¶¶Òõ´«Ã½ÔÚÏß

Amanda Kramer: Every episode, we have an LBIdea or a key takeaway. And the key takeaway here is that it's important to stay focused on your area of expertise and be good at what you do in your field.

Welcome to the Leeds Business Insights Podcast, featuring expert analysis to help you stand out from the herd. I'm your host, Amanda Kramer. We are thrilled to be discussing all types of commercial construction and real estate development with Case Swenson, alumnus and President/CEO at SWENSON in the San Francisco Bay area.

Welcome to Leeds Business Insights, Case, and thank you so much for being here today.

Case Swenson: Thank you for having me.

Kramer: Before we dive into our conversation, Case, can you outline for us the difference between construction and development?

Swenson: Okay. Development for me is acquisition of a piece of property. It's entitling that piece of property. It is getting the construction drawings and permits for that property. So, entitlements and permits are two totally different things. And then, it's financing that property, building it, stabilizing it, and refinancing it. That's kind of the cycle of a development.

Kramer: Wonderful. What is one of the most important parts of construction?

Swenson: I would say forecasting. That is so important to be five steps ahead. And if you're not, it is a mess. Very important to be thinking... I said five steps, it should be 500 steps, just to make that point very clear.

Kramer: It is so important to be 500 steps ahead and to be prepared, and then still a million things are going to go wrong.

Swenson: No question about it. And one other thing I would say is, as a developer, another thing is follow the roads, right? So, that's always been something that I've paid a lot of attention to, whether it be trains... We've got a high-speed train here, so we bought some property nearby that was very inexpensive. But when the train stop gets there, that would change. So, that's a really important part of development, because in development, a lot of times you're going into new territories and things like that. So, transportation is something that should be high on your list to study in your market.

Kramer: What about innovations that you are currently seeing, is that something that you'd be able to share with our listeners?

Swenson: Yeah, and you know the innovations that I see, number one, it's the modular side. And there's good modular, there's mediocre modular, and there's really bad modular. And having a very good understanding of that is important. But construction, really, hasn't had any true innovations that have changed the way we've done it for my entire career. And even if I go to, like my dad's career, and we're still doing it the same way.

And it's sad that there isn't a better way. And the reason why is because it's a layer of cake that needs to have, basically, a billion parts that go into a building, and somebody has to put them in the right place and connect them up correctly. And, unfortunately, these modular situations, they can be helpful. And the most helpful thing with modular, it's not less expensive. Everybody claims it saves a bunch of time. I can argue that depending on the project. But the one thing that it does save is on vertical transportation. And that's something that's very difficult every day. Every six floors you go up, you lose two hours of productivity from your labor every day. So, if you can fly or use the crane to bring in bathrooms and kitchens, which are the most labor-intensive, that to me is the most efficient use of modular. But as far as the structure is concerned, I truly don't believe there's a lot of savings in time and/or money.

Kramer: Okay. Thank you for sharing that with us. Now, some listening may say, have there been innovations, for example, related to green building? But from your perspective, this is an area that is much more complex than may meet the eye. What can you tell us about this?

Swenson: So, on green building, the only thing that I see as really being a breakthrough, there's a company called Ubiquitous and they're making a paint that you can put in the glass of buildings that is solar. It is not very efficient, but because it covers the entire building and it's not expensive, because currently, solar is the most expensive way to save money on a building. There are many other ways to save money on a building. And things like awnings that go over on the south side of a building that, if they extend out in the summer, they provide shade and in the winter the sun can come underneath it. And then, you use mass, basically, where that sun comes in and heats up these different masses. So, let's just say it's a big piece, a concrete wall or something that's inside beyond the glass, and using ventilations, those types of things are the most efficient way to save power on your building.

And 33% of all power, all energy in the world goes into buildings. And so, when we talk about making these green, I mean, this is the world's energy. So, it is very important. And I love solar, and I'm a big fan. But when it comes down to design, you can actually save more through really smart designs.

Kramer: Case, we talked about some of the innovations or interesting parts of being in the industry. Case, why is right now an interesting time to be in construction in real estate?

Swenson: Well, in my opinion, it's always an interesting time to be in construction and real estate. I've been doing this since I was about nine years old. And what I love about real estate, even though it's not high-tech and some people think that it might not be very fast-moving, I disagree. And a prime example is, on Monday, I got some information and the train was... they were heading down the tracks. I got more information yesterday, which we made 180-degree turn on a very big decision that you don't normally see that in your everyday business that affects you like this would.

Kramer: What are some of the current challenges you're seeing in construction? And how do you approach those challenges?

