The new “normal” is about focusing on what is important and prioritizing what is meaningful, both as humans and as organizations.
Last year, a number of leaders throughout the country involved in land use—from lenders to landscape architects—were interviewed with the intent of capturing the qualitative side of the economic downturn and to describe their mood and behavior as they responded to the dramatic changes in the economy that affected work and life (see “How Is It Going?” September 2009, page 138 in the print magazine). People at the time were busy readying themselves and their organizations for whatever was to come next, without knowing quite what to expect.
There was a consensus among those interviewed then that the downturn represented a major reset in the industry, which had gone through a progression of denial, panic, and paralysis. They seemed ready to follow one of three paths—recommit to their core business and stay the course, try a new direction to take advantage of industry shifts, or reinvent their business altogether.
This year, the disparate group of people interviewed share several qualities: all are determined, but cautious.
This year has been more challenging than 2009, says Joe Brown, chief executive of AECOM’s Planning + Design + Development group. “Last year, we were still evening out the depth of the crisis. This year has been tougher, certainly in the U.S. and other developed countries,” he says. “We know so much more about the global economy and are committed to making progress in areas like carbon reduction. Yet the reality of making it happen in many cases seems to be slipping and still out of reach.”
All feel a sense of renewed focus, almost to the point of feeling reinvigorated. While the mood certainly would not be characterized as optimistic for the short term, there is a common theme that can only be called resolve. While the economic reset in the real estate community has been substantial, many express the belief that the downturn is a necessary course correction to an unsustainable rate of growth and attitude toward risk.
A Societal Shift in Progress?
Last year, many of those interviewed alluded to a “giant reset” or sea change that they saw coming in the land use community. This year, this notion has emerged as a probable full-blown societal shift. In his book The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity, author Richard Florida writes, “Great Resets are broad and fundamental transformations of the economic and social order and involve much more than strictly economic and financial events. . . . As it takes shape around new infrastructure and systems of transportation, it gives rise to new housing patterns, realigning where and how we live and work. Eventually, it ushers in a whole new way of life.” The downturn has forced people to examine alternatives to their lifestyles that they may never have considered before. For many of the 76 million baby boomers, this has meant simplifying their lives and shifting from material wealth toward a growing awareness of the impact of consumption, while the next generations seem to be more naturally attuned to social consciousness and to giving priority to quality of life over quantity of possessions.
The consensus among the people interviewed is that the economic shift has affected societal behavior, which in turn affects land use behavior in a fundamental way. They believe that change has not been in just the tools of the business—that is, in lending patterns and regulatory requirements—but also in the very fabric of development, such as land use patterns and density of development. Accordingly, this shift has opened up a vibrant conversation in the real estate community about the corresponding obligations and opportunities that come with new patterns of land use.
The industry has experienced a kind of reckoning, says Uwe Brandes, vice president, initiatives, at ULI, where he leads sustainable development and urban design research efforts. Instead of creating product that they hope will attract customers, industry leaders are placing much more emphasis on learning about what customers or tenants want and need, and responding to demand. Specific examples of changes in consumer-driven real estate behavior include:
the downsizing of second homes, both for economic and environmental reasons—and, in some cases, as an example of reverse conspicuous consumption, with buyers reluctant to flaunt their wealth in this period;
- the migration of baby boomers back to cities for retirement rather than the “sand states” of the Southwest and Southeast;
- the shift to a preference for renting rather than owning real estate;
- the dramatic increase in the number of people who work at home; and
- the rediscovery of the benefits of urban living.
Brandes recalls what he sees as a landmark—a press release in December 2007 from Forest City Properties virtually acknowledging that the firm is now in the property management business. That was a signal that the industry was changing its focus from development to stewardship, Brandes says. If it is true that nearly 50 percent of the U.S. building stock that will exist in 2050 is already built—as asserted by Peter Calthorpe, 2007 laureate of the ULI J.C. Nichols Prize for Visionaries in Urban Development, in his upcoming book Urbanism in the Age of Climate Change—such a change in focus is not an option. Professionals who for years have focused on new buildings and communities are now being challenged to apply their knowledge and skills to create value from the existing building stock.
Calthorpe appears to have been on the right track when he said last year that the current economic downturn would “finally be the death of sprawl.” Many people interviewed agree that it is becoming increasingly evident that patterns of growth established in the second half of the 20th century are not sustainable. “Living beyond our means both economically and environmentally has shocked us into being more responsible,” observes Clark Davis, cochair of HOK, one of the largest U.S. design firms. “This has given rise to development patterns that are more rational and resource friendly. Do we really need more retail space in most American cities? I think not.”
