When you need someone

to talk to about your retirement

plan, it’s good to actually have
a person.
Add more value to your retirement plan with personalized services and support. Call us at 1-866-954-4321.

Mutual of America® and Mutual of America Your Retirement Company® are registered service marks of Mutual of America Life Insurance Company,
a registered Broker/Dealer. 320 Park Avenue, New York, NY 10022-6839.
○ Europe’s stealth tech star 18 ○ The art of selling stock 22 ○ A Soviet Union reunion 10

February 18, 2019 ○ SPECIAL DOUBLE ISSUE

p40

p58

p62
 February 18, 2019

 Inside the elevator

that whisks owners—
and their cars—to
apartments in the
Porsche Design Tower in
Sunny Isles Beach, Fla.

THE 38 The Crash Lingers On

REAL ESTATE A decade after the housing bust, we’re feeling its effects in new ways
ISSUE
40 Zillow Wants Your House
The real estate app joins a growing crowd of high-tech flippers

46 Luxury Buyer’s Market

PHOTOGRAPH BY DEVIN CHRISTOPHER FOR BLOOMBERG BUSINESSWEEK

A downturn in pricey homes offers bargains for the well-heeled

50 No Hollywood Ending in New Orleans

Brad Pitt’s attempt to save the Lower Ninth Ward hasn’t gone as planned

56 Rise of the Branded High-Rise

Why just wear a label when you can live in it 24/7?

58 The Apartment Building That Conquered America

A history of the blocky, forgettable mid-rise that’s seemingly everywhere

62 Rooftop Solar—There’s a Catch

Those panels are a good deal, if you actually own them
  CONTENTS Bloomberg Businessweek February 18, 2019

 IN BRIEF 5 Snap election likely in Spain; R.I.P. Mars Opportunity How to Contact
Bloomberg
 AGENDA 6 The Fed on the Hill; Buffett sends his annual letter Businessweek
 OPINION 6 There’s still a chance to correct Trump’s nuclear error
Editorial
212 617-8120
 REMARKS 10 Who wants to be back in the USSR? Ad Sales
212 617-2900
731 Lexington Ave.,
BUSINESS 14 The Swede in Ferrari’s rearview mirror New York, NY 10022
1 16 Instead of an empire, Murdoch’s heirs will get a war chest
Email
bwreader
@bloomberg.net
Fax
TECHNOLOGY 18 IPO darling Adyen may struggle to keep investors happy 212 617-9065
2 20 Lessons in security from Estonia’s cybermilitia Subscription Customer
Service URL
21 Solar cell towers bring remote regions online businessweekmag
.com/service
Reprints/Permissions
FINANCE 22 Should Wall Street let darts do the selling? 800 290-5460 x100
3 23 Consumer protection might get buried in a sandbox or email
businessweekreprints
25 Big traders could put a dent in stock exchanges’ business @theygsgroup.com

Letters to the Editor

ECONOMICS 28  It turns out automation requires lots of human labor can be sent by email,
fax, or regular mail.
They should include
the sender’s address,
phone number(s),
and email address if
available. Connections
with the subject of
the letter should be
disclosed. We reserve
the right to edit for
sense, style, and space.
2
Follow us on
social media

Facebook
facebook.com/
bloomberg
businessweek/
Twitter
@BW
Instagram
@businessweek

29 Silicon Valley doesn’t like to share diversity data

31 Saudi authorities no longer see red on Valentine’s Day

POLITICS 32 Who’s afraid of the Green New Deal? Not Wall Street
MELISSA LYTTLE/BLOOMBERG

34 Justin Trudeau’s worst enemy may be Justin Trudeau

Cover, from top:
35 Lessons from a 2009 crash have made air travel safer Bryan Schutmaat
for Bloomberg
Businessweek. Laura
Buckman for Bloomberg
 LAST THING 68 Why Blackstone is now the world’s biggest landlord Businessweek (2)
 The power
2018 Results of Beauty
No.1
COSMETICS
GROUP
WORLDWIDE

€26.9  Bn
Sales

+7.1%
Sales growth 1

18.3%
Record operating margin 2

€3.89  Bn
Net profit after
non-controlling
interests

Global environmental
leader: 3 “A” ratings by
CDP for 3rd year running

Top gender-balanced
company in Europe
by Equileap

No.1 ranking worldwide in

Covalence EthicalQuote
loreal-finance.com reputation index

1. Like-for-like: based on a comparable scope of consolidation

and identical exchange rates.
2. 2018 operating results / annual consolidated sales.

 IN BRIEF
○ NASA declared Mars Opportunity’s mission complete on
Feb. 13. The rover’s planned 90 days of service stretched
out to 15 years. Among its achievements: the discovery of
evidence that salty water once flowed on the planet.
○ Spain may be headed
for early general elections,
after parliament blocked
Prime Minister Pedro
Sanchez’s proposed
budget, which failed to get
the required support from
the Catalan independence
parties. Elections may now
be called as soon as April.
○ Spending on Valentine’s
Day this year is set to crack
$20b
for the first time, according
to the U.S. National Retail
Federation. While the
number of Americans
splurging on romance
has declined to just over
50 percent, those who do
are spending more: $1$161.96
on average.
COURTESY NASA. GETTY IMAGES (3)
○ vi Strauss, the 165-year-old jeans maker, filed for an IPO in New York to help finance expansion abroad.
○ Maria Ressa, head of Philippine news site the Rappler and vocal critic of President Rodrigo Duterte, was arrested for libel.
○ Russian authorities declared a state of emergency on the island of Novaya Zemlya after polar bears invaded settlements.
○ Royal jewels including two crowns stolen from a cathedral in Sweden last year were found in a trash can near Stockholm.
Bloomberg Businessweek February 18, 2019
By Benedikt Kammel
○ Amazon founder and ○ French
CEO Jeff Bezos has
accused the National Interior Minister
Enquirer’s parent company Christophe
of politically motivated Castaner said
blackmail and extortion. The
tabloid published details anti-Semitism is
of his extramarital affair “spreading like
and, according to a Bezos poison” in the
blog post, threatened to
print more embarrassing country.
photographs unless
Bezos called off his own His statement came after the
government revealed that bias
investigation into the paper incidents and hate crimes jumped
and its intentions. 74 percent last year.
○ South Africa endured ○ In its biggest acquisition
several days of power in a decade, Morgan ○ “We are
outages, which troubled Stanley agreed to pay
utility Eskom blamed on
$900m making a
construction problems at
two giant new plants. The
blackouts may become a
for Canadian stock-plan
administration company
stance for
liability for President Cyril
Ramaphosa, who’s pledged
Solium Capital. The deal
allows the U.S. investment
the truth,
to revive the flagging
economy and faces
bank to push deeper into
the lucrative market for
against lies, 5
elections in May. younger clients, including
prospective millionaires
against hate,
from tech startups.
against
○ Nissan took ○ Mexican drug lord
ignorance,
an $83 million
Joaquín “El Chapo”
Guzmán was
against
charge related
to deferred
found guilty on all
counts at a drug-trafficking
trial in New York and faces
intole nce.”
compensation life in prison at his June
for jailed former sentencing. The trial revealed
Chairman Carlos the brutality and ingenuity of
El Chapo’s cartel.
Ghosn.
Former Democratic
representative and potentia al
2020 presidential candidate e
Beto O’Rourke whipped up e
The fallen executive has languished in crowd at a rally in El Paso, whhile
detention in Tokyo for three months President Trump spoke to
on allegations of financial misconduct, his supporters at a competing g
charges he denies. rally nearby.
  AGENDA
Bloomberg Businessweek February 18, 2019

 HSBC releases earnings  Private equity managers

on Feb. 19, a year after
naming John Flint as CEO.
He’s seeking profit growth
while spending billions of
dollars expanding in Asia.
come together in Berlin
for the annual SuperReturn
conference from Feb. 26
to March 1, the biggest of
its kind in Europe.

 The Central Bank of  On Feb. 23 frugal

Sri Lanka announces its
rate decision on Feb. 22.
The bank surprisingly
raised rates in November
to check inflation.
 The State of the Economy Address  Data on existing U.S.
U.S. Federal Reserve Chairman Jerome Powell delivers home sales are due on
his semiannual monetary report to the Senate Banking Feb. 21. Sales of previously
Committee on Feb. 26. Although he’s signaled the Fed is owned homes have fallen
done raising rates for a while, economists will seek clues as to their weakest level in
to whether the plan will hold into the second half of the year. more than three years.
billionaire and Berkshire
Hathaway Chairman
Warren Buffett will publish
his much-awaited letter
to shareholders.
 Sotheby’s Geneva is
auctioning modern and
vintage wristwatches,
including timepieces by
Patek Philippe and Rolex,
from Feb. 19 to 25.

 BLOOMBERG OPINION

armed with nuclear warheads. Western European govern-

6
Trump’s Nuclear Blunder
○ The U.S. has a choice: Forge a new INF deal with Russia,
or face a global arms race
The Trump administration’s decision to pull out of the 1987
treaty with Russia on intermediate-range nuclear forces is a
mistake. For all its faults, the pact was one of the West’s great
Cold War triumphs, and it continued to serve U.S. interests.
Fortunately, if the administration is willing to think again,
there’s a way to correct the error.
The White House said the treaty had to go mainly because
Russia has been cheating. The U.S. has evidence that Moscow
violated the agreement by developing and deploying ground-
based cruise missiles with ranges between 300 and 3,500
miles. Russia denies that and has made an unfounded counter-
claim that the U.S. has been doing proscribed research.
Even allowing for Russia’s violation—a measured transgres-
sion, less than an outright annulment—the treaty was good
for the U.S., because it made America’s European allies safer.
ments would almost certainly resist U.S. efforts, if any were
forthcoming, to place new weapons on their soil. So the rift
between the U.S. and Europe is growing. And if, as some sus-
pect, Trump is eager to weaken arms-control regimes around
the globe, it isn’t just Europe that needs to worry.
The remedy for the administration’s lapse of judgment
might be the New START agreement. This Obama initiative
slashed Russian and U.S. nuclear arsenals across the board
but is due to expire in 2021. The failure to adjust and renew it
might incite a dangerous arms race. One valuable adjustment
would be to make a new and improved INF part of talks.
Fortunately, Vladimir Putin’s military ambitions are
constrained by his struggling economy, so he’s eager to rene-
gotiate New START. The U.S. should come to the table and
propose measures on intermediate-range missiles as part of
the deal. Russia might not go for an outright ban—like the U.S.,
it is wary of the Chinese threat—but it might agree to caps, or
to restrictions on positioning such weapons against Europe.
This would leave U.S. allies on the Continent safer, while allow-
ing Washington (and Moscow) a freer hand in the Indo-Pacific.
At the same time, the U.S. should approach China about a
three-way deal with Russia. Conceivably, this could pave the
ILLUSTRATION BY XAVIER LALANNE-TAUZIA

The Soviet Union agreed to it after the Reagan administration
strong-armed West Germany and other countries into housing
Pershing II and cruise missiles, which Mikhail Gorbachev lik-
ened to “holding a gun to our head.” The EU tried last-minute
diplomacy to save the pact, but to no avail.
Now those U.S. allies face the prospect of large numbers of
sophisticated Russian missiles on their eastern flank, possibly
way for a global agreement, bringing in India and Pakistan,
whose feud has South Asia on edge. At the moment, Beijing,
flexing its muscles across Asia, would be reluctant to go along.
But the possibility of expanded U.S. and Russian arsenals in
the Indo-Pacific could change that thinking down the road.
Written by the Bloomberg Opinion editorial board
 145
92

WILLIAM, heart attack survivor.

 THIS IS WHAT

LOOKS LIKE.
You might not see or feel its symptoms, but the
results – a heart attack or stroke – are far from
invisible or silent. If you’ve come off your treatment
plan, get back on it, or talk with your doctor to
create a new exercise, diet and medication plan
that works better for you.

