McNellis: There’s No Place Like Home

As good times roll back around, real estate investors should take stock of the foibles of our past and resolve not to repeat them.

February 1, 2011

By John McNellis

If the Great Recession isn’t already in Northern California’s rearview mirror, we will pass it shortly, and good times—or at least dramatically better times—will be upon us. Maybe this recovery will be different. Maybe, amidst the celebrating by one and all, we will acknowledge what we have ignored in past booms—namely, that prosperity brings its own pitfalls. Principal among them is the well-fed’s desire to travel afield.

Jesus once lamented, “No man is a prophet in his own country.” Gospel, perhaps, if one is in the messianic line, but less useful for those of us with secular pursuits. A more germane proverb might be, “No man can make a profit outside his own country.” All too true and all too ignored by the lords of real estate.

At least in the good old days developers who strayed from what they knew—their flocks, so to speak—lost money with panache and style; they went down having fun. In the bottle-of-wine-for-lunch era, a successful developer would grow bored building tract houses and open his own restaurant. Opening night, the place would be wall-to-wall with the pretty people, the prawns would be jumbo and the Champagne French. Young lovelies would mob the enchanted developer; he would be the toast of the town. Soon enough the restaurant would empty like a played-out gold mine, and its owner would discover how quickly the toast of the town can become just toast.

More successful old-school developers—add a zero to the net worth—were apt to invest in a professional team in some new, emerging league. These developers would throw even better parties—wild affairs replete with chiseled athletes, long-limbed beauties and regional celebrities. Even prettier people would swarm these soirees, the thrilled developer could walk across his swimming pool on the shoulders of his admirers. But, since nary a one would ever attend a single game, the league would inevitably fold and these greater men would quietly lose their jerseys.

The true behemoths of that bygone era—developers with nine figures to the left of the decimal point—would buy a movie studio when they wearied of bricks and mortar. Their parties were the grandest: exclusive, starlet-strewn bashes peppered with the near-great from the fun walks of life. The studio might last a bit longer than the restaurant or the team, but in the end the titan would fare no better, selling to Hollywood insiders for pennies on the dollar, then learning the hard way just how appealing he truly was.

At least those developers, from the mere rich to the staggeringly wealthy, had a great time when traveling abroad. We, the serfs, could only gasp at their swashbuckling daring, and hope—forlornly—to be invited to their swanky parties. And possibly, to learn from their mistakes.

But what we learned—never invest in anything fun—was the wrong lesson. Or just half of the right lesson. When our turn came 20 years later—starting near the end of the 1990s—we were half-prepared; we knew we should run away from any investment advisor wearing a ponytail or more gold than a wedding ring; we knew the most one could hope for in opening a restaurant was a great table on Friday night.

But the lesson too few modern developers or landlords learned—stick with real estate—was their undoing. They—no, we—had learned to avoid the flashy, the glamorous and the outrageous. But we all were helpless before the bland, the boring and the goofy—the quants, the techies and the Internet savants. Being far more clever and practical than our economic forbears, we equated boring with reliability and mistook complexity for profits. If a presentation on a new company both went over our heads and put us to sleep, we were sure to invest.

That old saying—experience is something you acquire just after you need it—should be Silicon Valley’s official motto. Too late, we, the geniuses of real estate, learned each new company has dozens of critical elements that must be questioned from the outset, elements the innocent (in this admittedly rare case) developers would never dream of. Too late, we learned that “VC” stands for Viet Cong and that we were “angel investors” because we were about to die. We learned start-ups never die a clean, brave death. Unlike failed real estate that is guillotined on the courthouse steps, dying start-ups can linger for years. Investors may have utterly worthless shares, but management somehow ekes out a dreary, dividend-less existence seemingly forever, doing little more than paying its own salaries.

This time around, we should stay in our own country, we should stick with what we know, we should realize we are to Silicon Valley what doctors are to real estate. And, perhaps like that cowboy generation of developers from yesteryear, we ought to have fun, maybe even take Tug McGraw’s investment strategy to heart. When asked about how he would spend a sizable signing bonus, he reportedly said, “Ninety percent I’ll spend on good times, women and Irish whiskey. The other 10 percent I’ll probably waste.”

For more about John McNellis or McNellis Partners, please visit

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