The Next RealEstate Boom

In the coming 25 years, the biggest wave ofdevelopment since World War II will turn America's major metro areas into giant "megapolitans" teeming with opportunity. Want to get in? We've foundsome strategies that are already paying dividends.

November 1, 2005

(Business 2.0) - Nearly 20 years ago, Mike Ingram, almost broke,took the gamble of a lifetime. He packed his wife and six children into anOldsmobile and U-Haul and drove 1,000 miles to Phoenix, leaving his life in OklahomaCity in the dust. The company that Ingram had run, a distributor of veterinarydrugs and garden supplies, provided a decent living, but after Ingram's bank went belly-up, like many others at the time, Ingram decided to sell thebusiness. Then 42, Ingram was prepared to take a flier on a tantalizing Plan B:buying plots of desert land in places like Arizona that were on the verge of abuilding boom. "Phoenix was set to go," Ingram says, "and so was I."

Today, Phoenix is still going. And Ingram, the dust-bowl migrant, isstill cementing his reputation as one of the Sun Belt's most prescientspeculators. The investments he scraped together in the mid-1980s for tracts of farmland--including a ranch once owned by John Wayne--helped ignite asuburban building boom that hasn't let up. More than 500,000 homes have beenerected in Phoenix since 1990. Ingram's real estate investment firm, El DoradoHoldings, ranks as one of the biggest private landowners in Arizona, with holdingsworth nearly $1 billion.

Ingram's latest deal hints at a bigger story starting tounfold nationwide. As Buckeye and other exurbs emerge, eventually they'll boltonto one another until Phoenix and Tucson, its sister city 120 miles southeast,join somewhere in the middle. According to new studies by Robert Lang, anurban planning professor at Virginia Tech, and researchers at the Brookings Institution, similar growth scenarios will play out in nine other majormetro areas around the country, forming what Lang calls the new "megapolitan"regions of the United States. (For a detailed look at these megapolitans andtheir growth prospects, see "The $25 Trillion Land Grab," page 97.)

As America makes room for 70 million more people duringthe next two decades, these supercities represent the biggest long-term business opportunities since the end of World War II. In Oregon and Washington,growth trends see Portland and Seattle merging by 2030 into a single megaregionLang has dubbed Cascadia. In the South, Atlanta and Raleigh-Durham stand atopposite ends of a 400-mile stretch of Interstate 85, but emerging hubs in transportation, banking, and biotech will knit them together. "There's aspectacular phenomenon here that people have ignored," says ArmandoCarbonell, co-chairman of planning and development at the Lincoln Institute of LandPolicy in Cambridge, Mass. "Everybody is so focused on whether the real estatemarket is headed up or down, they can't see what's down the road."

Figuring out what investment angles to play--in whichregions, from so many statistical trajectories, covering such a long timeperiod--would give most entrepreneurs a migraine. But for others, the paths to becoming a megapolitan mogul are clearer than you might think. Brokers, planners,and developers agree on three emerging strategies: In the South and theWest, owning a piece of tomorrow's boomtowns is already driving billions in long-termspeculation; Ingram is just one master of the game. In the morecongested East, developers are buying parking lots and other underutilized land with aneye toward launching massive "infill" projects--looking for the cheapestdowntown and suburban property to deliver the biggest returns. And in almostevery region, a third trend is reeling in big money: Surging numbers of youngLatino families and immigrants are opening doors of opportunity for businessesjostling to figure out what they'll need and want.

There are more cautious ways to get a piece of the action,of course, such as buying stock in companies like Target and Wal-Mart,which will always go where the growth is. "But if you're a more hands-on type,"says Bruce Katz, the top urban planning researcher at the Brookings Institution,"there's land speculation and a whole new generation of opportunities." Here arejust a few--and some of the players placing the biggest bets.

STRATEGY 1

Step Into the Path of Sprawl

Lang's 10 megapolitans are already home to more thantwo-thirds of Americans, and according to census projections, their aggregatepopulation will grow by more than 25 percent during the next 25 years. By 2040 theregions will account for 75 percent of all money spent in the United States onprivate real estate (about $10 trillion) and create 64 million new jobs.

Every megapolitan has its own Buckeyes--raw land destinedfor bulldozers and homebuilders--but few possess the kind of economicperfect storm for growth and profit that Arizona boasts. No other region offers suchgreat volumes of buildable land at such low prices. An acre of dirt can stillbe had for as little as $25,000, compared with $1 million on the outer fringesof Chicago. Land tagged for development will drive a near doubling of the Phoenix/Tucson region's population, and unlike Los Angeles, the area hasenough water--from underground rivers, aqueducts, and nearby mountains--tosupport all the new residents.