Go to .
before it’s too late.
  REMARKS

10
 REMARKS Bloomberg Businessweek
○ With its efforts to rebuild a sphere
of influence in trouble, Russia for now
will be happy if ex-republics are too
corrupt to join the West
○ By Marc Champion
In the fall of 1991, as republics from Armenia to Ukraine were
declaring independence from the Soviet empire, an adviser
to Mikhail Gorbachev tried to persuade him to adopt the
approach of his rival Boris Yeltsin, president of what was
still called the Russian Soviet Federative Socialist Republic:
Let them go. “Once Russia revives, they will come back,”
the adviser wrote in a memo. Yeltsin assumed it would take
20 years to rebuild Russia’s traditional sphere of influence. So,
27 years later and with elections looming in two of the 15 ex-
Soviet republics—Moldova and Ukraine—is Russia winning?
The answer has important geopolitical implications. If
there’s one thing hawks in Washington and Moscow can agree
on, it’s that without an economic and security zone that to
some degree matches the territories of both the Soviet and
czarist empires, Russia—an energy and nuclear superpower
built on weak demographic underpinnings—will struggle to
compete in a new multipolar world order with its main rivals:
China, the U.S., and the European Union.
Yeltsin’s successor, Vladimir Putin, has been able to forge a
strong Russian nation-state, boosted by such bold moves as the
annexation of Crimea, according to Harvard historian Serhii
Plokhy. The memo to Gorbachev from Georgi Shakhnazarov
was excerpted in Plokhy’s book The Last Empire: The Final Days
of the Soviet Union. Yet Putin’s success in nation building may
have come at a cost, scaring away other former Soviet states
and hindering his project of rebuilding the sphere of influence.
“I think he is losing on the post-Soviet space,” says Plokhy,
director of Harvard’s Ukrainian Research Institute. “He’s try-
ing to do both things at once, and they are contradictory.”
Russia has tried enticing or coercing its neighbors in
many ways: offering subsidized gas, buying strategic infra-
structure, imposing trade and energy embargoes, med-
dling in elections, and using military force. The results are
mixed at best. Russia and four ex-republics have joined an
EU look-alike, the EEU, or Eurasian Economic Union. But
the three Baltic states, always special cases, joined NATO
and the EU long ago. Of the remaining seven, some look
beyond reach. Putin won Crimea for Russia, and Russian
troops occupy the breakaway regions of Transnistria in
Moldova and Abkhazia and South Ossetia in Georgia—but
he arguably lost the chance for strategic integration with at
least two of those countries as a result.
Much depends on what Putin in fact wants to achieve.
Fyodor Lukyanov, who heads the Council on Foreign and
Defense Policy in Moscow, says Russia no longer sees its “near
February 18, 2019
abroad” as a single space. Lithuania, Armenia, and Uzbekistan
are radically different cases to which Moscow takes varying
approaches. Ukraine is unique, an existential challenge as
much about Russian identity as geopolitics. “No one in Moscow
speaks about sphere of influence vis-à-vis Ukraine anymore,”
says Lukyanov, adding that Russia has lost leverage in Kiev
and can only sit by and watch as next month’s elections take
place. “There is no long-term vision about Ukraine in Moscow.”
That doesn’t mean it’s over. Anyone who argues Ukraine is
lost to Russia for good should look at history and the number
of times Ukraine has switched allegiance from East to West and
back again. A continuation of self-destructive oligarchic rule
in Kiev would prevent it from fitting into any sphere of influ-
ence other than Russia’s, Lukyanov says.
In the meantime, appetite matters. Moscow’s interests in the
region are rooted in centuries of history, as well as in Russia’s
deep self-identification as a great power. U.S. and European
support for the spread of democracy and the right of countries
such as Moldova and Ukraine to determine their own fate is,
by contrast, fragile: Ukraine matters a lot more to Poland than
to Italy, for example. With Donald Trump espousing a more
transactional foreign policy and the EU struggling with its own
nationalist demons, the project of Western integration could
fade. Given time, says Lukyanov, “the whole mood can change.”
By chance, Yeltsin’s 20-year mark—2011—was also the year
Putin got serious about building a stable security zone by keep- 11
ing Russia’s near abroad out of the EU’s orbit, as well as out of
NATO. Together with the presidents of Belarus and Kazakhstan,
he founded a customs union that would soon develop into the
EEU, a bloc with its own free-trade area, rules, and values.
Putin has since persuaded two more ex-republics, Armenia
and Kyrgyzstan, to join. Armenia signed up in 2014 after aban-
doning plans (under pressure from Moscow) to sign a Deep
and Comprehensive Free Trade Agreement with the EU. It
had little choice; Armenia—embroiled in a territorial dispute
with oil-rich Azerbaijan—relies on Russian military support
for security. Putin also persuaded then-Ukrainian President
Viktor Yanukovych not to sign an EU trade deal in 2013, but that
sparked the Revolution of Dignity on Kiev’s Maidan square,
Yanukovych’s ouster, and a retaliatory Russian military inter-
vention in Ukraine that continues in the Donbass region.
The events in Ukraine were a severe blow to Russia’s plans
for the region. Before Crimea’s annexation, popular support
in Ukraine for joining NATO languished at around 20 percent,
military neutrality was written into law, and NATO saw little if
any threat from Russia. That situation has been reversed. NATO
is beefing up its defenses in the Baltic states. Ukraine’s new
leaders went ahead and signed the EU trade deal, along with
Moldova and Georgia. And on Feb. 7 the parliament in Kiev
voted to write the goals of joining NATO and the EU into the
constitution. With voters in Crimea and the Donbass no longer
casting ballots, Russia-friendly parties aren’t serious contend-
ers in Ukraine’s elections in March and October.
For the countries that joined the EEU, the results have
been disappointing. That’s mainly because of the impact
  REMARKS Bloomberg Businessweek
of a decline in Russia’s currency and economy, which have
suffered under the weight of Western sanctions and weaker
oil prices for most of the organization’s existence. By 2017,
Russia was the top export destination for just one ex-Soviet
state, Belarus. All the rest sent more to the EU or China.
Moscow still has leverage over its neighbors, given its terri-
torial breadth, energy supplies, military might, and the large
Russian-speaking communities in some of these countries.
It can also rely on corrupt elites, migration, and weakening
Western support for the former republics to keep them in a
kind of purgatory—neither democratizing to integrate with the
West nor joining Russia’s sphere. Moldova, preparing for a par-
liamentary vote, tells this murkier story.
Vladimir Cebotari, vice president of the ruling Democratic
Party (PDM), says Putin could be close to a big victory on
Feb. 24. Ten years after the small wine-producing nation made
a clear choice to integrate with Europe, “that path is now in
question, and it could be reversed” if the pro-Russian Socialist
Party wins a majority, says Cebotari at his party’s plate-glass
headquarters in the capital, Chisinau. With young women in
black dresses staffing desks and bustling through the corri-
dors, the building has the improbable feel of a Bond movie.
A few blocks away, Socialist Party leader Zinaida Greceanii
is as alarmist as her opponent: “At stake is nothing less than
whether Moldova should exist as a country on the map,” she
12 says. She accuses Cebotari’s party of conducting secret negoti-
ations to merge the country with neighboring Romania, an EU
member. (Most of Moldova was part of Romania before World
War II. Both governments deny any plans to reunite.) Socialists
already hold the presidency—Igor Dodon was elected in 2016—
and the party leads in the polls for parliament. He has since
signed Moldova up for EEU observer status and won a prom-
ise from Moscow to relax punitive trade restrictions—a clear
signal of benefits to come if the country votes the right way.
Yet the West-vs.-Russia drama that the two parties are tap-
ping into ahead of the vote looks tired. Moldova risks simply
being stuck in an economically stagnant limbo. That could be
in Ukraine’s future, too, as disappointment rises over the slow
pace of change—despite two pro-democracy revolutions. In
both countries, oligarchs who captured economic and political
power in the 1990s continue their hold on the political system,
blocking reform. Ukrainian President Petro Poroshenko is
Richer Than Russia
EU
$17.3t
GDP China
$12.2t
Russia
$1.6t
Other EEU $236b* Other ex-Soviet $221b
February 18, 2019
worth $813 million, according to Bloomberg data. In Moldova,
Vladimir Plahotniuc, chairman of the PDM, is the country’s
richest man; he also owns four of the five national TV chan-
nels, according to an official 2016 report.
Europe is losing patience with supposed champions of
democracy who repeatedly turn out to be interested in hold-
ing on to power to enrich themselves and their supporters. A
$1 billion Moldovan bank fraud exposed in 2014 landed a pre-
vious “pro-European” oligarch-cum-prime minister in jail. Last
year the EU threw up its hands and suspended $113 million
of planned aid. The European Parliament was infuriated by
the passage of a law in Moldova that favored the PDM in the
coming election, another law providing amnesty for officials
with unexplained gains, and the voiding of a pro-democracy
candidate’s victory in Chisinau’s mayoral election last year.
In September the PDM changed its party branding from pro-
Europe to pro-Moldova—the same as that of the Socialists.
“Russia wants us in this gray area,” says Maia Sandu, a leader
of the Acum movement that grew out of protests against the
bank fraud. “So long as these countries are dirty and nontrans-
parent, that’s good enough for Moscow. So long as Moldova’s
government says it is pro-European, Putin can just point at us
and say: ‘See? That’s what it means.’ ”
Sandu also thinks the elections are a potential watershed,
although not because Moldova risks getting swallowed up by
its neighbors. Any government that jeopardized Moldova’s
roughly 70 percent trade or visa-free travel with the EU to
please Moscow would be committing political suicide. Russia’s
$1.6 trillion economy can’t offer the same enticements as the
OTHER EX-SOVIET INCLUDES AZERBAIJAN, GEORGIA, MOLDOVA, TAJIKISTAN, TURKMENISTAN, UKRAINE, AND UZBEKISTAN. 2017 GDP. DATA: WORLD BANK
EU’s $17 trillion bloc. Rather, she says, the Socialists and PDM
are in cahoots to keep true reformers—who’d threaten both
parties with financial loss or prosecution—out of office. The
*OTHER EEU INCLUDES RUSSIA’S FELLOW EURASIAN ECONOMIC UNION MEMBERS ARMENIA, BELARUS, KAZAKHSTAN, AND KYRGYZSTAN;
vote, she says, is a last chance to get on a democratic path.
It wouldn’t be the first such last chance for Moldova, but
Sandu could be right. Voters are changing. An estimated quar-
ter of the population has left the country—many to the EU,
taking advantage of passports issued by Romania. Half-empty
villages with mainly the elderly left behind are the result. A
December poll found that 49 percent of Moldovans regret the
fall of the Soviet Union, compared with 21 percent who don’t.
Moldova’s dysfunction may serve Russian interests for
now, but it doesn’t amount to victory. Moscow is steadily los-
ing influence across the former Soviet Union, according to
Thomas de Waal, a senior fellow at the Carnegie Endowment
for International Peace. The emerging multipolar world has
given governments in places such as Georgia, Moldova, and
the Central Asian Republics more options to balance against
the Kremlin, as China and Turkey enter their economies. Some
countries are diversifying their energy supplies to reduce
dependence on Russia. And younger generations aren’t nec-
essarily learning to speak Russian, once the lingua franca. “Ten
or 15 years ago, someone in the Kremlin could pick up a phone
and call a whole network of people they knew in these govern-
ments,” says de Waal. Even in friendly, dependent Armenia,
he says, “they don’t have that anymore.” 
 Numbers tell
only half the
story.
Your investments
deserve the full story.

