This is an entrepreneurship case in the real estate industry (in a New York neighborhood called DUMBO). DUMBO is one of the most chic neighborhoods of New York City, specifically Brooklyn, and the revitalization has been a "planned gentrification" as opposed to a "natural gentrification" process. This case primarily focuses on (a) entrepreneurial traits and behaviors in the context of real estate development and (b) relevant corporate strategies--horizontal and vertical integration--for the entrepreneurial firm. The secondary focus is on the resource based view. This is a complex case and it requires some prior understanding of strategy concepts. It will be appropriate as a business policy case for senior undergraduate as well as graduate students. Also, it may be used exclusively as an entrepreneurship case with junior and senior undergraduate students. Considering the length of the case, it needs to be pre-assigned; students must have read the case before coming to the class. Questions about the case should also be pre-assigned to point students' thinking in the desired direction. Actual analytical discussion should take roughly 10 minutes per question discussed, and another 5 to 10 minutes would be enough to provide a case summary in class.
Real estate entrepreneur-turned-mogul David Walentas has deliberately transformed Brooklyn's DUMBO neighborhood, where he holds about 3 million square feet of building space. Walentas has worked methodically to give the deserted area of DUMBO a neighborhood feel. Initially, he allowed artists to move in for very low rent. As artists moved in, so did culture, sophistication, and the need for art-related things. This gave rise to multiple galleries, design studios, and printing services firms in DUMBO. With an increasing population in the neighborhood, the government was more willing to invest in redeveloping State-owned properties in the area. This had strong positive spill over for Walentas' Two Trees Management Company.
At an estimated current going price of $700 per square foot, Walentas' 3 million square feet real estate holdings are worth about $2.1 billion. With development work in DUMBO factory buildings going full-steam, however, Walentas now faces a dilemma concerning his growth strategy.
Once these buildings are all leased out or sold, the growth of his company Two Trees Management will stagnate. Thus, despite tremendous success, what the future holds for Two Trees is anyone's guess.
By 2001, DUMBO (acronym for Down Under the Manhattan Bridge Overpass) was dubbed the most chic and up-and-coming neighborhood of Brooklyn. Comparing DUMBO's chic-ness to the most art-focused neighborhoods of Manhattan, New York Times quipped, "DUMBO is the new SoHo." Under the careful strategizing of real estate entrepreneur David Walentas, DUMBO has changed from a dilapidated graveyard of desolate buildings to a vibrant and happening residential-commercial hotspot.
Gentrification of DUMBO has been focused and quick. While urban scholars recognize gentrification as a gradual and slow process of neighborhood reversal through a variety of contributions from developers, real estate businesspeople, landlords, and the upper-middle class (Smith, 1982), such has not occurred in DUMBO. Control of a large portion of the DUMBO real estate allowed David Walentas the ability to act as a catalyst to speed up the gentrification of the neighborhood.
Through his company Two Trees Management, Walentas has reaped returns of almost one-hundred times that of his initial investments! As great as it sounds, Walentas is faced with a major dilemma among sell-now, sell-later, and rent-now options.
Walentas is converting his third building to condominiums this year. He currently owns 15 buildings in DUMBO. Prices keep increasing in the area, with the latest offering being in the range of $700-900 per square foot. So, converting all of the buildings now would mean making less money than is possible (assuming prices will increase further). However, the price keeps increasing partly because of the record-low interest rates that have enabled many people to afford homes that they previously could not. Industry experts keep warning that the mortgage interest rates will start going up (this has already started, although very modestly). So, when the mortgage interest rates go up, few buyers will be able to afford Walentas' highly priced luxury condos. Waiting for the economic cycle to come around 360 degrees (i.e., back to low interest rates) to sell his remaining housing stock at high prices is a huge gamble!
So what comes next for Walentas? His core competence is in real estate development and that is what he does best. There are, however, several tight spots to be aware of. Walentas can start working on another dilapidated neighborhood (perhaps Red Hook, which looks eerily similar to what DUMBO looked like 25 years ago). Or should he consider interior design, cleaning and maintenance, and other lines of businesses that will give him greater control over the real estate development business? He can continue to cater to the needs of his customers. Bringing in dry cleaning, bookstores, salons, spas, and a sports arcade could all add tremendous value to DUMBO.
