t’s lunch in a
Scottsdale restaurant. The attendees are mainly retired scions of
industry, professionals, and business. I came because the group is
having a presentation by one of the largest real estate developers in
Arizona, and I’ve come to hear the story of a “typical” Arizona
Mark Sklar, one of the three original (and still intact) partners at DMB was originally from Wisconsin and studied history. He has the midwesterners’ value system and sense of engagement.
He and his wife moved to Arizona to strike out on their own in 1971.
For seven years he was in the travel business before becoming partners
with Bennett Dorrance and Drew Brown to form DMB, a company known for
its excellence in real estate development and community engagement. As
he runs down the list of boards he is on, from arts advocacy to
Alzheimer’s centers to camps for special needs children, he tells us
the company credo: profitability, legacy, partnership and fun.
DMB was formed in 1982 out of some land syndications. Drew Brown was
Mark’s lawyer, and Bennett was Drew’s client. They spent a long time
getting to know each other, trying to understand if an enterprise among
the three of them would make sense. Mark, Drew and Bennett are
entrepreneurs who started off by buying and selling land, using money
they raised from syndications.
In 1989, the Resolution Trust Company afforded them an opportunity
to buy a bunch of stuff from defunct savings and loans. No one else
would invest, because no one knew where the bottom of the market was.
Sound familiar? So they bought a lot of property, including the famous
blue building on Alma School Road in Mesa, Arizona. Of course they had
the means to do it. It’s not a strategy for everyone.
About fifteen years ago, the company took a philosophical jump into
the planned community business. They view themselves as developers,
planners, and zoners and marketers of planning communities: large
communities (like Verrado and DC Ranch) with lots of different product,
and recreational communities for people who want vacation homes (Forest
DMB also has a significant amount of investment in California: in
Orange County at Madera Ranch. They also have a property in San
Francisco Bay that is currently under water; it was formerly a salt
mine owned by Cargill.
DMB prefers to do joint ventures with landowners rather than buy
property. They’re a project-centric company that pushes authority down
into the field into each project’s General Manager.
They have done quite a bit of succession planning, including
diversifying their capital base outside Bennett Dorrance’s personal
capabilities. They now have two financial partners from the Bay Area, a
board of directors, and a real plan to allow the company to succeed
them without a sale or liquidation.
And now…about the market. Mark’s guess is that it won’t turn around before Q3 of ’09 or have righted itself until 2010.
We have an oversupply of single family residential, which will
create a longer time to recover this time around. It was fueled by easy
money, and the idea that single family residential could be an
investment. Two and a half years ago, DMB was so concerned about this
that they hired a team to knock on every door in Verrado and see if
someone was living in the home. They found that about 25% of the homes
Arizona has a worse oversupply of single family housing than
California, because it has strong employment, a right to work state,
and it is easier to bring a product to market here than in California,
so that encourages inmigration.
167,000 homes were built in 2004-2006 in Arizona, where there is a
need for 35-40k a year based on inmigration. The oversupply will be
with us for a while. Here’s why:
1)We have had a dislocation in the financial markets that has been
unprecedented. Sklar is seeing a lot of institutional lenders do really
stupid things; they are handcuffed because they don’t know what their
portfolios are worth, and they are walking away from sound,
underwritten transactions. They just don’t know when the regulators
will come in.
Bill Gross’s newsletter for the past two years has been talking
about the shadow economy — large scale transactions that have been
securitized and sold to people who didn’t understand the underlying
value of the assets. The result of this continues to affect the real
2)Huge increase in commodities costs.
4)Interdependence with everything that happens in the national economy.
How does he feel? Negative for the short short term. The economy is
one problem for Arizona. Employee sanctions laws are another. The
inability of people to sell homes elsewhere slows the state’s
inmigration. (2006 102,000, 2007, 67,000 people.) DMB has taken their
land of the market to discourage more building for right now. They have
no wish to contribute to the oversupply. They are also tightening
budgets, lengthening timelines, and have laid off twenty people. But
DMB is optimistic for the long term. With the business and political
leadership we have now, he thinks Arizona has a rosy future.