Strategic investing takes us beyond the numbers. That’s why over 400 of our experts go out in the
field to examine opportunities firsthand— like a biotech company’s advancements that could lead to the first
allergy-free peanut. Our rigorous approach helps us select and manage investments for our funds.
Put our strategic investing approach to work for you today.
troweprice.com/fullstory | 1-877-872-5475

Consider the investment objectives, risks, and charges and expenses carefully before investing. For a prospectus
or, if available, a summary prospectus containing this and other information, call 1-877-804-2315. Read it carefully.
All funds are subject to market risk, including possible loss of principal.
T. Rowe Price Investment Services, Inc., Distributor.
 1
B From Sweden With
U
S
I
N
14
E
S
S ○ An artisanal upstart with
Chinese backing moves in on
Ferrari’s territory
Over the next three years, Ferrari NV aims to
double profits by dramatically boosting sales of
fast and fabulous cars such as the $1.8 million
Monza, the $2.1 million LaFerrari Aperta, and the
Purosangue, a sport utility vehicle that promises to
be one of the fastest rides on or off the road. To get
there, the Italian manufacturer will have to contend
with Christian von Koenigsegg.
Since 2002 his company, Koenigsegg
Automotive AB, has sold about a dozen hand-
built cars annually for roughly $2 million apiece.
He expects to increase his yearly production to
hundreds of vehicles by 2022, almost all of them
a new model priced around $1 million. And a
Edited by
James E. Ellis
few years after that, he hopes to boost output
and David Rocks to thousands of autos a year—which would make
his company a serious threat to Ferrari and other
makers of supercars such as Lamborghini and
Bugatti. “Some people already choose our cars
instead of a Ferrari,” von Koenigsegg says on a
tour of his factory on the flat green outskirts of the
Swedish town of Angelholm. While the car is “still
incredibly expensive, the potential sales volume
increases massively.”
Koenigsegg in January signed a $320 million
deal with National Electric Vehicle Sweden AB, or
NEVS, a Chinese-controlled company that bought
the assets of Saab out of bankruptcy in 2012. The
partners will start making the new model in 2021
at a sprawling complex of gray and yellow build-
ings in Trollhattan, three hours north of Angelholm
by car (or perhaps less in a Koenigsegg, with its
top speed of 249 mph). While the Saab plant today
is a virtually empty shell, it once employed 8,000
workers and had the ability to churn out as many
as 200,000 vehicles a year.
That’s a stark contrast to Koenigsegg’s current
digs, where 225 workers make some of the world’s
h Torque

15

most sophisticated vehicles using artisanal produc-

tion methods. The place feels more like a social club
for car buffs than a 21st century factory, with a foos-
ball table, comfy chairs, a half-completed jigsaw
puzzle—and nary a robot in sight. Almost all the com-
ponents are made in-house: carbon fiber lamp cases
and wheels, chassis, and engines engraved with the
signature of the person who built them. Groups
of employees in jet-black slacks and sweaters sit
at tables chatting and hand-polishing metal parts.
PHOTOGRAPHS BY FLORIAN THOSS FOR BLOOMBERG BUSINESSWEEK

In one enclosed area, two people in hazmat suits

and respirators sand and shape carbon fiber com-
ponents with delicate tools that wouldn’t be out of
place in a sculptor’s studio. “One of the things I want
to do here is create technology that trickles down
and helps improve cars,” says von Koenigsegg, 46.
For the past two years, the company’s
engineers have been developing the model, which
will feature an engine that allows independent
control of the intake and exhaust valves. They say
that technology, which von Koenigsegg ultimately
aims to license to other manufacturers, can deliver
faster acceleration with almost 50 percent more Clockwise, from top
left: the current car; the
torque than conventional engines while cutting former Saab factory
fuel consumption and emissions. He’s tight-lipped where the new model
will be made; von
about other details, declining to say whether the Koenigsegg
car will be a two-seater, include versions such
as an SUV, or match the speed of the current
  BUSINESS
model. “If I tell you one small thing, it means I
tell you everything,” he says with a grin.
Global sales of ultrapremium cars—costing more
than $180,000—quadrupled, to 28,650, from 2009 to
2017, according to researcher IHS Markit, and those
numbers are likely to grow as the ranks of the super
rich continue to swell. But Koenigsegg still has a
long road ahead, says Philippe Houchois, an analyst
with Jefferies in London. Ferrari’s nine decades of
production give it a catalog of historic models it can
revive and update. With shipments of more than
9,000 cars a year, it can more easily turn a profit
by spreading development costs across a greater
number of vehicles. “About 10 or 12 years ago, it
was quite rare to get very high-end cars, and every
time there was one, there was buzz in the industry,”
Houchois says. With the economic boom of the past
decade, “there’s been a sudden proliferation of
special-edition, multimillion-dollar cars.”
Von Koenigsegg was already familiar with the
NEVS team. In 2009 he bid on Saab’s assets, but
he balked at the conditions demanded by Swedish
government officials. When NEVS bought what
was left of the Trollhattan complex, it invited
manufacturers—including Koenigsegg—to test their
16 vehicles at Saab’s old facilities. Today, in a corner
of the vast production halls, a parade of cars
from across Europe are evaluated for emissions,
durability, and adaptability to extreme heat or
cold reproduced in what the company calls a
“climate chamber.” With a $930 million investment
from Chinese tycoon Hui Ka Yan in January, NEVS
will make battery-powered sedans based on the
old Saab 9-3 underpinnings, as well as the new
Koenigsegg. A few months ago, “the focus was
merely on survival,” says NEVS Executive Director
Stefan Tilk. “Now I get phone calls from people at
major carmakers looking for a job.”
The two sides are still nailing down the details of
the supercar plan, and many questions remain. But
von Koenigsegg brims with ambition and says he’s
accustomed to skeptics doubting his grand visions.
He first came up with the idea of building supercars
at age 22, shortly after finishing school. Naysayers
predicted he was doomed to fail because customers
would be unwilling to pay the true cost of a hand-
built car, and development expenses could only be
borne by established automakers. “The chances of
succeeding were so slim,” he says. “But since we
barely had the right to exist, we turned out to be
difficult to kill.” —Elisabeth Behrmann and Niclas
Rolander, with Blake Schmidt
THE BOTTOM LINE By 2022, Koenigsegg plans to boost output to
hundreds of cars a year, most of them a new $1 million model with an
engine that promises better acceleration and efficiency.
Bloomberg Businessweek February 18, 2019
How Murdoch 2.0
Will Be Different
○ After cashing out to Disney, Rupert’s kids could
be in for a major shopping spree
For several decades, the media industry watched
slack-jawed as Rupert Murdoch acquired news-
papers, magazines, TV channels, book imprints,
movie rights, satellite assets, websites, and social
networks. He bought from old-money, aristocratic
families on the decline and from startup hipsters
on the rise. Whether the media market was hot or
frigid, Murdoch kept right on buying in spite of
howling opposition from his progressive detractors.
Then, finally, he sold. In June 2018, Walt Disney
Co. agreed to pay $71 billion to acquire much of
the sweeping territory Murdoch spent a lifetime
assembling. Among other assets, Disney is poised
to take control of 21st Century Fox Inc.’s TV and
movie studios, its slate of cable-TV networks,
including FX and National Geographic, and its
stakes in satellite-TV networks Sky in Europe and
Star India. The deal, which is navigating one of the
final regulatory obstacles in Brazil, is expected to
close this spring. When it does, the Murdoch clan,
via its Nevada-based family trust, will likely net a
mix of cash and Disney shares worth as much as
$11.6 billion.
For years, everyone in the industry loved to
debate which of Murdoch’s three adult children from
his second marriage—James, Lachlan, or Elisabeth—
would ultimately assume the throne of their father’s
vast empire. While the huge Disney sale has put to
bed that question for a simple reason—instead of a
globe-girdling empire, the Murdoch heirs are about
Rupert’s World Gets a Makeover
Old Fox New Fox
By selling the studio, the
21st Century Fox movie studio
Fox Broadcasting Murdochs escape the
risk of costly film flops
28 Fox television stations
Foreign pay-TV operators
The lucrative news unit
(Sky and Star India)
will maintain the family’s
Fox News
clout in conservative
Stakes in Hulu, FX, and National U.S. politics
Geographic channel
Cable sports channels The sports channels,
(Fox Sports 1 and 2, Big Ten Network, Fox Deportes) plus Fox’s Sunday NFL
broadcasts, fit its new
Regional sports networks live-programming focus
  BUSINESS
to inherit a war chest—it also raises a new one: What
will they do with all that money?
Much attention will be focused on Lachlan, 47.
When the deal with Disney closes, Rupert’s elder
son will take over as the chairman and chief execu-
tive officer of the new Fox Corp., overseeing a com-
pany that will be roughly a third of its previous size.
Its portfolio will be largely rooted in current-events
TV programming in the U.S. via Fox News, Fox
Broadcasting, and Fox Sports. It’s unlikely to stay
small, however.
“We will buy other things,” Lachlan said in
November during an appearance at a conference
hosted by the New York Times. “We will be
acquisitive.” Through spokespersons, members
of the family declined to be interviewed for this
story. Recent moves, however, hint at the possible
direction of things to come.
Lately, 21st Century Fox has been stock-
piling the rights to high-profile live events. In
January 2018 the company signed a deal for
roughly $3.3 billion to take over the broadcast
rights for the NFL’s Thursday Night Football games
through 2022. A couple months later, Fox scooped
up the rights to World Wrestling Entertainment
Inc.’s popular SmackDown broadcasts, paying
about $1 billion for the five-year deal.
In September, 21st Century Fox invested
$100 million in Caffeine, a livestreaming platform
reminiscent of Amazon’s Twitch. At the same time,
Fox Sports announced a joint venture, Caffeine
Studios, that will develop exclusive live entertain-
ment content, including esports competitions.
“We’re excited to partner with Caffeine and build
something special for fans in the growing live social
streaming esports and gaming space,” Lachlan said
at the time. He now sits on Caffeine’s board.
“They’ve been ahead of everyone else in terms
of this bifurcation in media between live and on-
demand,” says Geetha Ranganathan, a media ana-
lyst with Bloomberg Intelligence. “The prices of
content have risen so astronomically thanks to
Netflix and Amazon. New Fox will be still spending
boatloads of money, but at least they will be
spending it on noncommodities. They’re riding
the ‘live’ wave.”
While Lachlan will be bolstering an existing
portfolio of businesses, his younger brother, James,
46, is likely to be buying and investing with a clean
slate. When the sale was first announced, there
was speculation that James, the current CEO of
21st Century Fox, could take a top job at Disney.
GETTY IMAGES (3)
Instead, analysts expect James to strike out on his
own, setting up an investment company that will
acquire or back companies, possibly focused on
Bloomberg Businessweek February 18, 2019
such areas as streaming TV or environment-related
missions. Analysts say they wouldn’t be surprised if
he also looks for opportunities in markets overseas
such as India, where he’s had success in the past.
So far during his career, James has avoided the
calamities that marked his father’s boldest forays
into tech (think Myspace). Thanks to James’s
foresight, the Murdochs became an early major
investor in Roku, the streaming media company ○ Elisabeth
now valued at more than $5.4 billion. “My suspi-
cion is that James is going to be putting all his efforts
into becoming one of the world’s leading tech inves-
tors,” says Claire Enders, founder of London-based
media researcher Enders Analysis. “He’s very much
into that milieu of super rich, super successful tech
investors who care a lot about the environment.”
James should have good access to capital
and deal flow in Silicon Valley. He sits on the
board of Tesla Inc. alongside the likes of Oracle ○ Lachlan
Corp. Chairman Larry Ellison, and has built an
extensive network in the media and tech worlds
on both sides of the Atlantic. “Many of the people
he worked with at Sky are so wealthy that they’ll
never have to work again,” Enders says. “They’ll be
available to help him and invest with him as well.”
When the deal closes, Elisabeth, 50, will also be 17
empowered to step up her spending. In 2011 she sold
Shine Group, a production company specializing in
reality TV, to her father’s business for some $670 mil- ○ James
lion. Afterward, she launched the Freelands Group,
a media and technology investment fund based in
London. Her taste in companies over the years has
gravitated toward the creative and production side
of the media industry. One of her more promising
companies is Vertical Networks, a Los Angeles-based
startup that makes digital, short-form video series
geared toward younger audiences on platforms such
as Snapchat, YouTube, and Facebook.
While Rupert, 87, may have at long last stopped
building an empire, he’s not entirely given up
on the thing he might love most: business and
political influence. When the Fox deal closes,
the Murdochs could end up owning as much as
5.6 percent of Disney, analysts at BTIG estimate,
making them the entertainment giant’s biggest
stakeholder. They could use the leverage to get
the family a seat on Disney’s board and to shape
the future leadership of the company. “Rupert is
going to be the single largest shareholder at Disney
and will have input in picking a replacement for
Bob Iger,” says Mario Gabelli, a major investor in
Fox. —Felix Gillette and Anousha Sakoui
THE BOTTOM LINE With the proceeds from the $71 billion sale
of most of Fox’s assets, Rupert Murdoch has amassed a huge war
chest his children can use to pursue their own business interests.
 Bloomberg Businessweek February 18, 2019

2
Spotify
○ Market cap

T $25.7b
Swatch
E $15.7b Renault
Adyen $18.9b
C $21.8b
H Michelin
Europe’s Quiet Tech Success