Walentas is divided between the two options he is facing--starting full-fledged real estate development in some other area or starting other lines of business that will complement his existing DUMBO project. Looking out the window of his office, Walentas saw two iconic bridges (i.e., Brooklyn and Manhattan winged out) symbolically showing him the different paths to the future. A mistake here would seriously jeopardize his greatest achievement thus far. What should be his strategic path from here on?
Walentas grew up amidst poverty in Rochester; he describes himself as "an indentured orphan." He went to the University of Virginia and while there he decided he wanted to be a developer. Determined and confident, Walentas got established as a developer relatively early in his life (Finn, 2003). It was, however, his project in DUMBO that turned him from an established developer to a real estate legend. It all started in 1979 when Walentas drove through the Fulton Ferry Landings, a several square block river-side area between the Brooklyn Bridge and the Manhattan Bridge. With the greatest skyline of the world as the background scenery, Walentas envisioned tremendous investment potentials in DUMBO.
Walentas himself described his career as being constantly "on the edge." His shirt sleeves have the embroidered phrase: "No guts, no glory." His philosophy complements two of Winston Churchill's much renowned quotes that Walentas deeply believes in--"Fortune favors the brave" and "Never, never, never give up." While growing up, Walentas was always a smart straight-talker--never hesitant to pursue what he believed in. Walentas describes his younger-self as 'fresh.' Reinforced with his spectacular success in DUMBO, he proclaimed that "perseverance beats inspiration any day" and one should "never take 'no' for an answer" (Schmid, 2004).
In 1982, Two Trees Management Co. purchased 9 buildings from Harry Helmsley for $16.5 million (Beyer Blinder Belle, 1990). The purchase price of some 2.5 million square feet of space was at the rate of $6.6 per square foot (Schmid, 2004). Two Trees later acquired other buildings, thus increasing its holdings to roughly 3 million square feet of space.
Soon after the purchase of these factory buildings in a completely dilapidated neighborhood, Walentas applied to the City government for a rezoning of the area. In 1984, the City and State governments conditionally designated Two Trees Management to develop the Empire Stores along with a number of city-owned sites in DUMBO (Beyer Blinder Belle, 1990). Walentas saw tremendous prospects in DUMBO and 'seized the opportunity' to bring about his plans. He proposed an elaborate rejuvenation plan for DUMBO. Suffice to say, such a grand plan was 'too heavy' to fly and needed revision.
Prior to his DUMBO investment, Walentas' strategy has been simple: buy space, add value, and sell at high margin. The DUMBO investment, being Walentas' largest holdings, did not fit into this traditional mold. Adding value to DUMBO seemed like an extremely challenging task. First, Walentas' proposed long-term plans of rejuvenation were plagued by political problems. The deputy Mayor of that time, Kenneth Lipper put many obstacles in Walentas' way with the DUMBO project for what have been described as some personal reasons (Finn, 2003). Then, in 1987, the stock market crashed. This had trickling effects on the real estate market. During 1989-1993, the New York real estate market was a total buyers market. So, one decade after acquiring roughly 3 million square feet of space, Walentas realized no gain. Worse yet, a significant portion of Walentas' wealth remained stuck in the gutters. At times, he even wanted to sell the properties; but could not do so as there was not a single buyer who would buy his vast building space.
During his continued financial hard-times, Walentas was patient. He survived through his other businesses--other revenue generating activities. However, amidst all the financial woes, Walentas was unwavering about his vision. He sent his son to the University of Pennsylvania. His son, Jed Walentas, apprenticed under Donald Trump (successfully, without being fired). And, the real estate boom beginning in the late 1990s set the stage for Walentas to realize his vision. Jed Walentas' solid education and excellent training made him his father's most reliable partner. Two Trees Management got a break in 1997 when the State Office of Parks, Recreation, and Historic Preservation solicited proposals for the redevelopment of the Empire-Fulton Ferry State Park. It was 'carpe diem' for Walentas, who was the only one to submit a proposal (on behalf of Two Trees). The State Office of Parks, Recreation, and Historic Preservation granted the proposal in 1998.
