side, facing west, with no lake views. In Ruttenberg’s plan, the two-bedroom units were on the southwest and northwest corners, with oblique lake views; the one-bedroom units were in the centers of the long sides of the towers with lake views to the southeast and northeast; and the largest—the three-bedroom units—were on the northeast and southeast corners, where they had panoramic lake views.
Third, Ruttenberg also charged a higher dollar-per-square-foot price for the larger units and a lower price for the smaller units, which is the opposite of typical practice. More often, units are priced so that smaller units cost more per square foot while larger units cost a little less and the difference between the unit prices is not as great. But at 600 Lake Shore, a 1,000-square-foot, one-bedroom unit sold for as little as $400 per square foot, or $400,000, and a 2,500-square-foot, three-bedroom unit sold for $700 per square foot or $1.7 million. Ruttenberg had looked at suburban retirement home models, where larger, better units are sold for a higher dollar-per-square-foot price. He had also learned from the sellout of his previous project across the street that lake views sell—“what a surprise”—and he was confident that he could charge a significant “view premium” for those three-bedroom corner units facing the lake. “Why pay that premium? Because there is an eighty-mile, no-build zone in front of your unit.”
Fourth, building two separate towers also meant that Ruttenberg could manage his risk by building in two phases, giving him more control over construction and market timing. This also allowed him to “prove up” the concept with the smaller first tower, which represented only 40 percent of the project’s size. He could then make adjustments to the second tower to best satisfy the market at the time. So the two-tower scheme made sense both economically and in terms of managing risk.
Figure 10. A typical floor plan for 600 Lake Shore Drive. There are six units per floor in each of the two towers, and all units have views of the lake to the east (right, in this plan). Courtesy of Pappageorge Haymes Partners.
Fifth, Ruttenberg managed his risk by designing reasonably sized units, paying attention to the total sale price of the unit rather than the dollar-per-square-foot price, providing value, and building with an eye toward what inevitably happens—a downturn in the market. At the peak of the condo boom, many developers were “blowing air” into their floor plans to create larger units that they could sell for higher prices based on dollar-per-square-foot pricing. This has the effect of making larger units look good on paper, but it can lead to difficulty when the market takes a turn for the worse because while home buyers may compare projects based on dollar-per-square-foot prices they buy based on what they can finance—the total price. “So if you provide the same unit as your competitor,” says Ruttenberg, “but you blow a little less air into the floor plans and you make them slimmer and a little more efficient, then you are hedging against the day when the market slows down. And if that means as a buyer you are paying $1.7 million to live in a three-bedroom, three-bath unit on the lake but others are paying $2.5 million to $5 million, then that feels pretty good to you.”
Figure 11. The unobstructed view east, over Lake Michigan, from 600 Lake Shore Drive, with Navy Pier to the right. Courtesy of 600 Lake Shore Drive LLC, a Sandz/Belgravia Group Ltd. Development.
Ruttenberg concludes that “much has been made of the ‘three L’s—location, location, location’—but something that is equally as important that gets talked about less is ‘value, value, value.’ You can have the best location but if it is overpriced then you have to hit the market just right or else you are out of luck. You always have to assume that it is going to go bad,” says Ruttenberg, “and so the question becomes, how do I differentiate myself for when that happens? Once again, ‘cautious risk taking.’ That is how we managed the risk on this project—by designing a product that we could complete and get to market faster and that would be a value even after the market turned down.” And when Ruttenberg talks about “we,” he is including his main partner on the project, Michael Supera. “Michael is the son of Louis Supera so 600 Lake Shore Drive was like a fifty-year reunion of the Ruttenbergs and Superas working together.”
Buzz Ruttenberg’s story illustrates how upbringing and background influence a developer’s career. His ideas about rule breaking and cautious risk taking offer one view of opportunity, risk, and how “psychological barriers” can cause people to value things differently—and create a good deal for the observant entrepreneur. And with 600 Lake Shore Drive, Ruttenberg explains how he was able to hedge against a downturn in the market by using a more efficient design to differentiate his project from that of his competition. Finally, despite the common misconception of entrepreneurs as crazy risk takers, throughout this story Ruttenberg explains how most developers really think about their business and the products they produce. For those who are successful over time, development is not about taking huge risks on bold, creative, but unproven ideas. Rather, it is about minimizing exposure to risk through a careful process of incremental improvement to traditional product types over time.
“The best Shakespeare plays are based on Greek mythology,” says Ruttenberg, “so the question becomes what adaptations can you make and how can you make it better, more interesting, and more current. It is the same for development: You don’t want to reinvent the wheel—once they cut the corners off, it rolls.” Still, to succeed, a developer must always be improving the product at the margins, so in the next chapter we will look more closely at real estate development as a product-development process and how product types evolve over time.
Chapter 3
The Real Estate Development Process
There is a reason for everything with each developer and each project is a big life story making its way into the building.
—John Carroll, Portland, Oregon, real estate developer1
Real Estate Development as Product Development
Real estate means different things to different people. To most of us it means the physical homes we live in and the office buildings where we go to work. To city planners, real estate development is a way to mesh the economic goals of private developers and their investors with a city’s larger economic and social goals, from business growth to job creation and housing production. Planners may influence the geographic direction of development, for example, by encouraging ground-floor retail in buildings that will be built on commercial corridors or by encouraging higher-density and mixed-use development around transit stations. For elected politicians, development is a way to encourage investment in the city—in ways that are in concert with policies, plans, and the desires of their constituents—and as a way to attract and retain businesses, house residents, and expand the city’s tax base. For architects, a real estate development project