N SAP $20.9b
O $129.3b
18
Lufthansa
L Ryanair $11.9b
O $15.1b
G ○ The safe-looking fintech
company has drawn waves
of investors since its IPO
Y Pieter van der Does doesn’t resemble the stereo-
type of a Silicon Valley executive who favors mas-
sive parties and private jets. He spent decades
cycling around Amsterdam on the bike he got in
high school. R&R generally means hiking with his
family, not jetting off to St. Tropez or Ibiza. On
his way to pitching potential investors on the ini-
tial public offering of his company, Adyen NV, last
year, the chief executive officer crammed his 6-foot
frame into a coach seat for six hours, mortifying his
banker. Company policy, he says.
Quiet, frugal, steady—this is the image Adyen
Edited by
brought to investors, one that’s helped almost dou-
Jeff Muskus ble the obscure Dutch company’s market value, to
$21.8 billion, since its June IPO, suddenly ranking
it among Europe’s hottest digital companies. If
you’ve ridden in an Uber, subscribed to Netflix, or
paid for Spotify Premium, there’s a good chance
Adyen ran your card. The one past indulgence the
CEO cops to is mountain climbing, and he carries
the lessons with him. “There are specific reasons
why you prepared to climb in a certain way,” Van
der Does says. “It’s about not falling for the trap,
that often climbers do, where you see a shortcut.”
What separates the company from the likes of
PayPal, Stripe, and Alipay in the $2 trillion digi-
tal payments business is that it’s a one-stop shop.
While other companies handle just a link or two in
the convoluted chain moving money from custom-
ers to merchants, Adyen handles the entire pro-
cess, from checkout to fraud detection to dealing
with Visa and Bank of America to making sure sell-
ers get paid. This lets the company process addi-
tional transactions from existing customers at
  TECHNOLOGY
almost no extra cost, says Jan Hammer, a partner
at Index Ventures, an Adyen investor.
Since the summer, when investors looking for
safe bets briefly pushed the payment company’s
market value above $25 billion, making it compara-
ble to that of Spotify Technology SA, analysts have
taken pains to go on record that Adyen’s pace seems
difficult to maintain. While the company’s first-half
profits rose 75 percent last year, to €48.2 million
(about $54 million), “sustainability of the growth
is my biggest question,” says Christopher Brendler,
an analyst at Buckingham Research Group. And the
market’s exuberance has left Adyen little room to
underperform. “Even our optimistic forecasts are
largely priced in,” wrote Richard-Maxime Beaudoux,
an analyst at investment bank Bryan, Garnier & Co.,
who advises selling the stock. Translation: When
you’re trading at 140 times forecast earnings, there’s
nowhere to go but down.
At its founding in 2006, Adyen saw the mobile
web coming. A decade earlier, Van der Does, then
an executive trainee at Dutch textbook publisher
Reed Elsevier, joined BiBit, an early web payments
company, as chief commercial officer. BiBit was sold
to Royal Bank of Scotland for an undisclosed sum
in 2004. Soon after, Van der Does and other com-
pany veterans say, they began to grow frustrated
by the separation RBS enforced between engineers
and salespeople. Van der Does and BiBit co-founder
Arnout Schuijff came up with the idea for a mobile
BiBit during their Sunday jogs. The two made for
an odd-looking pair: Van der Does, tall and almost
gaunt with a close-shaved head, jogging beside the
much shorter, pudgier Schuijff, who became Adyen’s
co-founder and chief technology officer.
While rivals competed mostly on price, Schuijff
and Van der Does bet that merchants would pay for
faster, more reliable transactions. Adyen concluded
it needed control over the whole chain. Old-line
processors usually record each step in a transac-
tion as a separate event, logged in a massive data-
base and processed in big batches as infrequently as
once a day. Instead, Adyen records full transactions
instantly in a standard double-entry bookkeeping
system customers can track in real time.
From the start, Van der Does targeted Silicon
COURTESY ADYEN. DATA: COMPILED BY BLOOMBERG
Valley, but U.S. companies started to learn Adyen’s
name only after 2010, when Groupon acquired a
lookalike German startup called MyCityDeal, an
Adyen client. Van der Does persuaded Groupon to
use his systems worldwide at a moment when the
deals site’s revenue was rising at an annual rate
approaching 1,000 percent. From there, Adyen
started to pick up a who’s who of Valley clients, as
well as airlines, big retailers, and the rest. In 2012,
Bloomberg Businessweek February 18, 2019
the year Van der Does first signed Uber, Adyen ○ Adyen’s revenue
processed a grand total of $10 billion in payments;  Europe
five years later, the number was $122 billion.  North America
The CEO credits his steady march to eight oper-  Latin America
ating principles known within the company as the  Asia
Adyen Formula. Among other things, Van der Does  Rest of the world
promises to develop whatever features a customer
needs, on the condition that Adyen rolls them out to €1b
every customer. The system’s simplicity has been a
strong selling point, says Brendan Miller, a payments
expert at researcher Forrester. Especially notable,
he says, is that unlike rivals, Adyen handles online, 0.5
mobile, and in-store payments in one product.
Adyen also tends to win big customers by help-
ing them set up in tough markets such as Brazil or
Australia, then gaining the companies’ other busi- 0
ness. “Land and expand,” Van der Does calls it. A 2015 2017
few months before his flight to meet IPO inves-
tors, the company pulled off its biggest coup, dis-
placing PayPal Holdings Inc. as the main processor
for EBay Inc. and its $95 billion in annual transac-
tions. The win raised Adyen’s profile ahead of its
○ Adyen’s stock price
IPO, especially because EBay had been a PayPal
client for 15 years and owned PayPal for most €800
of them. “They’re authentic, direct, and hon-
est about what their platform does,” says Alyssa 19
Cutright, EBay’s vice president for global pay-
ments. “That’s really refreshing.” 500
On the surface, little seems to have changed at
Adyen even now that Van der Does and Schuijff
are paper billionaires. “I have no ambitions to
buy a big yacht,” Schuijff says. Van der Does still 200
cycles around Amsterdam, though he did recently 6/12/18 2/8/19
upgrade his high school bike. Adyen didn’t hold a
bell-ringing ceremony at the Dutch Stock Exchange,
he says, because “we celebrate customer wins.”
The stock price isn’t displayed anywhere in the
office, and Schuijff says no one talks about it.
That decision might be pragmatic, not just
modest. Adyen’s Feb. 27 earnings report will mark
a big test, as investors hunt for signs of weakness.
Although Van der Does prides himself on his metic-
ulous planning, the company has taken a few serious
risks to get this far. Some analysts are skeptical that
last year’s EBay deal amounted to more than hype,
because Adyen paid EBay about $70 million in cash
for the privilege, plus more than $83 million in stock
warrants—enough to give the auction site a 5 percent ○ Van der Does
stake if it exercises them. “From a purely financial
standpoint, the deal is far more beneficial to EBay,”
wrote Beaudoux, the analyst at Bryan, Garnier & Co.
Analysts are full of ideas about other lines of
business Adyen could pursue, including drawing
consultant-style conclusions from its vast stores of
data or using its Dutch banking license to cut out
  TECHNOLOGY
card companies entirely. Marcus Hughes, direc-
tor for strategic business development at invoicing
and payments company Bottomline Technologies
Inc., says Adyen ought to broaden its model to mit-
igate the risk that Google, Apple, and Amazon start
processing their own payments. Yet while Stripe,
Square, and PayPal subsidiary IZettle increasingly
cater to startups, Van der Does has maintained
his focus on big clients. Doing otherwise, he says,
“requires things other than what we are specifi-
cally good at.” —Jeremy Kahn, Selina Wang, and
Natalia Drozdiak
THE BOTTOM LINE Investors briefly valued Adyen higher
than Deutsche Bank, but they’ve bet so heavily on the payment
processor that the company may find it tough to keep them happy.
Security Lessons
From Oneof
Russia’s Neighbors
20
○ Europe and the U.S. are taking notes on how
an Estonian militia prepares for digital war
Estonia is the first member state in the European
Union that might be called Extremely Online. Over
the past decade, the Baltic republic of 1.3 million
people fully digitized its government services and
medical data. More than 30 percent of Estonians
voted online in the last elections, and most critical
databases don’t have paper backups. To sleep a little
better at night, the country has recruited volunteer
hackers to respond to the kinds of electronic attacks
that have flummoxed the U.S. and other countries
in recent years. While many are civilians, these men
and women, numbering in the low hundreds, have
Bloomberg Businessweek February 18, 2019
security clearances and the training to handle such
attacks. Their sturdy, bearded commander, Andrus
Padar, previously a military reservist and policeman,
says the threat is taken as a given: “We have a neigh-
bor that guarantees we will not have a boring life.”
Padar’s militia of amateur IT workers, econ-
omists, lawyers, and other white-hat types are
grouped in the city of Tartu, about 65 miles from
the Russian border, and in the capital, Tallinn,
about twice as far from it. The volunteers, who’ve
inspired a handful of similar operations around “If the trees
the world, are readying themselves to defend have very good
against the kind of sustained digital attack that roots, deep in
could cause mass service outages at hospitals, the ground,
banks, and military bases, and with other criti- then it’s not
cal operations, including voting systems. Officially, so easy to
the team is part of Estonia’s 26,000-strong national break them”
guard, the Defense League.
The additional support is welcome. Estonia’s
Information System Authority says its volume of
cybersecurity cases, including malware-spreading
web domains and emails, rose to about 11,000 in
2017, a 20 percent jump from the year before. In
2016 hackers linked to Russian military intelligence
allegedly infiltrated the network of the nation’s larg-
est shale oil producer. (Russia has denied ordering
any attack.) “We have been very, very keen on col-
laborating with them,” says Uku Sarekanno, the
information agency’s deputy director general, of
Padar’s group.
So are security officials elsewhere. French
authorities say they’ve been inspired by the
Estonian system, and Latvia set up a similar unit
a few years ago. Through a partnership with the
U.S. Department of Defense, the Maryland National
Guard’s digital squads have trained with Estonian
forces, and the head of Michigan’s Cyber Civilian
Corps is planning to visit Tallinn later this year.
“We’re learning a lot from them,” says Air Force
Colonel Jori Robinson, vice commander of the
Maryland Air National Guard’s 175th Wing.
Estonia’s civilian hacking-defense corps grew
out of the aftermath of a 2007 attack that periodi-
cally took banking, government, news, and other
websites offline over several weeks following the
nation’s worst-ever street riots. Authorities blamed
Russian operatives—the attack followed the relo-
cation of a Soviet-era war memorial in Tallinn,
a trigger for the riots—and security experts still
rank it among the worst cases of state-sponsored
internet warfare. Vladimir Putin’s government
denied involvement.
Formally established in 2011, Padar’s unit mostly
runs on about €150,000 ($172,000) in annual state
funding, plus salaries for him and four colleagues.
  TECHNOLOGY

Innovation Solar Cell Towers

(If that sounds paltry, remember that the country’s
median annual income is about €12,000.) Some Off-the-grid cell towers from Telefónica SA, Spain’s largest
volunteers oversee a website that calls out Russian telecommunications company, bring internet and cell service
propaganda posing as news directed at Estonians to remote areas without wired connections. Half the world’s
in Estonian, Russian, English, and German. Other population remains offline, according to the UN Broadband
members recently conducted forensic analysis on Commission for Sustainable Development.
an attack against a military system, while yet oth-
ers searched for signs of a broader campaign after Innovators
discovering vulnerabilities in the country’s elec-
Juan Campillo and César
tronic ID cards, which citizens use to check bank Hernández Perez
and medical records and to vote. (The team says it Ages: 34 and 33
Head of Internet Para Todos
didn’t find anything, and the security flaws were and manager of strategic
quickly patched.) projects and investments,
respectively, both at Telefónica
Mostly, the volunteers run weekend drills with
troops, doctors, customs and tax agents, air traf-
fic controllers, and water and power officials. Origin
“Somehow, this model is based on enthusiasm,” Telefónica agreed to set
says Andrus Ansip, who was prime minister during up Campillo and Perez’s
Internet Para Todos project
the 2007 attack and now oversees digital affairs with 20 full-time employees
for the European Commission. To gauge officials’ in 2016 after the pair worked
on a Google project trying
responses to realistic attacks, the unit might send to deliver internet access via
out emails with sketchy links or drop infected USB high-altitude balloons.
sticks to see if someone takes the bait. A CD labeled
with an image of Russian porn star Katya Sambuca
in a bikini proved especially effective at ensnaring Funding
military officials—now the country’s military com- Telefónica won’t say how
21
much it’s investing in Internet
puters shut down if they detect an unknown disc or
USB drive. Major Ivars Ercums, the commander of
Para Todos, but Perez says
the company is focused on
How It Works
projects where a nationwide
Latvia’s National Guard Cyber Defense Unit, says his investment of $50 million to
team can learn from the Estonian group’s tactics. $300 million makes sense. ① Each tower receives microwave
So far, the Estonian volunteers haven’t seen transmissions from the adjacent
a reprise of the 2007 attack—unsophisticated by tower in a chain leading back to
Early Service
today’s standards—or the 2015 blackouts in Ukraine a grid-and-internet-connected
Telefónica brought its first network operations center.
attributed to Russian agents. That has something to reliably 24-hour gridless cell
do with the very presence of the defense squads and towers online in Peru late last
year. They serve 25,000 people
the many additional IT experts hired by most major in the Amazon rainforest,
Estonian companies over the past decade, says Tim according to Clear Blue
② Relying on solar panels, batteries,
Maurer, co-director of the Cyber Policy Initiative at Technologies International, and specialized control hardware
which makes the control
the Carnegie Endowment for International Peace. systems. Perez says customers
and software, each tower maintains
Padar is an unlikely choice to lead this “gang,” there pay no more for service cell coverage within a radius of
than in grid-connected areas.
as he calls it. As a boy watching Soviet propaganda about 2.5 miles.
on TV, he longed to become a Soviet military offi-
FROM LEFT: ILLUSTRATION BY DANIEL ZENDER; COURTESY TELEFONICA SA

