How Real Estate Developers Think. Peter Hendee Brown

included Webster Place. The only place downtown to see a first-run movie was at a four-screen theater at Water Tower Place, a seventy-four-story, mixed-use tower on Michigan Avenue, but a moviegoer had to brave congestion and expensive parking to get there.

      So the Ruttenbergs gambled that bringing in a new theater in a suburban-style mall on the North Side with free and easy parking would increase the market for first-run movies in the city but they had no guarantee that the movie distributors would create a new zone. “At Webster Place, parking was free and you could tell right away from the parking lot whether the movie you wanted to see was showing, rather than paying for parking and then taking the elevator to the seventh floor of Water Tower Place just to find out what was playing or to find out that the movie you wanted to see was sold out.” The theaters at Webster Place opened “with secondary stuff,” says Ruttenberg, “but all 1,600 seats were full within a week and the movie distributors realized that two zones might be a good thing after all, since they would ensure more seats and more revenue for first-run movies.

      “Business deals are about ‘what is best for me,’” says Ruttenberg, “and what was best for the movie distributors was the creation of a new zone. It was a perceived barrier but to me it was obvious.” Webster Place went on to become a big hit. “And with the success of Webster Place, our expertise—without any long-term plan—continued to grow, and as it grew, we gained more access to capital.”

      Value, Value, Value

      Since the 1990s, Ruttenberg has done nothing but for-sale housing in the city. “We needed to learn, develop our expertise, and scale up slowly, so we started out doing small townhomes, then small midrises, and then we went bigger.” Since 2000, Ruttenberg has developed three condominium towers on Chicago’s lakefront, one at 530 Lake Shore Drive and two more across the street at 600 Lake Shore Drive, all adjacent to Navy Pier, Chicago’s big waterfront entertainment center. But once again, says Ruttenberg, “Following the business model that I have already described—cautious risk taking—we didn’t build condos the way other developers did at the peak.”

      The property at 600 Lake Shore Drive was about one acre and was the last piece of vacant land on Chicago’s lakefront. In the 1980s there had been plans for a ninety-story building but they fell apart when the stock market crashed in 1987. In the 1990s another developer made plans for a massive single tower but it never got off the ground either. As he was finishing 530 Lake Shore Drive, Ruttenberg approached the owner of the property across the street and said, “Your zoning is going to run out soon and the mode in the city these days is downzoning, so if your FAR [floor area ratio, which is the ratio of buildable floor area to site area] gets reduced from 16 to 12, you will lose 25 percent of your value, but if you work with me maybe we can do something.” Ruttenberg had a plan that comprised two towers that were perpendicular to the lakefront rather than one big tower that was parallel to it. This scheme offered a number of important benefits.

      First, while his competitors developed buildings designed to maximize their buildable area based on zoning, Ruttenberg took a more modest tack. “Instead of building the tallest building with the biggest floor plates, we built the shortest buildings possible based on our land costs, to minimize the risk of having too much product to absorb.” Shorter is also better, says Ruttenberg, because “while many people believe that it does not cost more money to go higher, in fact every time a building gets taller it gets more complicated and more expensive.” Tall buildings are like sails, and the as they get taller, more must be spent on design and construction to offset the effects of “wind-loading.” As a building becomes taller its columns and foundations must become larger to resist the building’s tendency to tip, while exterior window and wall systems must be stronger if they are to resist both positive and negative wind pressure. “But, more important, the taller the building, the longer it takes to complete and the longer it takes to deliver the last units and this is only made worse by having small floor plates at the top.” Further, the longer it takes to get to the top the more the market can change in terms of tastes and the more time your competitors have to supply more product and saturate the market.

      Figure 9. Buzz Ruttenberg’s two-tower design for 600 Lake Shore Drive, Chicago. Courtesy of Pappageorge Haymes Partners.

      Second, Ruttenberg’s conception for two towers rather than one allowed for smaller floor plates and more exterior perimeter for the same amount of area, which meant more windows in the units. But more important, by placing two towers perpendicular to the lakefront, Ruttenberg’s floor plan allowed him to arrange his units so that they all had lake views, whereas a single tower parallel to the Lakefront would have had many units on the back side, facing west, with no lake views. In Ruttenberg’s plan, the two-bedroom units were on the southwest and northwest corners, with oblique lake views; the one-bedroom units were in the centers of the long sides of the towers with lake views to the southeast and northeast; and the largest—the three-bedroom units—were on the northeast and southeast corners, where they had panoramic lake views.

      Third, Ruttenberg also charged a higher dollar-per-square-foot price for the larger units and a lower price for the smaller units, which is the opposite of typical practice. More often, units are priced so that smaller units cost more per square foot while larger units cost a little less and the difference between the unit prices is not as great. But at 600 Lake Shore, a 1,000-square-foot, one-bedroom unit sold for as little as $400 per square foot, or $400,000, and a 2,500-square-foot, three-bedroom unit sold for $700 per square foot or $1.7 million. Ruttenberg had looked at suburban retirement home models, where larger, better units are sold for a higher dollar-per-square-foot price. He had also learned from the sellout of his previous project across the street that lake views sell—“what a surprise”—and he was confident that he could charge a significant “view premium” for those three-bedroom corner units facing the lake. “Why pay that premium? Because there is an eighty-mile, no-build zone in front of your unit.”

      Fourth, building two separate towers also meant that Ruttenberg could manage his risk by building in two phases, giving him more control over construction and market timing. This also allowed him to “prove up” the concept with the smaller first tower, which represented only 40 percent of the project’s size. He could then make adjustments to the second tower to best satisfy the market at the time. So the two-tower scheme made sense both economically and in terms of managing risk.

      Figure 10. A typical floor plan for 600 Lake Shore Drive. There are six units per floor in each of the two towers, and all units have views of the lake to the east (right, in this plan). Courtesy of Pappageorge Haymes Partners.

      Fifth, Ruttenberg managed his risk by designing reasonably sized units, paying attention to the total sale price of the unit rather than the dollar-per-square-foot price, providing value, and building with an eye toward what inevitably happens—a downturn in the market. At the peak of the condo boom, many developers were “blowing air” into their floor plans to create larger units that they could sell for higher prices based on dollar-per-square-foot pricing. This has the effect of making larger units look good on paper, but it can lead to difficulty when the market takes a turn for the worse because while home buyers may compare projects based on dollar-per-square-foot prices they buy based on what they can finance—the total price. “So if you provide the same unit as your competitor,” says Ruttenberg, “but you blow a little less air into the floor plans and you make them slimmer and a little more efficient, then you are hedging against the day when the market slows down. And if that means as a buyer you are paying $1.7 million to live in a three-bedroom, three-bath unit on the lake but others are paying $2.5 million to $5 million, then that feels pretty good to you.”

      Figure 11. The unobstructed view east, over Lake Michigan, from 600 Lake Shore Drive, with Navy Pier to the right. Courtesy of 600 Lake Shore Drive LLC, a Sandz/Belgravia Group Ltd. Development.

      Ruttenberg concludes that “much has been