Jonathan Rose, president of New York–based Jonathan Rose Companies and cofounder of the Garrison Institute in the Hudson Valley, is exploring the systemic shifts being documented by emerging research that connects behavioral science to the built environment and climate change, and is identifying new opportunities to effect positive change at a personal, professional, and policy level.
Many people refer to this as the “new normal.” If this is a valid way to frame the changes being observed, the new normal seems to be fueled by three behaviors:
- Caution. While the focus on due diligence has tempered financing and development activity, a healthy degree of caution will require more fiduciary responsibility and realistic expectations for returns and outcomes going forward.
- Doing more with less. This is not just a function of assiduous cost cutting. There seems to be a genuine recognition that many common business practices in the past two decades were simply bloated. Necessary trimming has showed how productivity increases can be achieved with fewer resources.
- Higher purpose. The survey panel identified many examples of a drive toward authenticity and achieving more than just profits.
There is evidence of a growing need for a higher purpose in real estate investments as part of a global shift in consciousness, says Paul Milton, CEO of the development company for the Singita Partnership, a new global initiative raising funds to invest in conservation-based ecotourism development. In the process of meeting with high-net-worth investors and banks throughout the world, he has seen how the collective greed that drove many investment opportunities in the past has made potential investors wary. Milton notes the emergence of many new imperatives for investing, including the need not just to make a profit, but also to make a difference—particularly in the communities that will be affected by the investment—as well as the need for more transparency and trust, and for alignment between investor and investment well beyond financial payback.
The “Why” Era
The deal, per se, seems no longer to be enough for anyone. “There is no longer investment for investment’s sake: there has been a shift in consciousness,” Milton says. “Buyers and investors alike are tired of promoters who have not delivered on their promises.” Today, decisions to invest, to build, to allocate capital, to buy, to lease seem increasingly to be centered on the question why, rather than how much. Investors and lenders question rationale in a manner that is redefining the word “scrutiny.” Many transactions have slowed or died as a result. Even on a personal level, individuals are examining their own behavior in ways they may never previously have considered by calling into question their own motivation and returning to their core values.
At a time like this, individuals and organizations need to ask themselves the “why question,” says Chip Conley, CEO of Joie de Vivre Hospitality (JdV), California’s largest operator of boutique hotels. In good times, companies and individuals focus primarily on what their goals are and how to achieve them. Conley contends that why is the harder question, but central to finding purpose and meaning in work and life, as well as to reenergizing an organization. Conley himself has made a dramatic change since he was interviewed in 2009. He sold his company and has found a new calling: while still consulting for JdV, he has begun to write, speak, and consult on the management philosophy that made his company successful. “We are straddling two eras, so there is bound to be friction” he observes. “The new normal really is about focusing on what is important and prioritizing what is meaningful, both as humans and as organizations.”
The Dark Cloud of Unemployment
Almost everyone interviewed recognized and commented on the fundamental role that unemployment is playing in blocking a speedy recovery for the U.S. economy. Mike Covarrubias, CEO of TMG, a San Francisco Bay Area–based regional real estate development firm working in all building sectors, uses the word “terrifying” to describe the potential for long-term unemployment. He makes explicit what may not have been obvious in formerly robust times. “Jobs drive real estate,” he says. “Without companies hiring, they are not expanding into new office buildings. Without new jobs, people are reluctant to invest in new housing or travel and have no real buying power.” A reversal of the downward trend in employment seems elusive, and several people interviewed are redesigning their businesses to adapt to the reality that reduced buying power will alter the nature of their work.
For example, Dave Howerton, chairman of Hart Howerton, a full-service planning and design firm with offices in New York City, San Francisco, and London, has addressed the sustained unemployment affecting his hospitality and residential clients by creating a smaller, tighter organization. He acknowledges that one year ago the firm was primarily focused on “stopping the bleeding,” but over the past year, Hart Howerton has refined its business model to become scalable so that it is viable at any size.
Eyes on the Public Sector
Jim Heid, founder of the sustainability consulting and development advisory firm UrbanGreen, subscribes to the philosophy that crises do not change trends, but they do accelerate them. The decisions made in the next 24 months will have an enormous impact on the built environment for decades to come, he says. “We cannot build communities for the 21st century with the 20th-century model.” He believes changes are needed at all levels, from development to capital markets and public processes, with perhaps the most important change coming in government regulations to encourage rather than stifle more sustainable forms of development.
In California, the California Environmental Quality Act (CEQA) has effectively become a way to stop development, not improve it, as was intended when the law was passed in 1970. Few people in the land use industry in California would disagree with Heid that CEQA is deeply in need of a major overhaul. This is only one example of a phenomenon that people interviewed feel passionately about: government at all levels needs to step up to the plate to accelerate, not prevent, the right kind of development and to make changes to outmoded land use regulations.