cer, until he “woke up” in high school, he says. He Next Steps

joined the Estonian police force in 1991, the year
the country regained its independence from the
USSR, and spent years training as a military reserve
officer on the side. He still trains his people with
military precision, his helmet and tactical vest
often within arm’s reach. “If the trees have very
good roots, deep in the ground,” he says, “then it’s
not so easy to break them.” —Natalia Drozdiak,
with Ott Ummelas, Helene Fouquet, and Vernon Silver
THE BOTTOM LINE Estonia’s hundreds of volunteer
cyberdefenders have helped safeguard the exceptionally digitized
country, along with some peers, against foreign agents.
The Internet Para Todos program aims to connect the more than
100 million offline people throughout Latin America, building
on lessons learned in Peru. “It is good news that Telefónica
has committed to powering these towers with 100 percent
solar,” says Mark Jacobson, a Stanford professor of civil and
environmental engineering who sees solar energy as the
climate-friendly future of wireless networks. He warns that
facilitating development in the forest-rich Amazon, however,
could do the planet more harm than good. —Michael Belfiore
 Bloomberg Businessweek February 18, 2019

F Buying Is Easy.
Selling Is Hard
I Investors are so bad at picking stocks to drop
that they’re better off doing it at random

N Princeton economist Burt Malkiel is famous in and Buying Slow by researchers from the University

A
investing circles for suggesting that blindfolded
monkeys throwing darts at a newspaper’s stock
pages could build a portfolio that would do just as
well as one chosen by expert money managers. A
of Chicago, Carnegie Mellon University, MIT, and
portfolio analytics firm Inalytics Ltd. The study
concluded that one of the likely reasons for the dis-
crepancy was “asymmetric allocation of cognitive

N recent academic study suggests that the blindfolded

monkeys actually may do even better than the aver-
age institutional investor. However, the monkey
traders should be given the darts when it’s time to
resources.” Translation: Investors spend way more
time analyzing what to buy than what to sell.
Monkeys with darts would have one big advan-
tage over human fund managers when it comes to

22
C sell holdings, not when deciding what to buy.
The researchers looked at more than 4 million
trades among 783 portfolios from 2000 to 2016 and
found that stockpickers actually showed skill when
selling. The animals wouldn’t get emotionally con-
nected to the stocks in their portfolio. Some pro-
fessional investors know they have this kind of
behavioral bias and take steps to correct it. Their

E
buying. However, the sales by these institutional
investors cost them as much as 100 basis points,
or a full percentage point, of yearly returns com-
pared with a no-skill strategy of simply selling hold-
ings at random, according to the study Selling Fast
methods can be pretty complicated.
At New York-based Edgewood Management, pri-
mary coverage of a stock holding is taken away from
the original portfolio manager and given to another
member of an investment committee when certain

ILLUSTRATION BY CESAR PELIZER

Edited by
Pat Regnier
 FINANCE
criteria are met, such as two straight quarters of
disappointing earnings. At Sierra Mutual Funds in
Santa Monica, Calif., Chief Investment Officer Terri
Spath advises portfolio managers to employ trades
known as “trailing stops,” which are standing orders
to sell any stock that falls by a certain percentage.
Jerry Dodson, founder and chairman of Parnassus
Investments in San Francisco, says he tries to deter-
mine each stock’s intrinsic value, then buys shares
when the price falls to 67 percent of that value and
sells when they reach 100 percent.
Dodson has had good results lately—his $4.1 bil-
lion Parnassus Endeavor Fund has beaten 91 per-
cent of similar funds over the past five years—but
it’s hard to know how much of this is because of
his selling technique. Decisions to sell in general
aren’t well studied, especially by investors them-
selves, according to Michael Ervolini, co-founder
and chief executive officer of Boston-based Cabot
Investment Technology, which makes software
that analyzes equity portfolios. His firm has scru-
tinized almost $3 trillion in investments and found
that one-third of portfolios exhibit what is known
as the “endowment effect,” or a tendency to hold
onto a winning stock for too long after it stops out-
performing. His work leads him to agree with the
main takeaways from the academic research, he
says: “Managers know more about, and are better
at, their buying and know less about, and are not
as good at, their selling.”
“The way people learn to sell is largely from the
people they worked with when they were young—
it’s not calibrated,” Ervolini says. “It’s either folklore
or heuristics”—that is, mental short cuts typically
learned by trial and error. One of Cabot’s clients is
Polen Capital in Boca Raton, Fla., which has found
success by not selling too often. It runs a growth
fund with a concentrated portfolio of only about
20 companies. Over 30 years, portfolios the com-
pany has run with this strategy have owned only
about 120 stocks, according to Daniel Davidowitz,
CIO and co-manager of the Polen Growth Fund. The
$2.8 billion fund has beaten 99 percent of similar
funds over the past five years.
Davidowitz says he was worried Cabot’s anal-
ysis of the firm’s trading might reveal they were
holding too long. And it did find that selling deci-
sions were a bit of a drag, costing Polen about
22 basis points per year in the decade through
2017, though in the latter five years the decisions
got better, contributing a net positive 32 basis
points per year. “What they’ve told us is that a lot
of our outperformance comes in the first three or
four years of our holding, and then it becomes a
lot more mixed,” Davidowitz says. “So what they
Bloomberg Businessweek February 18, 2019
Succeeding While Selling Rarely
Total annual return
 Polen Growth Fund  S&P 500  Russell 1000
27%
18
9
0
-9
2014 2015 2016 2017 2018
DATA: COMPILED BY BLOOMBERG
are telling us is that, as you get longer into a hold-
ing period, especially when it comes to compa-
nies that have done well, to keep reevaluting the
investment decisions more stringently.”
Davidowitz says Cabot’s system lately has been
nudging the managers to consider selling shares of
technology consultant Accenture Plc, because “it
looks a lot like the kind of company that we held too
long in the past.” They’ve reevaluated and decided
they still like it. “But we understand why we’re get-
ting the nudge,” he says. —Michael P. Regan 23
THE BOTTOM LINE Professional managers don’t seem to give as
much attention to selling as they do to buying and could have a bias
to holding on to winning picks for too long.
The New Way
To Deregulate
○ So-called sandboxes are supposed to give fintechs space to grow.
But they may also remove some key consumer protections
Sandboxes are the hot trend in financial regulation.
Or rather, deregulation. China, Singapore, Australia,
Canada, and more than 20 other countries have
them. U.S. regulatory agencies are starting them.
Arizona has one, and other states may follow suit.
Sandbox programs are supposed to be a kind
of safe space to allow digital entrepreneurs to test
products without regulators breathing down their
necks. Governments are willing to stay their regu-
latory hand because the startups that emerge from
such experiments might lead to new jobs and
  FINANCE
expanded access to financial services. They also
provide competition to big banks. There’s even a
sandbox for sandboxes: Regulators in 12 countries
have agreed to experiment with financial technology
across borders.
But as sandbox initiatives proliferate, critics
worry that the concept has become a covert effort
to neuter consumer protection laws. “Why allow
companies that aren’t ready to provide financial
services to the public to be permitted to do so?” says
Maria Vullo, who on Feb. 1 stepped down as super-
intendent of New York’s Department of Financial
Services, the state’s top financial watchdog.
Lauren Saunders, associate director of the National
Consumer Law Center, says the movement “has
taken a wrong turn in this deregulatory era” under
President Trump. In the U.S., she says, sandboxes
aren’t “framed as a way to help companies comply
with the laws, but to get relief from the laws.”
A proposed Consumer Financial Protection
Bureau sandbox is perhaps the most striking such
effort. Congress created the CFPB as part of the 2010
Dodd-Frank financial reform act. Its mission is to
crack down on deceptive or unfair consumer finance
practices. Some of those, such as predatory mort-
24 gage lending, helped cause the 2008 financial crisis.
The agency was designed to fill what was seen as a
gap in existing regulation and enforcement.
But companies approved for the CFPB sandbox
would come under a powerful protective umbrella.
While a December proposal says applicants would
have to show how they plan to control for con-
sumer risks and reimburse customers who might
be harmed, approved companies would be partially
immune from enforcement actions by any federal or
state authority and from lawsuits by private parties.
The safe harbor would extend to consumer protec-
tion laws that ban discrimination in lending, limit
consumers’ liability for unauthorized credit card
charges, and require plain-English explanations of
real estate transactions. The agency says it plans
to invite trade associations to apply for sandbox
approval for entire industries.
Paul Watkins, who runs the CFPB’s Office of
Innovation and will run the agency’s sandbox
if it’s approved, said in a January podcast that
“innovation is part of consumer protection—these
things are not opposed.” The program, he said, will
achieve the bureau’s broader purpose, “which is
to ensure competition within markets and ensure
consumer access.”
Twenty-two state attorneys general and a coali-
tion of 50 public-interest groups are fighting the idea.
People get “starry-eyed when they hear the word
‘innovation,’ ” says Saunders, “but dramatically
Bloomberg Businessweek February 18, 2019
innovative products require more supervision, not
less.” She cites the now-banned practice in which
banks automatically gave debit card customers over-
draft protection, then charged $40 when an account
lacked the funds for a $2 cup of coffee.
The U.S. Office of the Comptroller of the
Currency is considering a sandbox program for the
national banks it regulates, but it’s already paved
the way for fintechs that don’t accept deposits to
receive special national bank charters. While the
OCC wouldn’t override banking rules, it would tai- ○ Vullo
lor them to any newly chartered company’s size,
riskiness, and complexity. And the OCC would pre-
empt states, normally the overseers of nondeposi-
tory financial institutions. “Ten years ago, we went
through a crisis because the loosening of regulations
permitted institutions to take on risk at the expense
of the consumer,” says Vullo, the former New York
regulator. “It’s like people have amnesia.”
Bryan Hubbard, an OCC spokesman, says it’s
“misleading to suggest consumer protections would
suffer” if a fintech company were to receive a fed-
eral charter. The OCC, he says, would conduct bank-
like exams of fintech companies to prevent abuses.
The sandbox movement took off after the U.K.’s
Financial Conduct Authority coined the phrase to
describe its program, begun in 2016, to encourage
innovation and competition. The FCA has since
allowed 89 companies to market-test their concepts.
A report by Deloitte says perhaps the British initia-
tive’s biggest achievement “has been to break the
myth of regulation being a barrier to innovation.”
The Trump administration took away a different
lesson: In a July report, the Treasury Department
encouraged states to establish sandboxes as a “uni-
fied solution” for what it considers postcrisis regu-
latory overkill. If states don’t do it, the report says,
Congress should step in and preempt state laws.
Even without sandboxes, there’s been no short-
age of fintech startups. The Treasury report says
that more than 3,300 fintech companies started
from 2010 to 2018. Funding from investors for such
PHOTO: VICTOR J. BLUE/BLOOMBERG. ILLUSTRATION BY JOSH FREYDKIS
 FINANCE
companies has been growing rapidly, reaching
$22 billion globally in 2017, a 13-fold increase since
2010. Fintech lending now makes up more than
36 percent of all U.S. personal loans, up from less
than 1 percent in 2010. Some digital financial services
reach as many as 80 million people, the report says.
Three days after the Treasury report, Arizona’s
sandbox opened to fintechs that provide a service
to consumers—online loans, mobile payments, cryp-
tocurrency products, robo-advice—not available in
the state. Accepted companies can serve as many as
10,000 customers and operate for two years without
a license, after which they must obtain approvals or
cease operating.
Sweetbridge NFP Ltd., a Scottsdale, Ariz., fintech,
is one of three companies that have been approved.
It plans to convert the value of vehicle titles into dig-
ital tokens that customers can trade, borrow, and
lend. The Arizona attorney general office’s website
describes the trial as a “blockchain-enabled prod-
uct designed to purchase financing without a credit
check and offer affordable, consumer-friendly vehi-
cle title loans.”
Title loans allow car owners to get access to quick
cash by putting up the title to their vehicles as col-
lateral. Since 2010, when the state banned payday
lending, auto-title lenders have exploded in Arizona.
The state in 2015 had more than 630 title-loan out-
lets—one for every 8,000 residents—according to a
Consumer Federation of America report.
For the sandbox program, Sweetbridge will rely
on insurance data and Kelley Blue Book auto values
rather than credit checks and other tools of tradi-
tional underwriting. It agreed to cap its loans at
an annual interest rate of 20 percent—below what
most title lenders charge. Sweetbridge’s test, which
it says will begin soon, will also limit loans to 20 per-
cent of a vehicle’s value. Scott Nelson, Sweetbridge’s
founder and chief executive officer, said in an email
that the Arizona sandbox allows startups to quickly
test products “in a controlled environment without
the cost and time delay that is typical for licensing
new financial products.”
If successful, the company plans to offer the
title-loan product more widely. A Feb. 6 CFPB
announcement could make that easier. The
agency said it plans to rescind the part of Obama-
era rules that require payday and auto-title lenders
to determine the likelihood that a customer can
pay back a loan. Sweetbridge says its loans won’t
be available in the U.K. and Europe, where such
assessments are required.
Jean Ann Fox, the former director for financial
services at the Consumer Federation of America,
says she’s unsuccessfully tried to find out whether
Bloomberg Businessweek February 18, 2019
the Arizona sandbox products are actually operating
and under what controls, which state laws have been
waived, and whether the entities have been asked to
post bonds in case they have to reimburse custom-
ers. “It’s not so much a sandbox as a black box,” Fox
says. Katie Conner, a spokeswoman for the Arizona
attorney general’s office, which oversees the pro-
gram, says it “is the absolute last place where any
deceitful players would want to be.” Of the three
approved companies, only Grain Technology Inc.
has begun offering its product and on a limited
basis—personalized savings and credit plans through
existing bank accounts. “These companies have
been in the sandbox for less than four months— ○ Global funding from
investors in 2017 for
things are just getting started,” she adds. fintech companies
For now, Arizona’s trials can only be offered
to in-state consumers. But the state could extend
its reach by seeking admission of its sandbox into
$22b
the CFPB’s if the agency moves ahead. That may
not be difficult: Watkins, who would manage the
CFPB’s sandbox, led the effort to design Arizona’s.
—Paula Dwyer
THE BOTTOM LINE The Treasury has proposed sandboxes to
encourage innovation in financial technology. But even without
them, there’ve been more than 3,300 startups since 2010.
25
Our Very Own
Stock Exchange
○ The proposed Members Exchange is being
funded by some of Wall Street’s biggest traders
Does the U.S. need another stock exchange? There’s
no shortage of places to trade: Nasdaq, Cboe Global
Markets, and Intercontinental Exchange’s NYSE divi-
sion each run multiple public exchanges, and there
are dozens of private markets housed inside banks.
Even so, a group of Wall Street trading titans has
announced plans for a platform that it’s calling the
Members Exchange. And despite the crowded field,
chances are good it could take off—after all, the own-
ers likely will be among the customers.
Like most exchanges these days, the Members
Exchange will be largely invisible to everyday inves-
tors. Relatively few stocks are traded on the famed
New York Stock Exchange floor. Almost all the
action takes place on electronic markets housed in
fortresslike data centers in New Jersey. Regulations
require that brokerages and trading firms get the
  FINANCE