No wonder speculators have been circling the Arizonadesert like condors. One California-based developer of big-box malls recently paid$15 million for a 77-acre quadrant of empty desert at a new freeway exitoutside Buckeye. A plot for a future exit down the road that sold for $2 asquare foot last year is flipped today for $4. "The country is swarming Phoenix,"says Nate Nathan, the top commercial real estate broker in the area. "This placeis on fire."

The fire has been hottest for folks like Ingram who got inearly and bet big. Before taking on the Douglas Ranch project in Buckeye, Ingramand his longtime partner, Monty Ortman, had acquired some 18,000 acres. Most ofthat land, Ingram says, he got for just $500 per acre. Along the way, he soldoff half of the holdings at huge profits to fund new acquisitions andsubdivisions. Here's a typical deal: In 1992, Ingram and Ortman acquired John Wayne's 6,500-acre former ranch in Maricopa, another nascent "boomburb" 40 milessouth of Phoenix, for about $3 million. Earlier this year El Dorado Holdingssold two-thirds of it to Engle Homes, a national homebuilder, for $160million plus a future royalty on each of the 15,000 houses Engle will build there. Aneven bigger payday awaits Ingram in Buckeye. Douglas Ranch will eventuallyhave 84,000 homes, 250,000 residents, four freeway interchanges, and dozensof office parks and malls. "Buckeye's fate is sealed," Lang says. "It will be abig city."

Each region has a few "edge" cities like Buckeye, wheretrends are converging to trigger a flash flood of construction. Buying land earlythere can generate head-spinning windfalls for players like Ingram, but there areplenty of lucrative wrinkles for others. In-N-Out Burger, for instance, emergedfrom 1960s suburban sprawl outside Los Angeles. HEB Grocery Stores became an$11 billion company by establishing footholds in bedroom communities aroundSan Antonio.

Tomorrow's boomtowns hold the same promise. In Maricopa, aSubway franchise and a Carl's Jr. were among the main eateries in town at thestart of the year. Pat Kieny, who had spent 20 years managing other people'srestaurants in the region, took that as a cue: Start a restaurant in Maricopa thatcould become a regional favorite before a stampede of national brands overrunsthe town. With help from friends, Kieny, 45, put down 20 percent of the$850,000 initial investment and last July opened Native New Yorker, aChili's-like sports bar. Kieny says he'll be able to repay his investors in three years, bywhich time he hopes to open two new locations. "McDonald's, Taco Bell, andother food chains are coming next year," Kieny says. "But I've already got a localbrand and a loyal clientele. The mayor and fire chief eat lunch here."

Sounds almost too easy. The truth is, it's easy to make alot of foolish bets in sprawl development where the conditions aren't asfriendly as they are in Arizona. In more congested suburban metro areas--like thenorthern Virginia towns enveloping Washington, or the exurbs of Chicago--risingfuel costs and long commutes are killing the appetite for more bulldozing ofraw land. Many people who bought a McMansion an hour away from the officewhen gas cost less than $2 a gallon are already downsizing. Zoning nightmares indenser regions are also sending developers elsewhere. "In Dallas, I can get a development approved in nine months," says Greg Vogel, a top commercialland broker based in Scottsdale, Ariz. "Around San Francisco or Los Angeles,it can take a decade--lawsuits included."

STRATEGY 2

Park Money in Parking Lots

If the major metro areas around the country were to growthe way they did after World War II, they would gobble up more than 100 millionacres of raw land and convert it to urban space by 2030. But you won't find thatkind of available land in dense Eastern cities like Boston and New York. That'sone reason roughly half of all new development between now and 2030 willsimply replace existing structures. "Every beltway around every big metro, andall of the big arterial highways and interstate links, have been used up," saysBob Yaro, a planning expert in New York City who chairs an advisory groupfor the reconstruction of the World Trade Center. "There's no capacity. We'regoing to have to be really creative."

And smart. Investing in new skyscrapers doesn't work in acity surrounded by a horizon of cheaper land. That's why Arizona developersare rolling their eyes at Donald Trump and other out-of-towners who haveproposed high-rise condo towers in nearby Scottsdale. They won't sell, theyargue, because a buyer can get a house with a two-car garage and pool for thesame price in the suburbs. "You have to go with the flow," says RobertMayhew, an executive at DMB, the developer behind a new community in Buckeye calledVerrado. (See "Unarrested Development," page 104.) "Why would you doinfill in a market like this?"

So where does infill work? On the cheapest land in themost crowded places: parking lots. They're adjacent to commercial and retailstructures, they cost little to demolish, and there are plenty of them. According to theUrban Land Institute, the United States has about 30 percent more parkingspaces than it needs, one reason many developers believe they'll deliver the biggestreturns.