As an active leader in economic development initiatives, Andy Ball, CEO of Webcor Builders, based on the San Francisco peninsula, has a way of leading a turnaround, not just for his business, but also for the region, that is bold and direct. He goes straight to what he considers the source of the problem: Washington. While the private sector is doing what it takes to cut back and make changes to adapt and survive, Ball believes that local, state, and federal governments have not made parallel cuts or developed the incentives that are required of them. Together with other business leaders as a part of the Bay Area Council, Ball travels to Washington regularly to meet representatives to educate them on important land use issues. His most recent campaign is for a $1-per-gallon (26-cent-per-liter) gasoline tax to modify behavior related to fuel consumption and to promote clean energy technologies and infrastructure, such as high-speed rail, that are critical for the future of cities.
Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, is hopeful that this difficult period will encourage local and regional governments, which are now struggling with their own financial crises, to adopt a more positive attitude toward growth and be willing to work collaboratively with planners and developers to achieve—and even attract—well-considered growth for their jurisdictions to support the tax base.
Several people interviewed mentioned increasing involvement of their organizations with government at all levels; 70 percent of AECOM’s revenue, for example, is from government clients around the globe. Public/private partnerships (PPPs) are one vehicle for getting projects moving and transferring best practices to the public sector.
One current focus of Indianapolis-based Greenstreet Ltd. is on building PPPs necessary to solve the complex and interrelated problems of transportation, affordable housing, and climate change. Jeff Kingsbury, Greenstreet managing principal, recognizes that this approach can be much harder and take twice as long, but he believes that working together with public agencies as a developer and adviser toward a common vision will ultimately promote smarter, more sustainable growth. And, he adds, “while last year was about short-term urgencies, this year we are focused on the longer term.” For some organizations, the move to PPPs—which were not mentioned at all in last year’s survey—has required them to develop new competencies such as grant writing.
Many respondents think that the money allocated under the American Reinvestment and Recovery Act did not serve to stimulate growth. But as Karen Alschuler, urban design principal at Perkins + Will, observes, because much of the stimulus money went to repair old infrastructure, the question now is what should be built in areas with the improved infrastructure. The financial realities are causing delays in development, she acknowledges, but she is happy to see that many landowners are at least moving forward with large planning initiatives, doing what is needed to ensure that built solutions have a sound rationale.
Capitalizing on Opportunity
What is the impact on business of these change factors in 2010? Simply put: diminished activity. The profound effects on many sectors of the land use community are known to anyone associated with them: much tougher competition for a greatly diminished roster of building projects, constricted access to capital, overbuilding in sectors fueled by consumer spending, apparently attractive deals that just do not pencil, 50 to 70 percent layoffs in construction, 30 to 40 percent layoffs in the design professions, and idle developers, with revenue streams only a fraction of mid-2000s levels. For many, domestic work has all but dried up.
But the macroeconomic changes challenging the industry have also created opportunities of a different sort for individuals, organizations, and the industry as a whole. Against this backdrop of economic and social change, land use leaders were asked how they—and their firms—are doing today. Several trends are apparent.
Focusing on basics has kept some organizations strong. Many of those interviewed remarked that operating with increased scrutiny, greater transparency, a more cautious outlook, and an eye for “doing the right thing” characterizes the context of the business of land use today. They also stress that these are principles of just plain good business. Organizations that based their operations on sound business fundamentals were not always the ones posting the biggest “successes” over the past decade, but they are often the ones that survive today, poised for what the future brings.
The leaders of businesses that always had a strong rationale and mission say they are doing fine today, if not exactly prospering. For TMG Partners, the core business and long-term strategy are no different than they were when the firm began 17 years ago. Covarrubias has implemented a conservative investment strategy over the past three years, refusing to ride the wave of increased leverage. The firm is now working on assets that others bought in previous cycles and seeking joint ventures for repositioning. This is not fundamental reorganization, but it is, in Covarrubias’s words, “changing where we point the ship.” Rose, whose company has also been vigilant about cash flow and appropriate leverage, believes that current economic conditions and value shifts support the fundamental objectives of his company, which are focused on urban renewal, the greening of existing buildings, and affordable housing.
Economic challenge has been a stimulus to become more efficient, creative, and entrepreneurial. According to Davis, a persistent culture of entrepreneurialism has enabled HOK to fare relatively well in this economic era because of the firm’s “try it and see if it works” attitude. “We see it in our professionals and in our clients: people who have critical needs figure out a way to move forward.”
Ross notes how quickly organizations have been able to restructure, improve productivity, and find new ways to generate revenue. The organizations that are the most entrepreneurial and creative during this period will set important examples for the future, he predicts.
Reduced size has had unintended benefits for Hart Howerton, as well. Younger people in the firm have had to step up and take on more responsibilities on projects and in firm management. It has also meant that the senior partners are working much more collaboratively in a kind of skunkworks fashion to get solutions to their clients quickly, which David Howerton calls “kind of exciting.”