With great hopes and high spirits, Walentas engaged in detailed planning for the Fulton Ferry Park. The park was on the far-west side of DUMBO, just by the East River. Walentas' development plans of the State Park would provide a much needed green recreation area for DUMBO residents. The proposed redevelopment plan was very grand and expensive, costing the government $300 million. By 2000, the government withdrew its support for redeveloping the Park.
THE FUNCTIONING OF TWO TREES MANAGEMENT CORPORATION
Two Trees adds value to the properties it owns by converting factory buildings to posh offices and residential apartments. These offices and apartments have new fittings, large windows, and concealed electric, phone, and cable wirings. An excited Walentas exclaims: "We are thrilled to offer the finest move-in ready office suites in Brooklyn. DUMBO has Manhattan quality at one-tenth of the price" (Hagerdon Publication, 2001). Surely, Walentas is keen to bring new businesses to DUMBO.
Two Trees Management caters to businesses that are looking for a great deal of convenience in their daily operations. To facilitate in-coming business tenants, Two Trees offers four steps: visit space, sign lease, move-in, and get-to-work. In other words, all amenities, such as electrical wirings, telephone connections, and internet facilities are inclusive in the lease package. The City and State governments' actions have had mixed effects on Two Trees. On the positive side, the rerouting of Bus 25 through DUMBO has added convenience for the residents.
In contrast, the State and City governments' on-and-off approach toward Empire-Fulton Ferry Park has caused much grief for Two Trees Management.
Governmental tax-breaks have made leasing prices in DUMBO and other Brooklyn neighborhoods relatively attractive. For example, through the Relocation and Employment Assistance Program (REAP) program, businesses moving to Brooklyn can potentially save $13-15 per square foot over the price in Manhattan. Another tax-break is in the form of annual tax credits. Small businesses meeting certain specifications become eligible for $3000 per employee tax credits. Also, real estate tax abatement of up to $2.50 per square foot is available to these new business tenants (Grassi, 2001). Lastly, many businesses qualify for reduced energy rates. Two Trees Management has definitely benefited from these government-induced benefits, for these benefits have made DUMBO office space even more attractive than what Two Trees can claim credit for.
BEYOND REAL ESTATE--THE MAKING OF A NEIGHBORHOOD
Two Trees' approach to DUMBO has largely been way beyond real estate development. Walentas has always given much attention to bringing in businesses of 'certain types,' particularly businesses that add cultural character to the neighborhood (see Table 1). In the 1980s, Walentas offered a great deal of space for zero or very little rent to artists who would come and make DUMBO their workplace and home. It is not surprising that over the years many galleries, printing services, design studios, and software businesses have leased offices in DUMBO. Boutique galleries include M3 Projects, 5 + 5 Gallery, Metaphor Contemporary Art, Howard Schickler Fine Art, Paint Gallery, Gale Gates et al., Smack Mellon Studios, and d.u.m.b.o. Arts Center (DAC). More than a dozen printing services firms are also DUMBO tenants. Design studios, such as Four Eyes Production and Sceptre Consulting have added to the artistic or cultural character of the neighborhood. In recent months, several software firms and a couple of business consulting firms have also moved into the neighborhood.
Bringing in culturally linked firms as business tenants, Walentas has created an environment that facilitates trade. The design studios can get access to the best and most competitively priced printing facilities. The galleries serve as an important channel to display and sell artworks and new designs to the public. Business consulting and software firms may contribute to all of these businesses in more specialized and/or technical ways. Overall, Walentas' neighborhood design has converted DUMBO into a trade-friendly neighborhood.
Walentas's goal is not merely to facilitate his business tenants. The primary goal is to make DUMBO a vibrant and lively community where employment and entertainment create a synergy. He has been actively involved in organizing a variety of festive events, such as the Egg Hung & Spring Fling, BARGEMUSIC, Summer Film Series, and It's My Park Day (see Table 2). Since DUMBO's buildings are mostly old factory-buildings, adding a residential feeling to the neighborhood is critical. Besides various festive events, developing the Empire-Fulton Ferry Park would go a long way in fulfilling this mission. Attracting gourmet shops also adds an upper-middle class aura to the neighborhood.
