Forest City's Kevin Ratner: Sustainability Is ‘Best' Practice

We do this interview at or near the nadir of the real estate cycle. Given that Forest City Residential West is one of the largest real estate developers in the United States, share your agenda. What needs to happen reverse the real estate recession?

The banks need to work out their problems. There are a lot of bad loans on their books. Replacement costs are so far above what you can buy existing assets for. Until that gap closes you won't see new development. Recovery is really going to be led by the banks-their ability to lend and their ability to clean up their balance sheet will allow new development and the cycle to thaw out.

For the greater economy, if we listen to the Federal Chairman, we are out of the recession, technically. The greater economy will continue to get healthier. Real estate will continue to languish behind. Particularly when you look at commercial real estate and the $700 billion of CMBS coming due and all the issues that still need to be worked out. Particularly interesting is housing. Los Angeles started with an acute housing problem and it is only getting worse. There is no new product coming on line. The need will continue to grow. As soon as there is a little glimmer of hope people will rush back in.

What building type will lead a rebound: multi-family housing, single-family homes, or retail and commercial?

Home building will lead us out. We have seen some transactions of homebuilders buying finished lots; they are not land banking or doing anything like that. They have completely changed their business. They have gone back to what Kaufman and Broad was founded around-the starter home. Smaller homes on smaller lots are much easier to finance and it is much easier to come up with the down payment.

Multi-family housing is going to have the same challenges as the last go around, with construction costs well above affordable rents. Without subsidies from the government, it is going to be very difficult for that to start up again. But multi-family housing is one of the greatest needs. Clearly when you look at AB 32 and SB 375, we want to get housing near jobs and transit. That usually leads to higher-density housing and higher cost. It is a vicious little cycle. We can't turn to the government; the government is broke. Where those subsidies come from and where the catalyst comes from to start the multi-family housing has yet to be determined, in my mind.

Are there any housing markets within the Forest City Residential West territory that are well positioned for a rebound? Or, are all markets as depressed as Los Angeles?

It is all about job creation. Where are jobs going to be created? The Bay Area is "Start-up Ville." There are a lot of companies, a lot of venture capital money, and a lot of great ideas. The Bay Area will probably come back a lot faster than down here in Los Angeles. There are a lot of manufacturing jobs and entertainment jobs here in Los Angeles, and we have a lot of other industries. Those other industries will have a harder time getting going. The ports and all of the industries around goods transfer need consumerism and need a growing economy. You need the job growth in order to spur housing and every other kind of development.

Elaborate on the Forest City large-scale projects in the West that, by design, promise job creation -that create economic clusters where corporations and companies come to invest, build start-ups, and expand operations. For example, describe the Forest City projects at MIT and in Albuquerque.

MIT, and also a little bit at Albuquerque, is centered on what a lot of people are calling green economy or new economy kinds of jobs. At MIT it is biotech, but there is a lot of activity, money, and growth going on in health care and around big pharma. Mesa del Sol in Albuquerque currently has a solar cluster and movie production. We are trying to find those seams, build to those industries, and help create jobs. In Denver, at Stapelton, it was really centered around housing.

We have a lot of office entitled at Stapelton but we haven't really built any of it yet. That is an untapped resource, and we are out actively trying to find users for the office buildings. That means going out to the places where there is growth and stimulus dollars because that is where the jobs are going to be created first. We are trying to build around those industries and pull them into these projects.

When we interviewed you about Forest City's Los Angeles projects in December 2005, you mentioned that the prices per square foot were around $575-$600. Where are prices now, and where do they need to be for Forest City to continue to see condos as a vibrant Downtown prospect for the city?

I am not 100 percent sure where condo prices are but they are well below that-they are as much as 50 percent below that and clearly won't support high-rise condo development. Prices probably don't need to get back up to that range because construction costs have come down, but they will need significant growth. Then you will need to have all of the units that were built as condos-but are either in the rental pool or sitting on the shelf for awhile-to be flushed out of the system. On the apartment side for Forest City, rents and construction costs need to come back in line. They are still very out of whack. They are still not lining up to the point where projects cash flow on their own. Then you are in the subsidy game, and it is very hard at this point to go to the CRA/LA or the city and ask for money to go build housing when they are laying off civic workers and the state is taking their redevelopment funds, making it very difficult to do rental housing.

Forest City has what it terms "centers of sustainability excellence" within its portfolio. How does sustainability play into your work here in Southern California and into the company's developments nationwide?