best possible prices for customers, which in prac-

tice gives them little choice but to connect to all
13 exchanges and pay any fees they charge for mar-
ket data and other services. Traders would like this
to cost less, and their proposal to open a new plat-
form appears to be a salvo in that battle.
Among the nine companies behind the Members
Exchange are Citadel Securities and Virtu Financial
Inc., which probably handle about 40 percent of
the market’s trading volume, often on behalf of
better-known retail brokers. Fidelity Investments,
Charles Schwab, Morgan Stanley, and Bank of
America are some of the other backers. The

PHOTOGRAPH BY EVAN ORTIZ FOR BLOOMBERG BUSINESSWEEK. *NYSE IS A DIVISION OF INTERCONTINENTAL EXCHANGE INC. THE NYSE ARCA YEAR IS THE FOUNDING DATE OF THE OLDER OF ITS TWO MAIN ANCESTORS. NYSE AMERICAN HAS ROOTS IN
exchange still hasn’t filed for regulatory approval,
so it likely can’t open until late this year or 2020.
But if big players are able to direct trades its way,
then “NYSE, Nasdaq, and Cboe will be in significant
pain,” says Bill Karsh, who once ran Direct Edge, an
earlier upstart exchange.
Banks, brokers, and traders have complained

EARLIER OUTDOOR TRADING. BZX, EDGX, EDGA, AND THE INVESTORS EXCHANGE WERE OPENED EARLIER THAN THE YEARS LISTED BUT DIDN’T BECOME EXCHANGES UNTIL THEN. DATA: BLOOMBERG REPORTING
about the cost of getting data feeds from most of
the exchanges. (Bloomberg LP, the parent company
of Bloomberg Businessweek, has also contested some
of these fees with regulators.) Virtu last year noted
it can cost a trader $3.2 million a year for a single
26 vital category of feeds from exchanges. Exchanges
say they provide a lot of value for what they charge.
Nasdaq Chief Executive Officer Adena Friedman
said in October that exchanges, by fueling a shift
toward automation, have helped bring down inves-
tors’ costs dramatically. “The reality is that most Direct Edge was founded in 2005 by a prede-
Main Street investors pay nothing for quote and cessor company of Virtu. The business had cap-
trade data, while the cost of retail commissions have tured less than 1.5 percent of U.S. trading by July
been falling,” she told analysts on a conference call. 2007. Then it brought in two more big investors:
○ The 13 U.S. stock
The Members Exchange’s backers have promised Citadel Securities and Goldman Sachs Group Inc. exchanges and the
lower pricing on data and other fees. The threat of They flooded the business with volume, and its year they were founded,
grouped by ownership*
drawing away business could give its founders a market share exploded, surpassing 10 percent in
bargaining chip in their efforts to get the incum- 2009. Today, Cboe’s stock exchange business has New York Stock
bent exchanges to cut such costs. In that sense, the almost a 20 percent market share. Exchange, 1792

Members Exchange might succeed even if it never If the Members Exchange replicates that model, NYSE Arca, 1882

opens. But actually turning on the switch could give
its backers a stronger voice in debates about how
exchanges work. “This really is a culmination of a
lot of frustration that has been vocalized but fallen
on deaf ears in the exchange world,” says Joe Wald,
the CEO of Clearpool, whose software designs trad-
ing algorithms for customers. A Members Exchange
spokesman declined to comment.
it doesn’t mean the big traders can just stick to their Chicago Stock
Exchange, 1882
own exchange and ignore NYSE, Nasdaq, and Cboe.
NYSE National, 1885
They’ll still have to be connected to all these plat-
NYSE American, 1921
forms. Mehmet Kinak, the global head of system-
Nasdaq PSX, 1790
atic trading and market structure at mutual fund
Nasdaq BX, 1834
company T. Rowe Price Group Inc., isn’t convinced
Nasdaq, 1971
a new exchange is a good idea. By adding another
place that big investors have to connect to, it makes Cboe BZX, 2008

Whatever happens in the fee dispute, the history the web of exchanges more complicated. “If it looks Cboe BYX, 2010

of Cboe suggests that the Members Exchange could like any other venue but with lower operating costs, Cboe EDGX, 2010

win market share. Cboe’s stock exchange business I don’t know if that benefit outweighs the fragmen- Cboe EDGA, 2010

stems from two startups that emerged in the mid-
2000s, Direct Edge and Bats. Before they were part
of Cboe, they were funded by some of the biggest
trading firms in the country at the time.
tation concerns,” he says. —Nick Baker Investors
Exchange, 2016
THE BOTTOM LINE Big brokers and traders are annoyed about the
fees they pay for stock exchange data. The exchange they want to
open could be a way of applying pressure to such costs.
Rebuilding
Public Education
Learn, Lead, Innovate

March 19, 2019 | New York City

Join philanthropy and academic leaders to

discuss the critical need to rebuild K-12 public
schools in the U.S. and bridge the education
equality gap.

Topics include:

- Education reforms that can unlock

students full potential.

- New technologies that will help K-12

kids develop digital skills.

- Philanthropy’s initiative to close the opportunity

gap for students in low-income neighborhoods.

Proudly sponsored by:

Register today on: BloombergLive.com/Education

Sign up with registration code: BUSINESSWEEK
 Bloomberg Businessweek
E People
C
O ○ Why is job creation so strong
N
this late in the expansion?
It’s the technology, stupid
O
It’s another day at the emergency room of MedStar
Washington Hospital Center in the nation’s capital.
Patients are streaming in on foot and on stretchers.
28
M “I used to stand right here,” says Dr. Ethan Booker,
pointing to the spot near the door where he once
kept watch as Physician in Triage. The PIT’s job
is to grade human damage. It’s an emotional tug-
I
of-war: Somebody needs you, but somebody else
coming through the door may need you even more.
Technology that Booker helped develop has
transformed the way the ER triages patients. When
C
Dr. Jasmine Malek works as the PIT, she’s not even
in the emergency room. She’s several buildings
away. “I hope you feel better,” she tells a patient
via a two-way video link. Her screen also displays
S
a medical history and, with a few clicks, she can
order tests or follow-up treatments.
The system enables faster care. And it hasn’t
eliminated jobs. On the contrary, Booker says, “in
places where we were successful with this, there
was a need for more people.”
If you listen to techno-dystopians, the outlook
for workers is grim. Robots are already taking over
repetitive human tasks, and soon they’ll come for
the rest. But what’s striking about the later stages
of the 10-year-old U.S. expansion is how labor-
intensive it’s been, with 2.7 million jobs added last
year. Smarter machines, it turns out, often require
more people.
That may be part of the answer to a question
that puzzles economists: How come the steady
digitization of almost everything isn’t making the
economy more efficient? In the U.S., productivity
growth—measured in output per hour worked—
Edited by
has been slower in the current expansion than in
Cristina Lindblad previous ones, suggesting the tech isn’t delivering.
February 18, 2019
It’s hard to believe that when you watch Malek
in action. She makes tough decisions, directing
staff from a serene office far removed from the
bedlam of the ER. But she can get down there if
needed. It’s not like she’s in a call center thou-
sands of miles away. Triage done this way can
handle as many as 22 patients per hour, more than
double the old rate.
Just about every company in the U.S. is push-
ing technology more deeply into what they do.
They’re doing so at a time of low unemployment
and rising compensation, which would normally
be expected to eat into corporate margins. Yet
profits are holding up.
Ernie Tedeschi, an economist at investment
adviser Evercore ISI in Washington, says new tech-
nology may explain the contradiction. It enables
companies to profit from their recent hires. “You’re
able to bring in people while you’re making them
more productive,” he says.
There’s a school of economics that says this is
how big change happens. It’s one that puts inno-
vation center stage and downplays the hydraulics
of demand and supply that preoccupy Keynesians
and neoclassicals. Its dominant figure was Joseph
Schumpeter, who argued in the 1940s that
“creative destruction is the essential fact about
capitalism.” Business-cycle theorist Carlota Perez
developed his ideas, describing technological
shifts as “a complex collective learning process”
in which new and old ways of doing things over-
lap. During these adjustment periods, productiv-
ity measurements might mislead.
That’s how some business executives view tech’s
evolution now. It’s labor-intensive, often a sign of
inefficiency, but also labor-enhancing. Lonne Jaffe,
a managing director at Insight Venture Partners in
New York, sees this pattern across the portfolio of
more than 150 companies the private equity and
venture capital firm manages. For many businesses,
capital spending means software that’s enormously
scalable because of cloud computing—and cheap.
  ECONOMICS
Automation
“As prices drop below certain thresholds, entirely
new business models get unlocked,” Jaffe says. “It
can also unlock new pools of labor.”
There’s a riskier side to all this digitization—but
even that creates jobs. With everything from emer-
gency medicine to vacation planning now online,
huge amounts of data are generated. That’s valuable,
and hackers are testing every door and window hun-
dreds of times a day. Guarding it is an enormous
undertaking that requires a lot of people.
Dan Houston is chairman and chief executive
officer of Principal Financial Group Inc., which
provides retirement plan services, asset manage-
ment, and insurance. He budgets about $575 mil-
lion a year for technology. Some $300 million goes
to infrastructure and security, meaning about
half is spent on innovations that boost productiv-
ity or build connections with clients. It’s the same
everywhere, Houston says. “Everyone is muscling
their way through, throwing as much labor at it as
they possibly can.”
Eventually, he says, the data infrastructure and
network security foundations will be complete and
costs will probably decrease. But that’s still far off.
“If this were a nine-inning ball game, I think we are
in the third or fourth,” Houston says.
As chief information officer at Hilton Worldwide
Holdings Inc., Noelle Eder is also acutely aware of
the security problem, especially after her rival
Marriott International Inc. was hacked last year.
She doesn’t see that as a downside of new technol-
ogy but more like a flip side.
Eder describes the options available to Hilton
guests in a digital age. You’ve traveled a long way,
and you’re in no mood for the ritual at reception.
So on the cab ride to the hotel, you launch Hilton’s
DATA: BUREAU OF LABOR STATISTICS
phone app and check in—which provides you with
a digital door key. You can also set the tempera-
ture in your room, link up your Netflix account to
the TV, and order your favorite meal—all before
you’ve even arrived.
That personalized experience is only possible if
Bloomberg Businessweek February 18, 2019
customers share their preferences, which means ○ Labor productivity
growth
Eder has to win their trust. She says she devotes a
“reasonable majority” of her time to data privacy. 5.0%
The pace of hiring in hotels and health care
has outpaced that in many other industries. New
demand is one part of the reason. But new pos-
sibilities are another. Eder says the technology 2.5
will change what Hilton staff do and “create more
time for people in empathy and judgment-based
tasks.” That could be as simple as asking guests
over breakfast if there’s anything they need. “We’re 0
not designing technology to replace humans,” she 1988 2017
says. “I’m pretty happy about that. I happen to like 29
humans.” —Craig Torres
THE BOTTOM LINE Stepped-up investment in technology by U.S.
companies hasn’t really boosted productivity so far. One answer
may be that digitization is labor-intensive, at least at the outset.
Diversity Data
And the Special-
Sauce Defense
○ Tech companies say detailing how many women and minorities
they employ will expose them to harm from competitors
Diversity and inclusion—the two words are repeated
so often they’ve become a mantra in Silicon Valley.
Hardly a day goes by without some tech industry
leader extolling the virtues of having more women
and minorities in their employee ranks.
Yet when asked to demonstrate the progress
they’re making toward that ideal, many companies
  ECONOMICS
argue that publicizing workforce data is tanta-
mount to giving away trade secrets.
Granted, more employers in the industry are
voluntarily releasing information on their diversity
strategies. Yet some of those same companies say
government-mandated disclosures of how many
women and people of color they employ must
remain private. Making them public, they main-
tain, would invite competitors to poach their talent.
At issue is the EEO-1 employment data report
that all companies with at least 100 workers must
submit to the Equal Employment Opportunity
30 Commission annually. Over the years, several
news outlets have filed Freedom of Information
(FOIA) requests in an attempt to force the agency
to release company filings—mostly without success.
After one such attempt, Palantir Technologies, the
data mining company co-founded by Peter Thiel,
addressed a letter to the U.S. Department of Labor
in 2017 in which it warned that disclosure of the
data would encourage rivals to “raid” its growing
ranks of women and minorities, jeopardizing the
company’s investments in recruiting and training.
In a forthcoming research paper, Jamillah
Bowman Williams, an associate professor at
Georgetown University Law Center, notes that the
number of tech companies citing trade secrets as a
justification for refusing to release employee data
has been ticking up. “Companies can use this tac-
tic to hide gender and race disparities and interfere
with the advancement of civil rights law and work-
place equity,” she says.
Tech’s use of the trade-secret defense goes back
to at least 2011. That year, CNN asked 20 tech compa-
nies for their diversity stats. Only three—Dell, Intel,
and Ingram Micro—complied. When CNN submit-
ted FOIA requests, Apple, Google, Hewlett-Packard,
IBM, and Microsoft invoked an exemption covering
trade secrets, saying disclosure would cause “com-
petitive harm,” Williams says. (Since then, Apple,
Google, HP, and Microsoft have begun publicly
releasing their EEO-1s, in some cases also producing
Bloomberg Businessweek February 18, 2019
annual diversity reports. International Business
Machines Corp., which hasn’t made its data public,
declined to comment for this story.)
Last year, when nonprofit news outlet Reveal,
from the Center for Investigative Reporting,
requested the EEO-1s from 211 tech companies, just
26 complied or had already made the figures public.
(The organization successfully sued the government
for the release of data for companies that are fed-
eral contractors, such as Oracle Corp. and Palantir.)
Congress inadvertently aided those in the tech
industry seeking to evade public scrutiny when it
approved legislation in 2016 that bolstered com-
panies’ ability to launch cases alleging the misap-
propriation of trade secrets. Case filings jumped
30 percent the next year, Williams found. IBM went
as far as to sue its former chief diversity officer last
year to block her move to Microsoft Corp., claiming
she would take confidential data on its diversity ini-
tiatives with her. (The case was settled out of court.)
Williams argues the legal rationale is flimsy as it
relates to diversity. “This is not like McDonald’s and
their sauce that goes on the Big Mac or the Google
algorithm that’s the core of its business strategy,”
she says. “For workforce demographics, it’s unclear
what’s so economically valuable to where it would
be a detriment, other than reputational harm.”
In other words, the defense is often a convenient
way for companies to shield themselves from pub-
lic embarrassment. When the Labor Department
released Palantir’s diversity numbers in January,
Reveal reported on its website that more than
three-fourths of the company’s 1,328 professionals
were men and just 1.4 percent were black. Palantir
employed no women in executive or senior manage-
ment positions that year, either
Tech companies often point to a so-called pipe-
line problem. But the claim that there’s a shortage
of qualified women and people of color isn’t fully “It’s unclear
backed up by the data. In 2014 and 2015 black stu- what’s so
dents earning a bachelor’s degree in science, tech- economically
nology, engineering, or mathematics accounted for valuable to
7.1 percent of all graduates in those fields, accord- where it would
ing to the U.S. Department of Education. The share be a detriment,
of black workers employed in technical positions in other than
Silicon Valley amounted to less than half that. reputational
The disconnect is why transparency is crucial, harm”
Williams says. Without it, it’s hard to know where
companies are falling short—is it hiring, retention,
pay, or promotion? Making workforce demograph-
ics public could help answer some crucial ques-
tions. —Jordyn Holman
THE BOTTOM LINE While paying lip service to the goal of
promoting diversity in their ranks, many U.S. tech companies argue
that their demographic data should remain secret.
  ECONOMICS
Valentine’s Comes
Out of the Shadows
○ Saudi Arabia’s religious police look the other
way as businesses hawk roses and lingerie
The mood at the florist’s was as vibrant as the col-
ors. Fake red roses, amaryllis, and peonies were
displayed in the window with natural ones wait-
ing in an acclimatized room. There were red paper
hearts on sticks with “I LOVE YOU” spelled in white.
Valentine’s Day had arrived.
What was more conspicuous at the storefront on
a busy street in central Riyadh, though, was what
was missing: fear.
The runup to the holiday used to be a tense time
in Saudi Arabia, as businesses dodged the author-
ities to mark an occasion banned by the religious
establishment. But what was once Valentine’s con-
traband, sold covertly to carefully selected custom-
ers, is now creeping into the Saudi mainstream. You
won’t see advertising like you would in Lebanon or
Egypt, but you’ll be able to spot telltale signs that the
population is preparing for Cupid’s arrival.
The shift in attitude represents the paradox at
the heart of the new Saudi Arabia under de facto
leader Crown Prince Mohammed bin Salman.
A government crackdown has put dissenters on
notice that they risk liberty—and even life—if they
criticize the kingdom’s leadership. But the state is
also softening at the edges, allowing music concerts
FROM LEFT: ILLUSTRATION BY ROSE WONG; PHOTOGRAPH BY TASNEEM ALSULTAN FOR BLOOMBERG BUSINESSWEEK
and cinema and permitting men and women to mix
more freely in public.
There was no government announcement that
the unwritten ban on Valentine’s Day had been
lifted. But unlike in the past, there have been no
public injunctions against the sale of Valentine’s
paraphernalia. This time last year, the same Riyadh
flower store followed what had become a familiar
drill: Sign a pledge for the religious police that it
wouldn’t stock red flowers, move the offensive items
to a nearby villa, sell to trusted clients, and pray not
to get caught. Punishment included detention for
the store’s manager.
When the staff weren’t censured for transform-
ing a corner of their shop into a blaze of red earlier
this month, they took it as a sign they could relax.
“We’ve never had such an open Valentine’s,” says
the salesman, Mohammed, who nevertheless asked
not to be identified by his full name.
The religious police, whose powers have been
Bloomberg Businessweek February 18, 2019
curbed, didn’t pay their usual visit. And they didn’t
stop at nearby restaurants with orders to abstain
from using candles and tablecloths in colors asso-
ciated with this day for lovers—red, pink, and white.
The crown prince has promised a return to a
more moderate version of Islam, instead of the strict
Wahhabism, which rejects Valentine’s Day, Christian
feasts, and even most Muslim holidays. Fahd bin
Nasser, a 28-year-old technical engineer, says he
doesn’t mind if Saudis celebrate Valentine’s Day, but
it’s not for him. “It’s an innovation that Islam doesn’t
accept,” he says, as he sips coffee on a cool evening
in the popular Tahlia area of Riyadh. “I don’t even
celebrate my birthday for the same reason.”
Sarah, 25, has embraced the foreign import—
but discreetly. She and her boyfriend plan to cel-
ebrate Valentine’s Day at a compound filled with
expats. “I’m afraid to celebrate outside,” she says.
The upscale international jewelry store in Riyadh
where she works is also playing it safe, keeping gold
and diamond hearts inside instead of displaying
them in the window.
31
Others are more bold. One store in Riyadh dis-  Valentine’s Day
merchandise at a
played a picture of mostly red lacy bras with a buy- florist’s in Al-Khobar
two-get-one-free offer: “More Love,” it read. A waiter
at an upscale hotel said he has instructions to create
“romantic tables” for celebrating diners, decorated
with red candles and a scattering of rose petals.
Away from the capital, in less conservative cities
such as Jeddah in the west or Al-Khobar in the east,
attitudes are also more relaxed. A patisserie in
Al-Khobar posted a picture of a heart-shaped cake
on Instagram with a caption and a winking emoji:
“February’s cake has arrived,” it said. “It’s for
February, not for that.” —Donna Abu-Nasr
THE BOTTOM LINE Saudi Arabia’s religious authorities haven’t
officially embraced Valentine’s Day, but businesses that traffic in
romantic wares say there’s been no crackdown this year.
 February 18, 2019

Affordable Solutions Bond M

arket
Seafoam Mint
er
yd ropow
H
ydew
Hone

P Progressive
Policy Pear
Electric
Clover Car

O
tives
Incen ll Apple
For A

L Wind
Fern
Farm
Zero Emissions
Emerald
Democ
ra
Sociali tic
st Spru
ce

I
T Re pub l ic a
Turbine
nTeal
Solar P
Pine
anel

32
I
C
S Wall Street Has
Plenty of Green for
The New Deal
the Senate Committee on Environment and Public
○ Environmental legislation
Works, labeled it an “absurd socialist manifesto.”
has a willing backer in the Even House Speaker Nancy Pelosi, who’s been
financial industry fearless in the face of Republican opposition on
other issues, failed to bless it.
The plan’s greatest flaw, critics say, is that it
PHOTO ILLUSTRATION BY 731; PHOTO: SHUTTERSTOCK

