By Steven Pearlstein
Monday, May 14, 2007
Driving around Harbor Station, a 2,500-acre site in Prince William County 18 miles south of the Capital Beltway, you'd hardly think there was a residential real estate slump. There have been times this spring when the Kettler development company has spent close to $1 million a week putting in the roads and utilities and the Jack Nicklaus-designed 18-hole golf course. And plans are moving full speed ahead to begin Phase One of a project that, as envisioned, will have 4,000 townhouses, condos and single-family homes, a hotel, offices and retail town center. There will be riding and hiking trails through the wooded, rolling hills, a sailing school down by the big new marina and a new train station where you can hop on the VRE commuter line.
Harbor Station is the sort of large, mixed-use development that has made Kettler, the company, one of the most active developers in the Washington region and Bob Kettler one of the region's most successful businessmen. The project is grounded in the firm's strength in patiently assembling large tracts of land and winning zoning and other approvals for large-scale development, usually with promises of investing millions of dollars in public amenities and infrastructure. It is premised on the belief that there are still premium prices to be earned in places other developers never imagine. And it reflects an appetite for risk-taking notable even for an industry known for calculated gambles.
Most of all, it reflects an optimism about the Washington economy that is widely shared in the business community. Although publicly owned homebuilders have pulled in their horns and some government contractors have seen a flattening of the growth curve, there is a widespread belief that Washington is the Energizer Bunny of regional economies. And nowhere is that more prevalent than among real estate developers, who, in response to political realities, are busy shifting their focus from exurban sprawl to urban and suburban infill projects.
Although Harbor Station is the biggest thing Kettler has going, it is hardly the only thing. There's also a second phase of a luxury condo project in midtown Reston, a massive new complex in Pentagon City, a 500-unit project near the Largo Metro station, downtown projects in Rockville, Bethesda, Alexandria and Silver Spring, and the final stages of a nearly 2,000-unit community in Lorton that includes turning the old D.C. prison into an arts center. And don't forget the redevelopment of the old George Washington University Hospital and the crime-ridden Sursum Corda housing project in the District, along with Baltimore's Greektown neighborhood.
Add up all the Kettler projects in development or pre-development and it comes to roughly 20,000 housing units, 11 hotels and a couple of million square feet of retail and office space. The land it owns or controls, more than 5,000 acres, is probably the biggest private portfolio of developable land in the region. By any measure, that's an enormous bet on the Washington area real estate market at a time when overall housing prices are falling and economic growth is slowing nationally.
Bob Kettler has been here before, however, and claims to have learned his lessons.
At the end of the 1980s, he was flying high when the real estate bubble burst, banks and thrift institutions went belly up and more than a few developers were forced to file for bankruptcy. At the time, Kettler was in the midst of his most ambitious project to that point, Cascades, a community in Loudoun County, which he now describes as "grossly over-leveraged," along with other ambitious projects and a large portfolio of undeveloped land. After his credit dried up and the real estate market began to tank, he was forced to sell assets and renegotiate his debts. When it was over, Kettler was left with a couple of shopping centers, a few pieces of strategically located land and lots of contracts to manage the projects he and other developers once owned.
"It was ugly, but we gutted through it," he said recently.
Even back then, the Kettler name was well-known in the Washington real estate scene. His grandfather was an apartment developer in the late 1920s, and his father and uncle were among the most successful home builders in Montgomery and Fairfax counties during the first boom years of the '50s and '60s. Young Bob started out remodeling apartments in Adams Morgan while a student at GW in 1974, then worked his way up the development food chain, assembling land and building single-family houses on spec. He gained a reputation as an enthusiastic salesman with an eye for interesting architecture and aesthetic details. Even today, his staff reports that he can become particularly emotional about brick colors.
But it wasn't until the mid-'80s that Kettler found his real calling, conceiving and developing large, multiuse projects. He teamed up with Rick Hauser, an attorney who had once worked for Til Hazel, Northern Virginia's premier lawyer-developer, and launched his first big project, in western Fairfax County, which would become home to 3,000 families. With Sully Station, they not only established their credentials and reputation with county planning and development officials, but also proved that they could earn a premium of up to 25 percent by creating communities rather than simply building houses.
"Bob is a visionary," said Larry Nussdorf, chief operating officer of Clark Enterprises, the construction giant. "He can take a farm in a location that I would consider in the middle of nowhere and can visualize a fully completed residential development better than anyone I know."
After the debacle in the early 1990s, the challenge for Kettler was to figure out how to be a visionary while still being able to ride out the wild swings of the real estate cycle.
The first was to move, in a big way, into rental apartments that would provide a steady stream of income when the new-home market softened. That included a big push into "affordable" housing financed and subsidized through a federal tax-credit program, which Kettler developed with Clark Enterprises. Today, Kettler owns and manages a portfolio of 10,000 apartments, more than half of them "affordable."
The second lesson Kettler learned was not to have too many eggs in any one basket, be it one project or one segment of the real estate industry. In addition to rental apartments, Kettler started getting into retail, offices, condos and hotels, while continuing to be the largest supplier of land to many of the region's home builders, including NVR and M/I Homes. Building scale and staff expertise in all those areas has sometimes been a challenge. But the advantage is that Kettler can now quickly and easily move with the changes in the various product markets.
Perhaps the most important facet of Kettler's business model is a capital structure that relies more heavily on equity and less on debt. Once construction on a project is completed, Kettler has usually arranged to sell much of it to an insurance company like AIG or MassMutual, wealthy private investors like L.M. Sandler & Sons of Virginia Beach, or even private-equity firms like the Carlyle Group. The investment allows the company to pay down most of the debt.
Kettler is also teaming up with other big developers, such as Boston Properties at GW Hospital, the Staubach Co. in Leesburg, the Lerner family in Reston and the old Charles E. Smith Co. (now Vornado) in Pentagon City.
Because of those various arrangements, Kettler said, he has "given up some upside," as they say in the deal business, but is now better able to keep his costs under control, his cash flow positive, his debt light and his financial exposure to a minimum. More important, he said, it is a capital structure that allows him the luxury of patience, moving ahead with projects when the market is hot but slowing things down when it is not.
Time will tell whether he's really found the magic formula. During the past decade, just about anyone could have made money in real estate, and Kettler made lots of it, amassing a sizable paper fortune. The company now has 475 employees -- big for a development shop confined largely to one market -- with annual revenue of more than $820 million.
Bob Kettler himself is also beginning to assume a higher profile. He recently changed the name of the company from its old name of KSI Services to just plain Kettler. And the company became the named sponsor of a new hockey rink in Arlington, which the Washington Capitals share with the skating public. When the Potomac School in McLean arranged for Bill Clinton to attend the dedication of a new building, Kettler was there to welcome him as the co-head of the committee that raised more than $40 million for a building fund. Among the other parents contributing to the effort were Kettler pals Steve Case and Ted Leonsis, two founding fathers at AOL, and Capital One chief executive Richard Fairbank.
If Kettler has a weakness, according to some in the industry, it is that he rarely runs into a deal these days that he doesn't like or a grand project he doesn't think he can pull off. That is the curse of the visionary. But it is also the legacy of a real estate boom that has gone on so long, with so much money chasing after it, that it has become easy to believe that if you build it, they will come.
Steven Pearlstein can be reached firstname.lastname@example.org.