David Walenta's two trees management company: a case of deliberate entreprenuership.
Rahman, Noushi ; Naumi, Fabila
CASE DESCRIPTION
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.
CASE SYNOPSIS
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.
INSTRUCTORS' NOTES
Case Abstract
Real estate entrepreneur-turned-moghul David Walentas has deliberately transformed Brooklyn's DUMBO neighborhood, where he holds about 3 million square feet of building space. Walentas' Two Trees Management Company has added value to the properties in both traditional and novel ways. Traditionally, Two Trees has added value by making infrastructural changes. For example, converting factory buildings to luxury loft apartments has added much value to the buildings. Constructing grand lobbies, modern appliances, concealed wiring, convenient electrical outlets, decorative hallways, wide windows--all these infrastructural changes have added value to Two Trees' properties. However, the value generated from these infrastructural changes assumes a reasonable quality of life in the neighborhood that DUMBO did not have previously. Walentas has worked deliberately to give DUMBO a neighborhood feel. Initially, he allowed artists to move in for very low rent. As artists moved, so did culture, sophistication, and a need for art related things. This gave rise to multiple galleries, design studios, and printing services firms in the neighborhood. With an increasing population in the neighborhood, both City and State governments were more willing to invest in redevelopment projects. From rerouting Bus 25 through DUMBO, to substantial improvements in the neighborhood park, to establishing a boardwalk by the East River, the governments' interest and help had strong positive spill over for Two Trees Management.
In the late 1990s, with a rejuvenating neighborhood, an established cultural flare, and a rising NYC real estate market, Two Trees Management finally started selling and leasing its value-added apartments in DUMBO. All units of the first building were sold for a total of $70 million within months. All units of the second condo-converted building also were sold within months in 2003. At the current going rate of about $700 per square foot, Walentas' 3 million square feet of building space in DUMBO is worth about $2.1 billion.
With development work in DUMBO factory buildings going on in full-steam, Walentas now faces a dilemma concerning his growth strategy. His DUMBO resources, which made him a real estate moghul were unique and he had accessed them early on. Once these buildings are all leased out or sold, the growth of his company Two Trees Management will stagnate. 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 moving in other supporting and related industries. For example, household appliance, grocery, etc. can contribute to the neighborhood feel. However, Two Trees Management has no experience operating such businesses. What path Walentas pursues to achieve growth remains to be seen.
Teaching Objectives
1. Entrepreneurship
a. Traits b. Behavior c. Planning and Deliberation
2. Opportunities from external environment coupled with internal strength
3. Corporate strategy for future growth: Horizontal Integration vs. Vertical Integration and Related Diversification
4. Resource-based view of Walentas' assets
Courses
This is a complex case and it requires some prior understanding of strategy concepts. It will be appropriate for senior undergraduate as well as graduate students.
Undergraduate:
1. Business Policy and Strategy course
2. Entrepreneurship courses
Graduate:
1. Strategy courses
2. Entrepreneurship courses
Class Room Discussion Questions
1. What entrepreneurial traits do you observe in Walentas? How do these contribute to his success?
2. In what ways did Walentas add value to his properties?
3. To pursue further growth, speculate which strategy Two Trees should pursue. Justify your answer in terms of Two Trees' resources and capabilities.
4. Walentas' holdings of 3 million square feet of building space in DUMBO have been his main source of competitive advantage. Can Walentas sustain this competitive advantage? Justify your answer in light of the resource-based view.
Teaching Suggestions
1. This case needs to be pre-assigned; students must have read this case before coming to the class
2. Questions about the case should also be pre-assigned to point students' thinking in the desired direction
3. Actual analytical discussion should take roughly 10 minutes per question discussed (plus another 5 to 10 minutes of case summary in class)
Supplemental Video (available for sale at $11.95 from www.bobvila.com)
Vila, B.( 2002). Demolition and Preservation in Brooklyn. Waterfront Warehouse Rehab--Episode 2 (Show 1402). From: Bob Vila's Products and Services <http://web1.bobvila.com/BVTV/HomeAgain/Episode-1402.html>.
In this video, as excerpted from www.bobvila.com, "Chris Vila joins Bob again to tour a loft space in the neighboring Sweeney Building. In addition to stunning views of the Brooklyn Bridge and downtown Manhattan, the building boasts a "tar beach" roof top deck space. Bob and Chris are joined by David and Jed Walentas, the owners of the project building, who share with us their vision for the area. Back on site, demolition is underway and Bob meets Bill Higgins from Higgins and Quasebarth preservation experts to find out more about the history of the building."