Another telling example comes from Walentas' search for a bakery. When some 2400 square feet of store space became available at 85 Water Street, Walentas decided to find a specific baker. While various businesses wanted to rent the space, Walentas would only rent the space to a baker. This choice prevented Two Trees Management from securing several confirmed tenants for the space, but it enabled Walentas to add a critical neighborhood-element to DUMBO. After much searching, Walentas found Almondine--a French-style bakery with surprisingly affordable fancy delicacies (Croghan, 2004). This was a significant step in DUMBO's transformation, because, as home improvement guru Bob Vila says, "what's a neighborhood without a bakery" (Croghan, 2004).
As DUMBO picks up momentum as a neighborhood, both residential and business tenants keep flocking in to get some space of their own. Upper-middle class buying power, coupled with a degree of sophistication, has attracted fine restaurants to the neighborhood. DUMBO residents can now go to Pete's Downtown for Italian, Superfine for Mediterranean, Grimaldis for Pizza, Rice for eclectic dishes, Bubby's for traditional American food, and Five Front and River Cafe for new American dishes (Zagat Survey, 2005). All of these restaurants are medium to high end. Grimaldis' coal oven pizzas are the highest rated New York pizzas by Zagat (food score 27 out of 30) (Zagat Survey, 2005). The River Cafe, which is very expensive, is one of the foremost all-round restaurants of greater New York City (food score 25, decoration score 28, service score 24--each score is out of 30) (Zagat Survey, 2005).
FINANCIAL STATUS AND THE FUTURE
The real estate development project of DUMBO has been extremely profitable for Walentas. From $6.6 per square foot to an average of $700 per square foot is indeed a long stretch. Nevertheless, now is a crucial time for Walentas because once his renovated buildings are leased out and/or sold, the growth of Two Trees will stand still. Anticipating this impending slowdown, Walentas has been trying hard to construct new high-rise buildings in DUMBO. However, political opposition has made such vertical expansion remote. Growing in other neighborhoods in a manner similar to DUMBO remains another alternative for Walentas' Two Trees. Besides growth through real estate development, Two Trees Management may consider going into other supporting businesses. For example, a household appliance store, a grocery, a salon and a barber shop can contribute to completing the neighborhood feel and convenience. Whatever path Walentas chooses to pursue now will be crucial to the continued success (or failure) of Two Trees Management Corporation.
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Noushi Rahman, Pace University
Fabiha Naumi, Katalyst, Bangladesh
Table 1: Esteemed Artists and Arts Organizations Working in DUMBO Artists and Arts Critical Organization Genre Acclaim Vito Acconci Film, video, photographs, MoMA & sculptures Art at St. Anns Concert, music theater, puppet theater Brooklyn Front Miscellaneous (art gallery) Creative Time Miscellaneous (public arts Installations: projects) "Consuming Places" DUMBO Arts Center Miscellaneous (annual d.u.m.b.o. art under the bridge festival) Tom Fruin Sculptures (made of 'found objects') GAle GAtes et al. Theater Howard Schickler Photographs, paintings, Fine Art drawings, and rare books (19th and 20th century) J. Mandle Miscellaneous (experimental Performance arts using performances and installations) Lunatarium Music, dance, film, video, installation, and performance art Mastel + Mastel Digital art Sheila Metzner Fine art, photography Metropolitan Museum of Art; International Center for Photography; MoMA One Arm Red Meeting place for artists to mingle, establishing a sense of community Source: http://www.dumbolofts.com Table 2: Organized Cultural Events in DUMBO, April 2002-October 2004 Dates Events April 10, 2002 Egg Hunt & Spring Fling at Brooklyn Bridge Park September 2002-May 2003 BARGEMUSIC November 2003-December 2003 Snapshot Fashions: Dressing in the 20th Century Exhibition at the MF Adams Gallery January 29, 2004 Brooklyn Underground's Moonshine Theater presentation: "The Holy Mountain" January 2004-March 2004 MULTIPLEX at Smack Mellon March 2004-April 2004 MULTIPLEX at Smack Mellon March 2004-May 2004 Ricoh Gerbl and Robert Taplin and Smack Mellon April 1, 2004 Jen Ferguson April Fool's Day at Superfine July 2004-August 2004 The Brooklyn Bridge Park Summer Film Series August 2004-August 2005 Family Concert--The Persuasions October 2004 Good Samaritans October 23, 2004 "It's My Park" Day Source: http://www.dumbo-newyork.com…