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Wharton class instructs future apprentices in Trump's trade.
These days, the term entrepreneur is typically reserved for technologists — people who build businesses around making microchips, writing software or discovering drugs. But for decades, real-estate developers have taken risks that are just as big and have created plenty of innovations of their own.
Without developers, suburban malls wouldn't have lured shoppers out of so many downtowns — and entertainment-and-retail districts such as Boston's Faneuil Hall and San Antonio's Riverwalk wouldn't have beckoned many of them back.
The Wharton School's real estate entrepreneurship class provides a primer for students who dream of building a career out of bricks and mortar, not bytes and chips. For these students, apprenticing with a developer like Donald Trump beats listening to Steve Jobs on the coolness of the iPod.
For
a number of years Peter Linneman, the Albert Sussman Professor of Real
Estate, has taught the course in the fall, stressing the brutal basics
of development. He wants his students to think hard about the difficulties
of putting up or renovating a building. And he doles out advice like this:
"Become an expert at something. Learn about every property of the type you're interested in within a three-square block area. Know who's leasing it, who's not and why. Talk to everybody. You may get pigeonholed, but you'll actually know something."
Linneman begins his class by disabusing his students of their illusions. "Our students don't get much exposure to the idea that raising a million dollars isn't easy," he explains. "The typical discussion in business school is how do you spend $400 million."
That espresso shot of reality is one of the things that Bill Cowin (WG'02), an analyst with the Fidelity Real Estate Group in Boston, liked about the class, which he took as an MBA student. Linneman, for example, asked the students to lay out a plan for developing a $10 million office building in Philadelphia, Cowin recalls.
"He said, ‘Someone like you, just starting out, will get 65 percent financing, so you're left with 35 percent — $3.5 million. Where are you going to get that money?' In Philadelphia, he narrows it down to five groups that back real-estate projects and says, ‘If you have no connection to them, why would they lend to you?' He really drives home that people come up with business plans all the time, but implementing them is a lot harder."
The leads to another theme of the course, which is that real estate is, as Linneman puts it, "all about execution."
"Execution is figuring out what you're capable of, what the market needs and trying to do it better, cheaper or faster," he says. "The best route to being an entrepreneur is to find out what the big guys do poorly and what you can do better."
For early-stage real-estate developers, that typically means doing redevelopment projects such as converting an old downtown commercial building to condos or offices. Those sorts of projects tend to be local, as opposed to national, in scope — they're financed locally, sometimes supported by local government subsidies and filled with local tenants. "They're built on local relationships, rather than relationships with Fortune 500 executives," Linneman says.
Like Cowin, Jeremiah Kane, an MBA who graduated in May and aims to enter the real-estate business in New York City, lauds Linneman's practical focus. "His class isn't just about the economics and financing but also about trying to get a handle on the people issues of developing real estate."
Plus, Kane adds, Linneman backs up his teaching with real-world experience. Besides his Wharton work, Linneman runs a consultancy called Linneman Associates and publishes a newsletter for real-estate executives. Through his outside work, he has befriended such well-known developers as Chicago's Sam Zell, whom BusinessWeek once described as one of an "audacious new breed of real-estate tycoons."
Zell is famed for his contrarian instincts, often scooping up distressed properties while others shun them, and for being a pioneer of real-estate investment trusts. He visits Linneman's class as a guest speaker. "One of the reasons the course is popular is that it builds on my and my cronies' insights about entrepreneurship," Linneman quips.
In addition to Linneman, this past spring Lynne Sagalyn, a professor of real estate development and city planning, also taught the course with a focus on innovative ideas that have shaped the real-estate business such as loft apartments and boutique hotels and shows how real-estate innovators operate in both the private and public sectors.
Sagalyn came to Wharton from New York City, where she taught at Columbia University. Working in New York gave her a close-up view of the kinds of innovative projects that, she believes, distinguish entrepreneurs from copycats. "What's entrepreneurial about building the thirtieth three-story suburban office building," she asks.
But consider loft apartments, which she examines in her class. Originally, a few New York developers noticed that artists had converted floors in former industrial buildings into combined studios and living spaces. These apartments were large and had few walls. "They were illegal at first," Sagalyn points out. "You weren't supposed to live in buildings zoned for business."
The developers realized that the same sorts of living spaces might appeal to non-artists, too, and, in the Soho neighborhood, began converting commercial buildings into lofts. "Artist-living became trendy, and somebody saw an entrepreneurial opportunity by building on a social trend," Sagalyn says. "The entrepreneurial idea is a response to an opportunity, to a changing demographic."
Boutique hotels, which Sagalyn also covers, originated in a similar way in the '80s. "Ian Schrager, founder of the Studio 54 disco, figured out that young, hip people wanted to stay in young, hip places. He created a hotel concept that was entertainment focused, with high design values. It was for people who wanted something fun. It revolutionized the industry."
Sagalyn stresses that real-estate entrepreneurship happens in the public as well as the private sectors, even sometimes as a partnership between the two. "I like students to understand that some of the most interesting behavior occurs in the blurring of space between what's public and what's private," she says. That, too, she saw first hand in New York.
Shortly after arriving there in 1992, she became fascinated by the city's efforts to burnish 42nd Street and Times Square. Times Square was then a seedy district of peep shows and porn shops. "It had been a barrier to the western expansion of the Midtown office district. The 42nd Street project was supposed to catalyze the redevelopment of Times Square. I'd heard about the project — its financing was unusual and innovative — but it had been a failure."
She got a grant to study the public policy issues behind the financing. Sagalyn spent several years studying that process, and the result was her book, published in 2001, called "Times Square Roulette: Remaking the City Icon."
While Sagalyn was studying the project, it received a new infusion of life. "It moved from an being office-building to entertainment project." Private developers got behind it. And today, Times Square is once again one of New York's tourist meccas.
One of the lessons of the book — and something that Sagalyn and Linneman might agree on — is that real estate is about getting the details right. "Real estate is an incredibly detailed business," Sagalyn says, "far more detailed than bond trading."
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