For some organizations, the process of cleaning house has provided a chance to reinvent aspects of their business. “Good times let companies survive with bad practices, which can be fatal in a downturn like this,” Ball notes. “In good times, it is not as easy to see what needed to be fixed.” Most of the people interviewed acknowledged that opportunities for increased efficiency exist that they might not have recognized two years ago.
Thinking more holistically and working more collaboratively has expanded the definition of service. To many of the leaders interviewed, the fundamental nature of the economic downturn has exposed the interconnectedness of business, society, and politics. Brown is driven by the holistic imperative. “We need to look at the complex infrastructures of cities and information and understand how they interrelate,” he says. “Practitioners need to understand how their particular area of expertise relates to the broader context.” Brown goes so far as to say that “the way we have been delivering services to the real estate industry was broken. In fact, the whole system was broken. We can no longer think of solutions relating to land use, density, and transportation independently.” He points to the recent 62-mile (100-km) traffic jam that lasted ten days in Beijing as a graphic consequence of siloed thinking in which one solution creates problems for another part of the system.
AECOM has implemented what it calls a global cities initiative, working with selected cities around the world—including Phoenix and Beijing—to help them think more systemically about the problems they face. Brown points out that this initiative is not about selling AECOM’s growing platform of services, but about ensuring that what the firm delivers is presented within a much broader context than has been customary, even just recently.
Recognizing this more complex business ecology, Covarrubias has used this time to broaden TMG’s perspective in several ways: he is participating in many more community activities, and he has established an advisory board to provide insight and direction to the company’s development strategy, with members coming from various industries and organizations, not just from those involved in real estate.
Alschuler maintains that change will come from new kinds of partnerships, not just within design firms like hers, but also from outside partnerships. Perkins + Will is also exploring ways to bring together the generations within the firm to reinvigorate its culture and is encouraged by the groundswell of interest and talent in the emerging generation of planners who are committed to taking on the challenges that lie ahead and creating positive change.
Last year, Heid worried that the economy might rebound too quickly and that those in the industry would miss the opportunity to take advantage of this down cycle to learn new lessons and make positive changes in the industry and in their lives. It appears that many key industry leaders have not let this crisis go to waste and are looking for ways to apply to this decade the lessons learned from the past one.
“There is a great deal of uncertainty about where we are going and how long it will take to get there,” Ball says. “All we know is that things will be different.” Everyone interviewed agreed that the necessary change is not going to happen quickly. Applying Newton’s law, Ball notes that the unprecedented growth that led up to the recession may dictate an equal and opposite reaction, which means, as many put it, “a five-year hangover.” But what do firms do in the meantime? As Covarrubias says, “We can’t do nothing forever!”
Despite convergence of opinion on the current business context, no one has a prescription for stabilizing the land use community and charting a course for its future. But most of those interviewed, in their own way, reflected on the big shifts that must happen over time: lowered, more realistic expectations for returns; longer-term thinking; a life that incorporates what is truly valued, both personally and as an organization; making a difference to a community larger than one’s own enterprise; replacing hubris and greed with humility and creativity; and using more qualitative metrics than the gross domestic product and the Dow Jones Industrial Average—such as downtime and perceived happiness—to track the health of society.
When asked how they plan for the future in an environment of such uncertainty and change, the leaders, in more than one instance, replied that they are hoping for the best, but planning for the worst. No references were made to the formal strategic planning processes that have characterized business practices of the past two decades. Most seemed more concerned about strengthening their organizations in general and finding ways to be more resilient in order to be prepared for ongoing change.
Brown thinks it is all about action. At AECOM, he seeks to make bold moves rather than be prepared to react. Do not protect your organization; project it, he says. “You have to be agile as an organization to respond to the chaos and crises in the economy.” He says he has told his team for years, “If there is no chaos, create some! If there is no crisis, make one! Just get out and move. Make it happen.”
At the close of summer 2010, the survey group cannot be characterized as an optimistic cadre of leaders. Yet the survey did lead us to believe that, while future direction is still uncertain, leaders in the land use community are more realistic this year than they were last and ready not only to embrace change, but also to use it to improve their own practices in support of a better form of existence. Isn’t that something to be optimistic about? UL
Mary Breuer leads Breuer Consulting Group, which conducts executive search for the built-environment community. Marianna Leuschel heads L Studio, a communications consulting and design firm specializing in sustainable land use, energy, and climate.
(This survey was conducted by Breuer and Leuschel as part of their ongoing research collaboration. More than 20 professionals were interviewed this year for the second in a series of surveys and articles that will be done annually over the next decade to mark the qualitative shifts and attitudes in leadership in the land use community nationwide.)