Sample Student Answers for the Questions in DUMBO Case
1. What entrepreneurial traits do you observe in Walentas? How do these contribute to his success?
"A" response
By being proactive, innovative, and risk-taking, David Walentas shows all three generic traits of entrepreneurship. Soon after he bought roughly 2.5 million square feet of space in Fulton Ferry Landing, he renamed the place to call it DUMBO (abbreviation of down under the Manhattan bridge overpass). This was very inventive! So were offering the four-step leasing plan to businesses, allowing specific types of businesses (i.e., those adding to his envisioned cultural flare) to move in, and bringing renowned restaurants to DUMBO.
Second, he wanted the City government to give him the contract to work on the Fulton Ferry Park. When the government put up a tender, he was the first and only bidder. This shows his proactive attitude. The whole process of gearing "gentrification" in a "focused and quick" manner to revitalize the dilapidated neighborhood into a chic one was a unique case in gentrification history; and without Walentas' proactive attitude, this could not have happened. Specifically, arranging different festivals (e.g., 'It's my park' day) to create a neighborhood feel was a proactive step by Walentas.
Lastly, when people were scared to even go to DUMBO, he was risk-taking enough to buy 2.5 million square feet of space in 9 deserted buildings! Even under extreme financial pressure, he sent his son to the University of Pennsylvania and had him apprenticed under Donald Trump. The University of Pennsylvania was a risky choice for Walentas at that time and situation; but Walentas went ahead and made sure that his management team was getting the best training.
"B" response
Walentas shows all three entrepreneurial traits. For example, providing the four-step leasing plan to business tenants shows that he is inventive (because it is not a very common thing to offer). Walentas is proactive as well; we understand it from the fact that he organized several art-related festivals to create a neighborhood feel in DUMBO. As the developer, he just did not renovate the old buildings; he thought more and proactively arranged these festivals to make his tenants happier. Initially, buying 2.5 million sq feet of building space in nine deserted buildings was risky enough. The problem with deserted neighborhoods is that nobody wants to go there. But Walentas took the risk and bought those buildings with $16.5 million.
"C" response
Walentas is innovative and risk-taking. So he has two out of three entrepreneurial traits. He is innovative because he started new things that one wouldn't normally expect. For example, the four-step leasing plan and bringing in the higher end restaurants are innovative tasks that he did. He is risk-taking because he invested millions of dollars to buy a lot of space in an abandoned sort of a place. If his planned neighborhood revitalization hadn't occurred, he'd be doomed.
2. In what different ways did Walentas add value to his properties?
"A" response
Walentas added value to his properties in both traditional and novel ways. While renovating dilapidated buildings with large windows and new fittings is a traditionally value-adding task, most of Walentas' initiatives and works added value to his properties in unconventional ways.
His concept of changing old factory buildings into posh offices and upper-middleclass residential apartments is rather unique; after all, we do not normally expect to find these in 'once abandoned' factories. Instead of relying on a slow gentrification process and counting on others' contributions, Walentas purchased a lot of building space in the area and became the deliberate catalyst for triggering his envisioned neighborhood revival of DUMBO. On one hand, he offered the four step leasing opportunity (visit space, sign lease, move in, and get to work) to his business tenants; this all-inclusive deal (where all amenities came with the package) was hard to refuse. On the other hand, he also did a lot of things to give DUMBO a neighborhood feel for his residential tenants--from creating art festivals to bringing in Zagat-rated restaurants, to choosing the neighborhood bakery--Walentas did it all to make DUMBO a better place. The cultural character and upper-middleclass aura of DUMBO (i.e., the neighborhood upheaval in general), in turn, made his properties more valuable and easier to market.
"B" response
Walentas offered a 'ready to work' environment to his business tenants. He practically handpicked those tenants, making sure that they added to the cultural character of gentrifying DUMBO. In choosing these tenants, he could also create an interdependent business community in the neighborhood. Also, the large windows and good fittings added value to his properties. He also brought in many expensive and well-known restaurants, which also made the neighborhood more attractive.
"C" response
Walentas' apartments (that he rented out to businesses) already had electric, phone, and cable wires. It is not ordinary practice as it makes life more convenient for the tenants. Tax break also attracted businesses. He also tried to give DUMBO an artsy feel; and he also brought in many restaurants for fine dining.
3. To pursue further growth, speculate which strategy Two Trees should pursue. Justify your answers in terms of Two Trees' resources and capabilities.
