The Housing Chronicles Blog: How The Related Cos. Plans to Outwit the Slump

Saturday, January 12, 2008

How The Related Cos. Plans to Outwit the Slump

So how does The Related Cos. cope with a swooning housing market in its various markets such as Los Angeles, Boston and Puerto Vallarta? By throwing out its business plan.

Writing in the current issue of Business Week, Christopher Palmeri focuses on various ways that Related's Stephen Ross is willing to get creative in order to tap long-term financing and move existing inventory.

For financing:

On Dec. 17 his real estate development and management firm Related Cos. secured $1.4 billion from five prominent investors, including Michael Dell, Goldman Sachs (GS), and the government of Abu Dhabi—Related's first outside investment. He'll use that cash to fund what may be the most ambitious lineup of new construction projects in the country, $9 billion worth of giant condo, hotel, and retail towers he's building from New York to Los Angeles. "You have to look to the future," says Ross. "But make sure you can survive the present."

With that funding, Ross is confident he can bob and weave his way through the challenging real estate terrain. As necessary, he can retool his marketing tactics and even his building designs to attract buyers. He's also better positioned for the tough financing environment. Many banks now want developers to cough up more money for projects up front. And few banks are willing to back a project on their own, so developers must scramble to find multiple financiers.

And what about the St. Regis Hotel in Century City?

At the peak of the boom in 2004 Related paid $120 million for the struggling St. Regis Hotel in L.A.'s Century City neighborhood. Ross planned to turn the building into condos. But he decided he could get a higher price by tearing down the hotel and building a new high-rise. As a result, his costs have swelled to $1,000 a square foot. So, in one of the weakest housing markets ever, Related must sell the new condos at near-record highs for the city in order for Ross to recoup his costs and make a decent profit. (The asking price for the penthouses is $30 million.)

At Snowmass in Colorado, Related is hoping to increase affordability by offering fractional instead of full ownership for vacation condos:

At Snowmass, Related has asked for permission from local officials to sell fractional interests to multiple buyers rather than one condo to a single person. Ross hopes that will make the condos more affordable: Eight shares go for $300,000 each, compared with millions for an entire condo.

And, finally, their cash hoard is also allowing for some opportunistic purchases in Florida:

Ross's cash cushion is also allowing for some opportunistic buying. In South Florida, where he and partner Jorge M. Perez are prominent condo builders, prices are plunging, and buyers are walking away from their down payments. So Ross and Perez, who think the market is undervalued, are buying up competitors' condos—if they can get them for less than the cost of new construction, or roughly $500 a square foot. Says Thomas J. Barrack, chairman of Colony Capital, a large real estate investment fund: "[Ross] is courageous in the face of fear."

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