Even in the greater San Francisco bay area, retail is so overbuilt we would only consider doing a new ground-up project if we were pre-leased to a break-even on total cost. That said, retail is extremely location sensitive—to truly thrive, you not only need the best intersection in town, but that intersection's best corner. If you happen to have that corner at the right price, and with the right tenants in tow, you will do fine with a new project.

GlobeSt.com: Have you thought about going to other growth areas?

McNellis: No, we wouldn't consider expanding our operations into a new growth area. I go into this in some detail in the book, but in short, we believe one of the keys to our success has been our specializing both from a product standpoint and a geographic one as well.

GlobeSt.com: Can you elaborate a bit on what else you might caution?

McNellis: Sooner or later everyone—I mean everyone—loses money in real estate. I lost money every way you can in real estate. I learned the best way to make a loss merely painful rather than fatal is to limit what you risk on any given deal. If you put all of your assets into—or personally guarantee —every project you do and your projects grow bigger and bigger, you will go bankrupt. That I will personally guarantee.

GlobeSt.com: So what is your advice on avoiding career-ending loss?

McNellis: Perhaps the best way to insure against career-ending loss is also the most obvious: Don't over-leverage your deals. Invest more money in your deals at the outset. Take the contingency line-item in your budget seriously and make it meaningful. It wouldn't be a bad idea to sharpen your pencil, determine your best estimate for your contingencies and then simply double it. In sum, exchange a little upside for a small bulwark against the slings and arrows that are flung at us all.

Part 2 of 2

PALO ALTO, CA—In part 1 of this interview with John McNellis, a principal with McNellis Partners based in Palo Alto, CA, who recently wrote the book, Making it in Real Estate: Starting as a Developer, suggests that any young developer starts in the business by fixing up houses. “The problems you encounter and the skills you gradually learn from buying and fixing up small residential properties are the same problems—solved by the same skills—you will find on large commercial projects,” he said. In part two, we chat about the retail sector specifically and what the future holds, other growth areas and what to be cautious of.

GlobeSt.com: Is supermarket anchored retail a sector you expect to grow in your region?

John McNellis: I think it's fair to say that retail today is among the most challenged of all real estate product types. This is in part due to the onslaught of the internet, but is much more a result of decades of profound overbuilding. America has roughly 50 square feet of retail for every man, woman and child in the country. In comparison, Europe has roughly 2 square feet per capita.

Even in the greater San Francisco bay area, retail is so overbuilt we would only consider doing a new ground-up project if we were pre-leased to a break-even on total cost. That said, retail is extremely location sensitive—to truly thrive, you not only need the best intersection in town, but that intersection's best corner. If you happen to have that corner at the right price, and with the right tenants in tow, you will do fine with a new project.

GlobeSt.com: Have you thought about going to other growth areas?

McNellis: No, we wouldn't consider expanding our operations into a new growth area. I go into this in some detail in the book, but in short, we believe one of the keys to our success has been our specializing both from a product standpoint and a geographic one as well.

GlobeSt.com: Can you elaborate a bit on what else you might caution?

McNellis: Sooner or later everyone—I mean everyone—loses money in real estate. I lost money every way you can in real estate. I learned the best way to make a loss merely painful rather than fatal is to limit what you risk on any given deal. If you put all of your assets into—or personally guarantee —every project you do and your projects grow bigger and bigger, you will go bankrupt. That I will personally guarantee.

GlobeSt.com: So what is your advice on avoiding career-ending loss?

McNellis: Perhaps the best way to insure against career-ending loss is also the most obvious: Don't over-leverage your deals. Invest more money in your deals at the outset. Take the contingency line-item in your budget seriously and make it meaningful. It wouldn't be a bad idea to sharpen your pencil, determine your best estimate for your contingencies and then simply double it. In sum, exchange a little upside for a small bulwark against the slings and arrows that are flung at us all.