"A" response
Walentas should expand his real estate business through horizontal integration strategy. Red Hook, Brooklyn seems like a perfect target for him next. As far as his buildings in DUMBO are concerned, he should decide his plan of action rationally. If he has at least ten buildings in hand, he should rent out three buildings to take advantage of the ongoing increases in the rental market prices. He needs to focus on quality in the future; so, generating profits currently will help him to provide continuous maintenance on each building (of course, condo fees are usually designed to cover basic maintenance anyway).
As made evident in the article, "ushering in premium quality businesses" would most definitely "increase the value of the neighborhood." Therefore, Walentas could afford to sell at least two of his buildings to gain a set amount of money to payoff any existing mortgages. While he rents three, sells two, he can begin renovations to the other buildings at a pace that is convenient to him, especially in terms of completing the renovations when the market is hot.
Walentas has been successful because he has always acted rationally and competitively; so, making totally rash decisions and occupying all ten sites would not be as much of an advantage. Walentas should stick with real estate because, in addition to the leadership, he also has other resources, i.e., his four-step plan and a skilled and supportive management team. Now, having worked miracles in DUMBO, the management team is even more experienced, and thus is likely to be successful again.
"B" response
Walentas should use horizontal integration as a corporate strategy. Real estate is his area of expertise and he should stick to real estate for now. Two Trees should consider merging or partnering with other developers in DUMBO. This would give Two Trees greater control over the real estate properties in the neighborhood, which will continue to become more attractive every year. On a related point, while Walentas is enjoying the hot real estate market (like any other developer), he should make sure that he reaps his profits before the real estate market turns sour.
"C" response
Walentas' resource is his large ownership of real estate in DUMBO. And due to his reputation and DUMBO's new culture, he has the capability to build theater, art galleries and art trading centers. So he should diversify into the entertainment business now.
4. Walentas' holdings of 3 million square feet of building space in DUMBO have been his main source of competitive advantage. Can Walentas sustain this competitive advantage? Justify your answer in light of the resource-based view.
"A" response
In order to determine whether Walentas can sustain his competitive advantage, it is crucial to analyze the situation from all four angles--value, rareness, inimitability, and non-substitutability. First, his traditional and novel ways of value adding transformed the dilapidated neighborhood of DUMBO into a vibrant area, which is more cultured, feasible and attractive now. From $6 per square foot to an average of $700 per square foot numerically corroborates the value he added. Second, DUMBO is rare because there are very few waterfront neighborhoods in New York City proper. So even if somebody else wants to repeat Walentas' work in DUMBO in some other place, chances are slim to none that s/he would find a similar geographic setting (with a similarly unique view). Third, Walentas wins even where inimitability is concerned. Walentas had a vision of converting these factory buildings into posh offices and residential apartments to certain specifications; and that is exactly what he did. The cultural identity and the trading nature of the neighborhood that he created is one of a kind. So is his care in selecting his tenants. So DUMBO is inimitable. Lastly, there seems to be no substitute for Walentas' DUMBO project, since competitors would have to incur very high switching costs (i.e., large-scale real estate is a very capital intensive business). Also, he provides an all-inclusive packaged deal to tenants, so any building trying to compete with these perks would most likely lose. Walentas successfully created a project that has a positive outlook for the future from the perspective of his profits and from that of the people who live in the community. Thus, with the kind of resources that Walentas has, he can sustain his competitive advantage.
"B" response
Walentas' company has the ability to maintain its competitive advantage because it has four criteria necessary for that. Its capabilities are valuable, in that it has been successful in creating its vision by using incredible insight and innovation. It is rare because of the services offered to the tenants before they move in, such as internet, and phone connections. The DUMBO neighborhood enjoys inimitability because of the way it is setup. There are great quality buildings with a park nearby. Walentas' DUMBO project is also difficult to imitate because it has many tax breaks provided by the local government. Finally, the strategic capabilities are non-substitutable because the development strategy involves a large investment of a huge underdeveloped area and a long-term goal.
"C" response
I believe Walentas can sustain his competitive advantage. His property has added great value over the years, mainly cultural value. He wanted an area where work and entertainment could happen together. Over the years, the area has become an exciting place with different cultures and many different things to do. DUMBO has many rare qualities like the geographic uniqueness as well as Walentas' treatment with his tenants. I believe that Walentas will come up with new innovations to maintain the rareness of his property.
Noushi Rahman, Pace University
Fabiha Naumi, Katalyst, Bangladesh