Sold on Florida
By Jean Gruss
Developer Al Hoffman Jr., 71, leaves the Florida development business after nearly 30 years to become U.S. ambassador to Portugal on Nov. 12.
Currently a Fort Myers resident, Hoffman started development projects in the Tampa Bay area in 1975 and founded the company that is WCI Communities today. He retired as chief executive officer earlier this year but remains chairman of the Bonita Springs-based company, which reported $1.8 billion in revenues in 2004.
Hoffman's most notable accomplishments include developing Sun City Center near Tampa, acquiring Westinghouse Communities in Naples in 1995 and taking his company public in 2002 (stock symbol, WCI; recent price $25). In addition to his business ventures, Hoffman is also well known for his fundraising efforts on behalf of the Republican Party, most recently as national co-chair of the campaign to reelect George W. Bush.
Hoffman declined to discuss the future of WCI Communities, preferring to leave that task to successor Jerry Starkey. But he agreed to share his thoughts about Florida real estate, new developments in inland counties and taking his company public in 2002. Here's an edited version of the conversation:
What is your outlook for real estate in Southwest Florida?
I don't think there's any question we've seen a lot of froth in the market, particularly generated by people who feel that real estate valuations are going up so fast they need to jump on the wagon. They flip and make a profit. I think it's good that it should be slowing down. You'll always have people who will and should buy real estate as a good place to park their assets for investment purposes. If you look at the history of real estate, there have always been cycles when markets become quite frothy, particularly in California. While they might slow down for a while-and some micro markets might have a reduction in value-they always come back and then continue their upward trend. So I think Florida is seeing that. Perhaps because Florida is the largest market in the country, we've seen a lot of speculative investments, particularly in Southeast Florida. Those will slow down somewhat and that's good that they slow down. Having said all that, I'm not worried about the future, long term or short term. Even on a short-term basis, the market fundamentals are so strong.
What are the strong fundamentals?
With the dollar valuations so low, American real estate and Florida is very attractive to people from overseas. America has always been the safest place to invest and real estate has always been a good opportunity. People want to buy homes and use them as a vacation home and see them appreciate over the long term.
Second, many people in this country have lost confidence in the stock market. And it stands to reason now that they'd much rather invest in real estate to enjoy steady appreciation. A lot of people are looking upon the real estate market in that light. As long as the stock market doesn't go back to its gold-rush days, then real estate is going to be the stronger alternative investment.
Third, you have the baby boomers. We've been telling this story for years and years. It's here: 2005 is the first year of the baby boomers turning 60. We've got 60-year-old people who are starting to put pressures on the market for second homes, move-up homes and retirement homes. We all know they're thinking about retirement. They're more mobile, the kids are gone, they travel and also they've got more money. The baby boomers are starting to inherit the money made by their parents, which is the largest intergenerational transfer of money in the history of our country. They've got this walk-around money and they're buying second and third homes. That's going to be around for the next 20 years. That's what's driving the Florida market. The speculative investors account for only 10% of the market; they're going to be in and out. But the baby boomers are in for the long term and we've seen no slow down. That's going to drive our economy for a long time.
Now, you can look at demand. I sit on this Harvard University panel and they came out with a study that showed we need 20 million houses in the next 10 years. That's 2 million homes a year. No one can accuse the industry of overbuilding. We're a bit frothy, but we're not overbuilding. In our markets, we've seen some signs of slacking off in certain areas, mostly from speculative investors, but the demand for housing is still so strong.
You've been through many cycles before. Is this one different from any other?
No. It's always been like that. Real estate markets go up and down, then higher again. There are the chicken-little guys who say that any kind of a slowdown is a disaster. All I can say is we're going to have another record year.
What do you see as the biggest challenges or obstacles to growth in Southwest Florida?
Material costs for construction and growth management. For material costs, the answer is to develop more capacity for materials to keep prices competitive. American manufacturers, whether it's concrete or windows, are gearing up capacity. Right now, though, we have a big window shortage. We can't get windows fast enough. The result is we have to slow construction and hold off on selling more houses. We've deliberately had to hold sales up. It's going to take another year or so before the pressures let up.
