The annual Forbes Billionaires List speaks volumes about the movement and concentration of wealth across industries and geographies. The list includes two US-based self-made real estate billionaires added in 2015 and two added last year. How did these new members of the billionaires club make their money? What lessons can you glean from their success to apply to your business?
The 2015 additions both benefited from the boom in property values in and around the Bay Area. San Francisco-based developer Jay Paul (#1,250) debuted on the list with a net worth of $1.5 billion. His privately held Jay Paul Company owns 4 million square feet of high-end office space leased to companies like Amazon and
The 2014 additions to the list of non-dynastic real estate tycoons built their fortunes in New York. Jeff Sutton, ranked #642 in 2014 and #557 in 2015, is the founder and president of Wharton Properties which acquires and manages more than 120 New York City buildings leased to top fashion brands. David Walentas, ranked #1,210 in 2014 and #1,054 in 2015, is the founder of Two Trees Management Company rightly credited for transforming Dumbo from a rundown industrial area into a vibrant neighborhood.
Lesson 1: Go Where The Money Is
“Why do you rob banks?”, a journalist once asked Willie Sutton, Jr., a prolific American bank robber. Sutton responded: “Because that’s where the money is!” Applied to any situation, the moral of the story simply urges us to first consider the obvious.
Without exception, the four new billionaires on the Forbes list succeeded by following an unmistakable trend: the increasing concentration of economic growth around the hotspots of finance and innovation. Even with their intelligence and entrepreneurial gumption, they couldn’t possibly have succeeded, not on this scale, in a tertiary U.S. market.
This doesn’t necessarily mean that the next generation of real estate billionaires will also emerge from the cauldrons of creativity in New York and the Bay Area. The trend is your friend, as Wall Street traders like to say, but only until it isn’t, until inflated valuations limit the potential for profit and increase the risk of losses. Still, whether the next wave of real estate wealth comes from New York, San Francisco or elsewhere, it will most likely benefit the investors who understand that capital always chases growth.
This dynamic spurs demand for real estate. Property values increase as yesterday’s start-ups turn into today’s iconic corporations and function as magnets for talent and investment from around the world. Growing companies need commercial space, and their employees need to live nearby. Whether an economic boom is fueled by the fashion industry or technology innovations, it needs a brick-and-mortar foundation. This is not only true in New York and San Francisco; wherever you live, you can find a local hotspot positioned to attract interest from businesses, consumers and investors.
Lesson 2: Leapfrog to Where The Money Is Going
When David Walentas invested $12 million to buy two million square feet in Dumbo, the decision seemed so outlandish that it scared away all of his partners and most of his banking relationships. He also told The Real Deal in 2012 that, in addition to the scoffs of naysayers, the community board habitually voted against Walentas’ rezoning proposals. It was a tough but also an impressively rewarding journey. Today, a single apartment in Walentas’ Clock Tower building can sell for twice the amount of the entire original investment. Dumbo is a stunning success, both as a neighborhood and as a case study in real estate investing. But it took Walentas 25 years of his career to bring his original vision to life.
That’s why, the next generation of real estate billionaires will not just be long-term investors who can accurately calculate the present value of future cash flows; they will be visionary investors who can sustain the courage of their convictions over the course of decades.
Lesson 3: You Don’t Need to Understand Technology or Fashion
Levi Strauss understood that, during the California Gold Rush (1848-1855), the “forty-niners” would need tough garments that can withstand hard manual labor. He moved to San Francisco, but instead of panning for gold, he sold pants “For Men Who Toil”. Similarly, real estate investors succeed by serving the very basic foundational needs of people and businesses managing growth. Jay Paul and Sanford Diller are not technologists, and Jeff Sutton never studied fashion or design. These people simply saw a trend in the market that would predictably create demand for real estate.
Lesson 4: Find a Niche
Jeff Sutton likes to tell amusing stories about his lucky breaks along the way, but these are not really stories about luck. These are stories about focus, about the importance of finding a niche in a market opportunity too big for any single investor to exploit fully. Sutton succeeded largely because he understood Manhattan’s allure for high-end retailers, and he introduced innovations in multi-floor retailing that significantly improved the profitability of his projects.
In addition, he showed a remarkable entrepreneurial ingenuity. He managed to strike deals one could describe as the real estate equivalent of selling a computer before actually building it. Specifically, he reversed the traditional sequence of buying a commercial property first and then looking for tenants. Today, Sutton owns some 130 properties leased to tenants such as Prada, Dolce & Gabbana, American Girl and Armani.
In Conclusion
Perhaps, the secret to making a billion dollars in real estate is that there is no secret. These self-made real estate billionaires built their wealth through visionary thinking and opportune risk-taking. These characteristics won’t bring billions to all average investors, but they will certainly move them to greater wealth.
