After the 11th...enduring effects on real estate

Real Estate Issues, Summer 2002 by Apgar, Mahlon

Remarks to the National Conference, The Counselors of Real Estate, The American Association of Chartered Surveyors, Washington, DC, February 26, 2002

Since September 11, America has awakened to a harsh reality that directly affects real estate and our profession. It can be summed (up in one word: vulnerability. During the last half-century, we behaved as if we were invulnerable. But two dates last fall showed that we are very vulnerable to what the military calls "asymmetrical threats" -that is, actions that cannot be deduced from hard data and linear analysis but must be induced from soft intelligence and disconnected events. September 11 compelled everyone to see terrorism as an asymmetrical threat and to support immediate, direct, forceful action. There is no room for weakness or equivocation. Yet December 2, the day Enron declared bankruptcy, was no less emblematic of asymmetrical threats to our economy and our business culture. The causes of December 2 must be countered with equal immediacy, vigor, and resolve. There is no room for excuses and grandstanding.

In these remarks, I will suggest parallels between these two awful-and apparently disconnected-events; highlight a new premise that is already reshaping corporate real estate strategies and urban planning policies; distill principles to guide real estate counseling under these new conditions; and outline the prospects I see for companies and communities alike as a consequence of the underlying trends and recent events.

THE PARALLELS

Both September 11 and December 12 were tragedies whose effects will linger for years. They claimed thousands of innocent, unsuspecting victims-one in lost lives and loved ones, the other in lost jobs and lifetime savings. Both events sapped the public's confidence-one in the invincibility of our homeland, the other in the buoyancy and integrity of our business system. Both events produced heroes-from New York's Rudy Giuliani and hundreds of others, to Enron's Sherron Watkins and those few who took great personal risks in speaking out about the cancerous behavior of their executives. Both underscored the value of technology-one to make society safer through better intelligence, the other to speed the economy's recovery and sustain the productivity gains of the past decade. Finally-and most critically for our role as counselors and trusted advisors to decision-makers-both events were predictable, not necessarily as to time and place but unquestionably as to the scale and scope of impact.

We quickly saw these parallels reflected in corporate applications of The Apgar Score [a system for evaluating real estate conditions]. Of the Score's five factors, the first four-Amount, Price, Grade and Area-dominated real estate decisions during the boom years of the 1990s. The fifth factor-- Risk-was limited to specific, highly localized market, financial, and environmental risks. Since September 11 and December 12, however, Risk has received the greatest attention and taken on new meaning for executives concerned with asymmetrical threats. Both events brought into sharp relief the axiom that effective risk management depends on full information and thorough planning.

Security has emerged as a key element in assessing risk. Are company buildings and systems vulnerable to infiltration, sabotage, and direct attack? Are corporate facilities, once symbols of market power and prestige, too visible and recognizable? Is corporate infrastructure integral to the regional and local public infrastructure, such as power and communications grids, water supplies, and drainage systems?

Simplicity has also been recognized as a critical factor in managing systemic risk. Enron's derivatives contracts allowed executives to conceal the risks from investors and even from the company's Board. Their very complexity obscured the fundamental weakness of these financing instruments and, by placing unchallenged power in the hands of a few, threatened basic concepts of risk management. They revealed a different type of vulnerability-the highly complex, "off-balance sheet" techniques that often fuel infrastructure projects, yet may mask weak underlying economics. Ingenious financing schemes, so prevalent in the 1990s "bull market" and so potent in Enron's collapse, divert companies from applying new technologies and work practices to their infrastructure and business processes.

September 11 was very personal for me. With four other CREs, I had begun a week's consulting assignment in Washington with the General Services Administration (GSA) on September 10. As the hijacked plane hit the Pentagon, I was standing on the roof terrace of GSA's headquarters looking out over downtown Washington toward Virginia, discussing our work plan with their staff. We watched in horror as heavy black smoke billowed up. I knew instantly that it was near my former Army office and staff. Soon after our panel assembled and we agreed to press on with our assignment, I walked to the Pentagon to help survey the damage and, over the next few days, plan its rebuilding as well as consult with GSA.