About four years ago we appointed my brother as director of sustainable initiatives for the company. We adopted sustainability as one of our core values about eight years ago. We have focused on sustainability for a very long time and it's something that we truly believe in. When we look on the residential side, we have always done most of our housing within urban centers, around transit and around existing infrastructure. For me, personally, sustainable development is just best practice. If you're not thinking about resources, if you're not thinking about the impact you're having on the infrastructure-be that water, transit, or shade and shadow-you're not being responsible. It is a part of everything we do, from using safe cleaning products in our offices, to the ways that we run our malls, to new development. It is part of every project right from the moment we start.

Does sustainability have a cost impact on your projects?

To use the language that people are using now, to do a LEED certified multi-family residential building here in California is pretty much cost-neutral. If you want to go beyond that there are costs associated with it. They range depending on what you need to do and where you need to go. A huge part of the process is choosing the right site and positioning the building on the site correctly If you do those two things right and thoughtfully, then trying to get to a high level of sustainability-and in some cases getting to a point where you are carbon-neutral-is within reach in terms of the cost impact.

We are a company that holds onto our properties. We can look at an upfront cost a little bit differently than someone who is in and out within five to seven years. We have a 30-year or longer hold period. We look at operations, long-term maintenance, and durability. If you can cut your operational costs-water use, for example-and be more efficient with your electricity, then it is a meaningful number to us whereas ,with others it may not be.

TPR recently asked Greg Vilkin, a former Forest City executive, what developers do during a down market: How time and resources are being spent? What are their priorities? Your response would also be valued.

We are spending time looking at our business and looking for ways to innovate the way that real estate development is done. We are, of course, doing some consulting for the lending institutions for cities and for companies who are large holders of real estate. We are really trying to take this opportunity to do a little R&D and see if there are ways that we can help our the industry grow. We joke that if we took a plumber from 100 years ago and dropped him on a job site, other than the power tools, he would probably recognize a lot of what was going on. Why is that? We are spending some time trying to figure that out.

We have also started an energy business as a bit of an offshoot of stuff we are doing in Mesa del Sol to build power facilities for municipalities and institutions around the country and, potentially, around the world. We are looking into how we use our real estate expertise in ways that may not be at first blush where you think a real estate developer would go.

Developers must deal with local jurisdictions for project approvals and plan checks. What developmental signals (e.g. subsidies, regulatory reform) are you now seeing from the public sector, and what signals does Forest City need to become a bit more bullish?

Every city that we speak to is more than willing to sit down with us and they are more than willing to have discussions to help us out in ways that they can. It usually doesn't have to deal with subsidies because their hands are tied there. In terms of approvals, the willingness to look at new models, to talk about fees, and to talk about how development gets done, they are all very open. Cities are actually coming to us and asking what they can do to prepare for when we are ready to go again. I am bullish on the cities, but a lot of them are losing staff and that is a problem. There are not as many projects for them to work on and they are trying to find time to do other things. They are doing some good work there, but for me to come back in, they are going to need to provide some subsidy so I can do more rental housing or some of these other transactions. If they have land that they control that would be a big advantage. But again, that is a funds-available problem that the cities are dealing with.

If a city or community wished to prioritized job growth-especially in Los Angeles where there has been no net new jobs in the last 25 years-what investment and policy incentives must be in place to truly attract, retain, and grow jobs?

More than anything else you need to first have a vision. The vision needs to have a keeper and a champion. Whether that is one person or a group of people, the vision needs to be clearly stated and defined so people get behind it and focus. In this world, you need to find the money to stimulate that type of growth. From my perspective, real estate decisions are very important-not just transportation, but energy decisions and zoning-in order to encourage different types of development so you don't wind up with office on one side of town, residential on the other side of town, and no retail. You want things to be integrated to create vibrant, thriving communities that are active at night, active during the day, and give people a lot of options. Once that happens, the companies will want to come here. It all goes back to having a vision.

Jurisdictions all over the world have focused on implementing such an agenda. Some have been more successful than others. Forest City is both national and global-having done business in India and Western Europe. What is your advice and counsel could you offer Los Angeles to move from goal to vision, and then to reality?

As I said before, there needs to be a clear vision, leadership, and initiatives to make that happen. Los Angeles is a very diverse place; we are very spread out. There are a lot of wonderful things about Los Angeles, but we need to focus. We need to focus on specific areas, around specific ideas, and we need to get the buy-in from all the major stakeholders. Everyone needs to play together in the sandbox so we can bring this city back to where it was and create new jobs.

If we talk again in six months, in the spring of 2010, will we be addressing the same topics?

Pretty much the same topics.

And a year from now?

You might start hearing something different but probably not. Hopefully there will be a lot more activity around existing assets, and there will still be conversations around debt and what the banks are going to do. We have seen all of the problems on the residential side. We haven't dealt with them all, but we know them all. We still don't know what all is out there on the commercial side. We still don't know where all of the really big problems are. That realization is coming. It will take us a while to work through that.