As for growth management, the demand for growth has really been generated by a national demographic trend, so we just have to recognize that. But that puts pressures on responsible growth. We don't want to manage growth to keep it at a low level, but to allow the level of growth to go up and be sustainable in a proper way. It's a constant battle with infrastructure, water, and air quality and there are all different kinds of influence groups that have a particular element of that they want to protect. So it's going to require some concentrated effort on the part of state government and local municipalities to meet the needs.
Florida has tremendous resources. When you look at Florida, it's got 18 million people and that's not much bigger than metropolitan New York. Now I'm not saying we should make all of Florida a Manhattan, but we've got an awful lot of land that hasn't been developed and the resources are there to do that. Everybody wants to move toward the coast. Our coastal areas represent an urban set of problems. But the agricultural areas offer the logical places for the majority of our expansion. I think the "New Town" concepts are the best way to go to balance the different needs. I'm talking about new towns such as Ave Maria in Collier County and Babcock Ranch in Charlotte and Lee counties.
Is this move to develop inland Florida counties a real trend now?
That's right. Pelican Bay at one time was considered too far out of Naples. Then people said Pelican Marsh is on the east side of U.S. 41 and we're not sure you can be successful out there. Then they said, Bonita Springs, that's nowhere, that's agricultural. If anyone says that moving to the next area that's undeveloped is risky because nobody's done it before is being shortsighted.
Did WCI ever consider buying Babcock Ranch?
We were asleep at the switch on that one. We had an awful lot on our plate. It's like anything else; if you have a deadline to meet you're not going to start research on a story that's going to take a year to do. But we should be focusing more out there in the future.
You didn't think much of Ave Maria at first?
No. I think [Ave Maria founder] Tom Monaghan was probably a greater visionary. I never wanted to go out to Immokalee. A visionary is somebody who's only a year or two ahead.
Do you have any advice for West Palm Beach developer Syd Kitson and his Babcock Ranch development?
Yes, I think his best shot to succeed is to turn it over to WCI. (Laughs).
He's done a good job. He was smart enough to get some big money into it. He has a wonderful opportunity to make it into a pristine, first-class community. A good developer should never maximize the use of a piece of property. He should always make sure that it's got lush landscaping and that it has people-friendly amenities. It's got to be the kind of place that, as it ages, it becomes better. All the great communities around the country were developed to a much higher standard. My advice to any developer is: Develop to the highest quality possible and the extra cost will be more than made up for by the value of the community.
Looking back, was taking WCI public in 2002 the right thing to do?
Taking the company public was absolutely the right thing to do. It allowed us to compete with the big boys on raising money at the least expensive cost, which is the secret to this business. So it's accomplished that. Secondly, it's created a public commodity, which is necessary to give options to key executives. To have such strong entrepreneurial-minded people you've got to have to opportunity to gain wealth. You're not going to attract top executives unless you give them the opportunity to make a lot of money. So it's achieved its objectives.
We went public before Sarbanes Oxley and that has cast a pall over industry and American business. Much of that was necessary to correct the corporate missteps from the excesses of the 90s. That was a hell of a roller coaster ride. You see that most of the high-profile cases all had to do with high-tech stocks. You didn't see that with companies that made a basic product. I don't think our industry needed policing. There were no homebuilding companies that got into trouble. Our industry has evolved and matured to the point where the top publicly held builders are operating correctly. As a citizen of America, I understand why it was enacted. But as a homebuilding executive, Sarbanes Oxley has been a real burden.
Has Sarbanes-Oxley been so much of a burden that you wish your company were private again?
No, but I tell you what concerns me. It costs us millions and millions of dollars in legal fees, insurance costs and liability costs. Nowadays it seems that every employee who leaves a company sues their employer over some aspect of Sarbanes Oxley. But what it has also done is forced our key executives and our board to focus on that law. It has diminished individual entrepreneurial instincts, which makes many companies thrive and grow.