Swenson: So, right now, the biggest challenge for us is the economic cycle. We have the rising interest rates also bring up cap rates, which is how your building is valued at the end of the day. So, there are people that are trying to get out of their construction loans because they don't want to build into this market because they were counting on it being valued where it was last January. But they're not. And construction prices have dropped because of this actual phenomenon. There's less demand because people can't get buildings out of the ground. And so, the subcontractors and the labor and the materials are a lot more readily available. But it's only dropped about 5 to 10%, but the building is down 30%, so it's going to take time for those things to meet each other.

Kramer: And how do you best navigate a challenge at that magnitude?

Swenson: It has been really difficult because the people that work here are like my family, and there are people here that I've had to let go because I don't have work for them. Most of them have found their way and they've found things, and I'm very happy about that. So, that is the biggest challenge, is not being able to provide enough work. I always say I have two jobs. Number one is make sure there's work. And number two, that everybody's paycheck cashes. And unfortunately, I'm not failing, and we still have quite a bit of work, but not as much as we used to, due to this. And we're not alone. This is an across-the-board in California, for sure. And across America, it's still difficult to get things going from the ground up. But California is particularly difficult.

Kramer: Thank you for sharing that with us, Case. For someone listening who's interested in getting into construction or learning more about how that works, how would they get started?

Swenson: Having skills and knowledge is something that you earn over time. And I'm a firm believer in hard work. There's no substitute, in my opinion, regardless of whether you're doing ballet or construction. And so, I want to make sure that, if I were to go out on my own and start a construction business, that I was ready to put in the time and the energy. And, obviously, you have a lot more of that when you're young.

The thing about construction is that it's all based on faith. And what I mean by that is your customers and what they know you can do and what you've been able to prove that you can do. So, when you start out, you're going to be starting out by, maybe, doing a landscape installation, maybe doing a roof installation. Maybe, you could find some insurance work. A lot of guys get started there because insurance companies, there could be a fire or a flood and you come in and fix that, and you work with insurance companies. But regardless, you can't just go out and start building a 20 million, 50 million, $100 million project until you've proven that you can build the one before it that's a million or a million and a half, and that you've been able to successfully complete it.

And at that same time, you've been able to endure the issues with construction. Since they built the coliseum in Rome, there has never been a perfect set of plans. And there's never been a construction job that went perfectly. And if anybody tells you that, I would not believe them. And I'll bet you, if I went back through it with whoever said that to me, I could find something that wasn't perfect.

So, you need to be tough because there's so many hits-over-the-head, if you will, when you go through these projects because, for some reason, the crane breaks down or for some reason the doors don't show up or for some reason you can't get the utilities company to be a part of it, where everything's all lined up and then there's always something that comes in. And it's how you sort that and how you take responsibility for those mistakes when they are yours and how you also make sure that people pay for extra work. Because a lot of times, people are like, "Oh, wait a minute, that should be included." It's like, "No, hold on a second. That's not on the plans. I'm sorry. You decided to add this railing around the deck that we built for you. It was supposed to be wood, and now it is copper. And I don't understand why you don't think that this additional work and these additional costs should be my responsibility." And that is a constant battle that you have. And everybody, you know, talks about change orders, and the contractor is always trying to do this. It's because you get into these jobs and things change, and it creates more work than what you anticipate, in the first place. So, you need to be able to explain that and make sure that you get paid for that, or you're going to go broke. But, where I started this conversation, but you also have to take responsibility for your mistakes that you make, so.

Kramer: Absolutely. It sounds like, Case, in a way, a project is a living organism that is constantly changing and you've got to be able to adjust to that.

Swenson: You're absolutely right. No question.

Kramer: And as we think about boiling that down to skill sets that are important for someone to have that would like to go into construction, into development, what would that list look like?

Swenson: The more business you can have, the better. And that, accounting so important, my goodness, gracious. And finance and business law and some level of engineering. More, the merrier, no question about it. Because if you can find a better way, especially if you're in a competitive situation, the more you know about engineering and how things are built, you might be able to find a better way to do it. Therefore, you can outrun your competition, because there will always be competition in the construction industry.

Kramer: Absolutely. And so, those are some of the hard skill sets. And it sounds like some of the more qualitative skill sets would be the ability to pivot, the ability to problem-solve in the moment, take responsibility for your project. Would you have any others to add to that?

