last unit is sold or the last square foot is leased, the construction loan is repaid, and all investors have received their initial equity back, ideally with a return or profit. Political work—meetings and negotiations with neighbors, politicians, city staff, commissions, and other interests—will also be ongoing as will parallel public relations and marketing and sales efforts. The design will evolve continuously too, from a freehand sketch on a napkin or the back of an envelope to a big stack of detailed drawings and specifications that the contractor will use to determine the final costs of labor and materials and to construct the building.
It sometimes helps to view development this way—as a series of stages and as a list of tasks—but it can also be viewed as a process that is punctuated by a small number of important milestones. These include property acquisition, preliminary approvals, final approvals, achieving a predetermined percentage of presales or signing a lease with an anchor tenant, closing on financing, completion of construction, stabilized occupancy, and sale. Each of these is a required step on the way to a completed project and each requires the careful management of myriad tasks through multiple stages. While these lists of stages and tasks are easy enough to comprehend in the abstract, they are more fluid and messier in practice. Because no two development projects unfold in the same way, managing uncertainty and the “unknown unknowns” is just one more part of the business. Real estate development is a complex type of product development with high stakes. Minor mistakes or omissions in any of the stages, tasks, or milestones can derail or stop a project and cost the developer most if not all of his or her financial resources. And just one bad project can wipe a developer out.
If real estate development is a form of product development, what exactly is the finished product that developers make and how do they go about doing it? In the next section we will explore these questions by considering the careers of two Portland developers—Pat Prendergast and John Carroll. Each had a long and productive career spanning various product types, and together they were the first to see the potential in an abandoned railyard that has since become a neighborhood called the Pearl District. We will hear how they each think about both the product and the process of development, beginning with Prendergast, whose career story is a study in opportunism, adaptation, and product innovation over time.
Portland, Oregon: The Graveyard of the West
Pat Prendergast grew up in Dallas and attended Park City schools and the University of Maryland while he served in the U.S. Air Force. After he was discharged he returned home and took an entry-level position in a large bank. Three years later he moved to Houston to work in a smaller bank where he knew he could learn more about what the various departments did. The most profitable department in that bank was real estate construction lending, so Prendergast began to pay attention to the man who ran that department. “He was a darling of management and he brought in a lot of money so I gravitated away from the commercial lending side towards real estate construction lending.”6
At the time, a big developer headquartered in Dallas named Trammell Crow pressured the Los Angeles–based commercial broker Coldwell Banker to come east and open its first location outside of California, in Texas. “Crow, who had become Coldwell’s largest client in California, felt strongly that Texas was going to be the next Southern California and he ended up being right,” says Prendergast. Five people came from Los Angeles to open Coldwell’s Houston office and a year after meeting them Prendergast went to work for Coldwell Banker in commercial brokerage. “We were working with some of the largest national developers including Trammell Crow and Gerald Hines, who was based in Houston.”
When Coldwell opened an office in Dallas, Prendergast moved back to his hometown. “CB was representing Neiman Marcus, which was based in Dallas, and Neiman was on an expansion program at the time. CB was also doing a lot of regional shopping mall leasing around the Midwest at the time so I did that for a couple of years.” Then, in 1972, one of the original five CB people who had come from Los Angeles to Houston was asked to go up and open an office in Portland, Oregon. He recruited four other CB people from around the country to go with him and one of them was Prendergast. “My father-in-law had a lot of friends in Seattle and California, so when I told him I was planning on maybe moving to Portland he checked around. Back then, Oregon was known primarily for its poor, lumber-based economy. ‘Word I get,’ said my father-in-law, ‘is that Portland is the graveyard of the west.’”
Creating Capital to Do Other Things
Prendergast moved to Portland anyway. “Coldwell had a Seattle presence at the time and they were all over California, so when we arrived in Portland that was the catalyst for Crow, Hines, Don Koll out of Newport Beach, and some of the other larger players who wanted national brokerage representation if they were going to come into a relatively unknown market like Portland.” Soon, Prendergast wanted to get into the business on his own but, at the time, Coldwell wouldn’t allow its brokers to own real estate. “They thought it was a conflict of interest and that as listings would come in the brokers would cherry-pick the good ones.” If he wanted to own real estate, he would have to go out on his own, so a year after moving to Portland, in 1973, Prendergast left Coldwell and formed his own development company.
“I started out doing build-to-suit commercial buildings on twenty-year, triple-net leases for expanding companies like Denny’s and 7-Eleven.” These large, national “credit tenants” could guarantee that the rent would be paid, lowering Prendergast’s risk and virtually ensuring a dependable income for the duration of the leases, while leaving him with buildings that could be sold as assets in the future. “Some of the banks were doing branches and the savings and loans were still expanding so I did buildings for them too. Until 1979–1980, we basically concentrated on those small, low-risk, build-to-suits to create capital to do other things.”
Late in the 1970s, Prendergast started doing some of the early speculative office-building developments in Portland, fairly close in to the core. “Those went reasonably well considering there was nothing in the urban center at that time, so in 1981 I did my first office building in the central business district.” This was a 200,000-square-foot building near Portland State University that Prendergast did as a joint venture with New York–based Merrill Lynch Hubbard. Between 1973 and the early 1980s Prendergast developed several million square feet of office space in Portland, Seattle, and Denver. “Then, slowly but surely, the high-tech boom started taking off in the early 1980s so we had a fairly sustained market for about ten years. High interest rates in the early 1980s, however, followed by the 1986 tax act that closed a lot of loopholes and eliminated tax benefits as an equity source, and then the savings and loan crisis in 1987 combined to dampen the commercial office market throughout the United States for decades to come. The rest of the 1980s were a tough time nationally for office development,” says Prendergast. “So, since the 1980s, we have concentrated largely in the urban center with the exception that I participated in some fairly significant land development and land sales in the 1980s, mostly on the west side, where high-tech was growing.”
An Inkling of High Tech
As late as the 1980s, Oregon was still struggling to move beyond its historical, labor-based lumber economy, and real estate market cycles were short when compared to the rapidly growing Sun Belt. “A good market cycle in the commercial and industrial area would be eighteen months,” says Prendergast, “but you have to have growth to have a decent economy, so the question then was ‘How would Portland make the transition?’ ” The answer began to emerge when high-tech companies began to relocate to the region from California. “Growth started to occur in Portland metro with the advent of high-tech in the early 1980s.”
At the time a new real estate product called “flex space”—a variation on the traditional one-story suburban industrial building—had come on the market and started to supply space for these companies. Flex space started with a basic high-bay warehouse or light industrial building. The innovation was that a strip of office space was tacked onto the front, creating an assembly building with offices. Flex space provides lots of flexibility