Parking lots helped persuade Charles Wang, the 61-year-oldfounder of Computer Associates, now the world's third-largest software company,to become a real estate mogul. After stepping down four years ago as CA'schairman, Wang, a co-owner of the New York Islanders hockey franchise, launched a development firm and began dreaming of a massive complex around theNassau Coliseum, where the Islanders play.

Wang bought a long-term lease for the 77-acre site in LongIsland's Uniondale, nearly all of it covered by parking spaces that sat empty 95percent of the time. "It's an asphalt desert," Wang says of his acquisition. Hisplan will replace the pavement with a multilevel parking deck for thousandsof cars, leaving room for condos, a conference center, and a 60-story skyscraper.Estimated price tag: $1 billion.

Yaro calls the project a crucible of the future. "It's aperfect example of how we're going to have to exploit land previously wasted by50 years of sprawl," he says. "There's no other way to accommodate growth in theEast."

STRATEGY 3

Give Them What They Quieren

Capitalizing on the development boom doesn't mean riskingeverything on a land grab. You can find opportunities just as big by startingbusinesses that cater to an underserved Latino population that is growing like noother group in American history. The U.S. Latino population will swell from 40million to 73 million between now and 2030. It is the fastest-growing ethnicgroup in all but three of the 10 megapolitans.

Numbers like those helped persuade Toyota to build a new$850 million plant in San Antonio to produce Tundra pickups. "We think theHispanic market and I-35 present a long-range opportunity," says Toyota seniorvice president Dennis Cuneo. Texas is the largest truck market in the UnitedStates, with Latinos making up the fastest-growing group of buyers. Toyota wantsto unseat Ford's F-150 in the Texas market but currently ranks third insales, behind Ford and Chevrolet.

The solution? Build brand loyalty by helping to crown anew generation of Latino industrialists. Toyota has begun signing contractsto purchase Tundra parts from new suppliers in the area that aremajority-owned by Latinos. One such entrepreneur is former SBC executive Berto Guerra, 55,who retired last year to create Avanzar Interior Technologies, a supplier ofseats and other parts. Guerra and his partners own 51 percent of the firm,which is part of a joint venture with $28 billion Johnson Controls. Next yearGuerra will have 400 workers, and he estimates first-year sales at $100 million.

Just as Toyota "made" Guerra, Guerra will soon makeothers. He plans to recruit other Latinos to become some of his many subcontractors."I'll walk into the bank when they apply for a loan and say, 'I want this businessto supply me with this gizmo for the next 10 years,'" Guerra says. "Thinkof the ripple effect."

Another player profiting from Latino growth is CityView, adevelopment firm founded five years ago by Henry Cisneros, a former U.S.secretary of housing, with $7 billion homebuilder KB Homes. The companyhas invested $1 billion in inner-city homes aimed at Latino markets in Texasand California and will soon move into Atlanta, Chicago, and Tampa. CityViewmakes money by acting as a venture capitalist. It funds builders when it spotsthe right project, and then tunes the design to buyers' tastes. Whenarchitects saw that Dallas residents converted carports into bedrooms, CityView decidedto embed plumbing in the carports for future sinks and toilets. CityViewestimates 2006 revenues of $1 billion on 20 percent returns--considered a home runin urban redevelopment.

Where Latinos will shop will also look different from themalls of classic suburbia. Hispanic Retail Group, a division of $1 billion ForestCity Enterprises, recently bought an empty Kmart and Vons in Coachella,Calif., a desert town east of Palm Springs. The stores didn't appeal toresidents--90 percent are Latino--so HRG plans to subdivide the Kmart into a villagemarket inspired by Plaza Mexico, a Latino retail mecca in the southeastern L.A.suburb of Lynwood. HRG president Andres Friedman pitched a similar project lastyear to a city official in nearby Indio but got a cold reception. "She saidconsumers there want upscale stores like Williams-Sonoma," Friedman says. "Indiois 75 percent Hispanic. They're not into Williams-Sonoma."

The future residents of Buckeye certainly will be, if theluxury homes Mike Ingram and others are building sell as planned. At themoment, there's little reason to think they won't. But if his real estateambitions go sour, or if projections about megapolitan growth are off the mark,Ingram has an ace up his sleeve. Having watched his own overleveraged bank and 60others collapse along with oil prices in the early 1980s, he and Ortman decidedlong ago to always pay cash for land. Should the boom go bust, they won't oweanyone a dime. "It's been a wonderful run, and it's a wonderful market," Ingramsays, "but you don't count your money when you're still at the table."