Swenson: Yes. You know, what I have found is I've seen a lot of different contractors go outside of their area. And a lot of times, they get hurt by doing that, because they don't understand the market there, they don't understand the labor there. And it is very important to really understand the market that you're in, how much it costs per square foot, how high you can build, how wide you can build, what kind of municipality that you're dealing with, and how difficult they are. We have Santa Clara, for instance, nearby city. They are so difficult to work with. And I know that. So, if we're going to do a deal there, we better make sure that it sings. Where in some place like Santa Cruz, we have a lot more agreeable municipalities, and we can get through their planning departments and things like that.

Kramer: Okay, that's really great information. On the development side, can you tell us more about how leverage works in your favor?

Swenson: So, leverage is the most important part of a development and something that you should really focus on understanding. There's the difference between the science of money and the science of, maybe, something like brain surgery. And the science of money is complicated, but it's also something that can... your deep understanding in that is the most helpful thing when it comes to doing development and construction.

It's a way to use others people's money that allows you to continue to make enough money to do your next development project. Each project takes about seven years. So, without having some level of money to weather that seven-year storm without having access to any of that money, that is truly the difference between someone that's able to develop or not.

But the bottom line of leverage and something, I think, a lot of people think it's really complicated, but at its core, what leverage means is using other people's money at a higher rate of return than what you're borrowing it for. So, you're borrowing it 5% and you're investing it at 8%, and you're making 3% on a loan is basically how that works. But you have to have the equity to get that loan in the first place. You have to have a good idea in the second place for the bank to actually make those types of loans.

Kramer: Case, for someone interested in entering a new market, what can they do to increase their chances of success?

Swenson: Find somebody local that knows the people, that knows the subcontractors, know the people that'll show up. I would not be entering another market without someone that you really knew and trusted.

Kramer: You mentioned economic cycles. What are some considerations for someone in construction and development as they look at economic cycles in the impact to their work?

Swenson: I think that another thing that is incredibly important are economic cycles and understanding how those cycles affect your business and being ahead of the game when it comes to that. And knowing when the cycle is on an upswing, let's call that 2013, you could really see that the momentum was building. And, right now, we're in a downswing, in my opinion. I see it happening for a long period of time.

When you see those kinds of things, it's important to make sure that you cut your overhead, you make very smart decisions, you maybe move them more quickly, because you want to be there to fight another day. And when you're seeing these economic cycles and all the signs that go along with it, that's the last time in the world that you want to take a risk. So, for me, and one thing that has helped with our success is really focusing on, maybe, making a little less money on a different project, but taking less risks.

Kramer: So, Case, earlier in our conversation, you mentioned that you got into the business at age nine and you are fourth generation in your family's construction business, which is amazing. What have you learned, being part of and scaling a family-owned business?

Swenson: So, what I have learned over the four generations, it's been actually 100 years that we've been working here in San Jose, and what I have seen is some of the generations didn't make it. And they had, at one point, the company had gone broke, and then we rebuilt it. And that happened in the '80s. And the reason why was because there were siblings that were at odds.

And I think that the most important thing is to see that, and especially for the older generations, to make sure that the succession plan is in place at a very early period of time. It's very difficult to have a company run by a committee. I understand having a board, but on the day-to-day, you need somebody that's capable to make the decisions that happen on a minute-by-minute basis. And so, I think that's the most important thing. And I think that the last two generations, we've been able to make that work.

And, as a parent, I think it's really important that you look at that, regardless if you're in the construction industry or you're in the software business or whatever business you're in. It's really important and it is your responsibility as a parent to make sure that succession plan is something that everybody understands. They don't have to like it, but they have to understand it, and you have to make decisions on that. And I've really... I've seen a lot go wrong and right on that based on planning ahead.

Kramer: Absolutely. A few really great points there, Case, and I'm sure ones that resonate with listeners who have been part of or are a part of family-owned businesses.

Every episode, we have an LBIdea or a key takeaway. And the key takeaway here is that it's important to stay focused on your area of expertise and be good at what you do in your field.

Swenson: I really think that sticking to one thing, sticking to one industry and just working hard. If I could give a young person any advice, that would be it.

Kramer: Case, I think that's a great spot to end. Thank you so much for joining us today.

Swenson: Thank you.

Kramer: Thank you again for listening to Leeds Business Insights. Don't miss a single episode, subscribe to Leeds Business Insights wherever you get your podcasts. You can also find more information about our podcast series at leeds.ly/LBIpodcast.

If you've enjoyed this episode, you may also enjoy Creative Distillation, an entrepreneurship research podcast from the Leeds School of Business. Check it out at pod.link/creativedistillation.

Leeds Business Insights Podcast is a production of the Leeds School of Business and is produced by University FM. We'll see you next time.