Even before Representative Alexandria Ocasio-
Cortez of New York and Senator Ed Markey of
Massachusetts, both Democrats, introduced their
Feb. 7 resolution outlining a “Green New Deal,”
members of both parties were calling the idea
unrealistic or worse. Republican Mike Simpson
of Idaho, who sits on the House Appropriations
Edited by
Committee, said it was “loony” without specifying
Jillian Goodman why, and John Barrasso, Republican chairman of
would be too costly. Ocasio-Cortez advocates defi-
cit spending, and she’s floated a 70 percent mar-
ginal tax rate for high earners that would generate
some of the necessary revenue. But those worried
about where the rest of the money will come from
are forgetting one major, surprisingly enthusiastic
player: Wall Street.
Investors are more than willing to put up
the capital to fund GND goals—which include
 POLITICS
switching to 100  percent renewable or clean
power in 10 years, building a nationwide energy
grid, and renovating existing buildings for energy
efficiency—provided they get clarity from Congress,
says Jon Powers, president of financial technology
company CleanCapital and former federal chief
sustainability officer under President Obama. “The
thing that holds up capital the most is uncertainty,”
he says. “Once you have certainty in that policy,
then that capital will know where to go.”
Sustainable investing is already a $12 trillion
market in the U.S., according to the Forum for
Sustainable and Responsible Investment; data
from BloombergNEF show that global issuance of
green bonds rose to $600 billion last year. While
investment funds and big banks are anathema to
Ocasio-Cortez, a Democratic Socialist who eschews
corporate donations, they certainly are interested
in how far she’s pushing the conversation on
green initiatives.
“Wall Street would take this seriously,” says
Stephen Liberatore, a managing director at asset
manager Nuveen, who oversees $9 billion in fixed
income tied to an environmental, social, and gov-
ernance strategy. “There are more and more inves-
tors who are interested in having exposure to green
projects and green debt.”
Government-corporate coordination on such a
scale has worked before—during the original New
Deal, but also during World War II, when Franklin
D. Roosevelt created a national production board to
direct factories into war-goods mode. “We’re imag-
ining a lot of different funding methods,” including
grants, direct loans, public-private partnerships,
joint ventures, or creating new bond markets, says
Robert Hockett, a Cornell Law School professor
and senior policy adviser to Ocasio-Cortez. “As in
the case of the original New Deal, we do envisage
existing firms playing a really big role.”
During the Great Depression, the federal gov-
ernment created the Reconstruction Finance
Corp., a government entity that doled out loans
to companies and states to encourage investment
and economic stability. The GND resolution pro-
poses creating public banks along similar lines to
give citizens part-ownership of infrastructure proj-
ects and investment returns.
Other funding avenues include public investment
in green bonds and asset-backed securities, which
are securitized leases tied to low- or no-carbon assets
such as solar panels or loans made to landlords to
finance building upgrades. The government already
works closely with the asset-backed industry via
Fannie Mae and Freddie Mac and at the state level
with programs like the clean-energy loan-financing
Bloomberg Businessweek February 18, 2019
system, known as PACE. But any federally linked
lending program would be controversial given
previous failures, including loan guarantees made
under the Obama administration to solar panel
maker Solyndra, which eventually went bankrupt.
Creating a federal lender to fund the programs out-
lined in the GND could be a solution, but it would
be contentious, too: Critics point to the threat of bal-
looning liabilities and risks to the economy.
Endorsed so far by about 70 Democrats, includ-
ing many of the nine declared contenders for the
2020 Democratic presidential nomination, the GND
proposal includes a jobs guarantee and health care
for all on top of its green-power pledges. A simple
resolution, it wouldn’t have the force of law if it
were passed—a highly unlikely eventuality. Senate
Majority Leader Mitch McConnell said on Feb. 12
○ The U.S. market
that he’ll force the Republican-controlled Senate for sustainable
to vote on it, to give everyone “an opportunity to investing is already
go on record” with their view.
Markey and Ocasio-Cortez are aware of the $12t
political challenges, but they’ve chosen to play the
long game. In a statement after the majority lead-
er’s announcement, Ocasio-Cortez’s office said,
“McConnell thinks he can end all debate on the
Green New Deal,” but “all he’s going to do is show 33
just how out of touch Republican politicians are
with the American people.”
Private-sector investment isn’t enough to
address the threat of climate change, says Saikat
Chakrabarti, Ocasio-Cortez’s chief of staff. “What
we think we need to do additionally—and what’s
not happening on the scale it needs to—is federal
investment,” he says. “The private sector alone can-
not solve the climate crisis.”
The United Nations Intergovernmental Panel on
Climate Change warned in October that the world
had to take extraordinary action to avoid warming
more than 1.5C this century, the goal of the Paris
Agreement. Natural disasters cost the global econ-
omy $350 billion in 2017, according to Swiss Re AG,
because of several particularly severe hurricanes; in
2018, the total was $155 billion. Climate researchers
project that extreme weather will only get worse.
The day after Thanksgiving, the U.S. government’s
Global Change Research Program released its fourth
report, in which 300 experts said climate change
could cost the U.S. economy hundreds of billions of
dollars a year and contribute to the deaths of thou-
sands of Americans by the end of the century.
Preventing that outcome can be done only
with action on a large scale and only with busi-
ness involvement, according to economist Robert
Pollin, who was commissioned to research an
Obama-era stimulus package that included about
  POLITICS
$90 billion in clean-energy investments. “If we
really are talking about totally transforming the
U.S. energy system in a decade or two decades,
there have to be some very big incentives there,”
he says. “We’re rebuilding an entire energy infra-
structure, so there’s massive opportunity for all
kinds of businesses.”
The drafters of the Green New Deal will need to
answer some major questions, including concerns
about trade pacts, heavy industry, and wages. But
the conversation they’ve prompted is already start-
ing to arrive at some answers. “Think about where
we are right now,” says Powers of CleanCapital.
Candidates for president are staking their cam-
paigns in part on the success of a massive green-
energy undertaking, which is a sign of how far
things have come from even a few years ago, he
says: “The cultural moment for something like this
to move forward is here.” —Katia Dmitrieva and
Emily Chasan
THE BOTTOM LINE Wall Street is more than willing to put up the
financing for a green overhaul. It’s just looking for guidance from
Congress, which the Green New Deal is intended to provide.
34
The Boy Wonder
Is Getting Old
○ Canadian voters may be tiring of Prime
Minister Trudeau
Justin Trudeau’s top rival in Canada’s October
general election is, technically, Andrew Scheer, a
pro-Brexit Conservative Party leader running a cam-
paign of suburban values and smaller government in
an attempt to hold the prime minister to one term.
But lately, Scheer’s had help in weakening Trudeau’s
brand—from Trudeau himself.
The famously globe-trotting, feminist, supposedly
woke 47-year-old prime minister has committed a
string of flubs, from a vacation on a private island
owned by the Aga Khan to a state visit to India where
he and his wife rubbed elbows with Sikh separatists.
That streak was extended on Feb. 7, when allegations
surfaced that Trudeau had pressured his then-justice
minister, Jody Wilson-Raybould, to help fix a legal
problem for SNC Lavalin, a conglomerate with long-
standing ties to his Liberal Party. This latest scandal
exposes Trudeau to allegations that his fresh-faced
Liberal Party is, in fact, the same old party with the
Bloomberg Businessweek February 18, 2019
same old baggage. That could be politically fatal for
an agent of change.
Wilson-Raybould’s three-year record as jus-
tice minister was largely uncontroversial. Trudeau
○ Support for Canada’s
relegated her in January to the lesser post of vet- leading parties, from
erans affairs minister, part of a larger cabinet shuf- CBC’s weighted average
of polls
fle that also saw the appointment of a new minister
Liberal
for rural economic development. The SNC story
Conservative
drew new attention to the demotion, and Trudeau
denied “directing” anyone to do anything. On Feb. 42%
12, Wilson-Raybould further escalated the crisis by
resigning from the cabinet.
Fortunately for Trudeau, his opponents have
problems of their own. Canada has three major 36
political parties: the leftist New Democratic Party,
the centrist Liberals, and Scheer’s right-leaning
Conservatives. The NDP is in free fall, and Trudeau
is poised to pick up many of its voters. Scheer, 30
meanwhile, is still relatively unknown outside the 7/12/17 2/12/19
Conservative Party, and he’s facing an upstart right-
wing party, led by a former rival.
Scheer, a father of five who was first elected to
Parliament in 2004, represents a district in Canada’s
conservative prairies. He won the party leadership
in 2017 as a compromise pick. A skeptic of globalism,
he not only supported Brexit but also has since gone
out of his way to remind people of that, even as talks
on Britain’s exit deal spiral into chaos.
Trudeau is “pretty lucky right now,” says poll-
ster Nik Nanos. Nonetheless, he sees an “accumu-
lation effect” building. Heading into the election,
Trudeau’s Liberals represent 180 of Canada’s 338
electoral districts, just 10 above the slimmest possi-
ble majority, leaving little margin for error. “When
things go wrong, people pin it on the prime minis-
ter,” Nanos says. “So for him, it’s been a year of not-
great news. Nothing’s really gone right.” ○ Trudeau
Trudeau’s people have tried to paint Scheer,
39, as a younger, dimpled version of his predeces-
sor, Stephen Harper, who governed from 2006 to
2015. In handing the job to Trudeau in October 2015, TRUDEAU: MARLENE AWAAD/BLOOMBERG. SCHEER: GEOFF ROBINS/AFP/GETTY IMAGES
many voters were driven by a desire to see Harper
defeated. Trudeau is trying to activate that same
desire, pitching himself as the best bet for progres-
sives who want to keep Scheer from taking power.
The prime minister’s virtue-signaling has given
his critics plenty of attack fodder, particularly ○ Scheer
as his gaffes mount. Roughly a year after he was
elected, polling data showed that more than half of
Canadians were happy with their choice, a major
achievement in the country’s multiparty system.
Now, barely a third say so. His party’s popularity
has slid almost 10 percentage points since 2016, to
37.4 percent, according to a polling aggregator run
by the Canadian Broadcasting Corp.
 POLITICS

Safety Plane Crashes

Trudeau does have a few things going for him.
He’s cut middle-class taxes, expanded parental On Feb. 12, 2009, Colgan Air Flight 3407 crashed on its
benefits, and enacted national pension reform. Pot approach to Buffalo, killing all 49 people on board and one person
legalization, which went into effect last October, has on the ground. Since then, there’s been only one passenger
gone mostly smoothly, and the country’s first fed- fatality in the U.S., thanks in part to lessons learned from the
eral carbon tax takes full effect in April. The econ- crash. —Alan Levin
omy is strong, and at 5.8 percent, unemployment is
near a four-decade low. Plus, Canadian voters have
historically given prime ministers at least two terms. What Happened
Still, there’s precedent for voters sending
Trudeaus a message. Justin’s father, Pierre, not
Reacting to a cockpit warning that the plane had slowed to
known for humility, won only a plurality of seats
below its recommended speed, the captain yanked up the
in his second election in 1972—more than any
nose, causing the plane to lose more speed and, eventually,
rival party, but not enough for a strong majority
plunge to the ground. Pilots are typically trained to add power
in Parliament. To avoid the same fate, Trudeau
and lower the nose in similar situations, and investigators
will have to show he can connect not just with his
spent months trying to explain the captain’s actions. They
base—liberal, educated, urban, and young—but
were never able to, but they did discover gaps in existing
also with the Tim Hortons-and-denim crowd that
aviation safety rules.
Scheer resonates with.
Lost in the strong top-line economic numbers are
a slump in crude prices, soaring housing prices in
Toronto and Vancouver, and the high-profile depar-
What Changed
ture of General Motors Co. from Oshawa, the sym-
bolic home of Canadian manufacturing. The new Congress passed a 2010 law with safety reforms to address:
minister of rural economic development will help
① Pilot fatigue: Airlines are required ③ Data analysis: Before the accident,
distribute money to regions that increasingly dis- to revise schedules so flight crews only large airlines routinely examined 35
trust the city-slicker Liberals. But the demotion of can get more rest. flight data; now almost all carriers do.
Wilson-Raybould—the first indigenous woman to ② Training: Pilots must now receive ④ Vetting: Pilots applying for jobs
hold the post—intensified an outcry among indige- more realistic training on preventing are required to provide records of
loss of control. previous flight tests.
nous communities, who already blame Trudeau for
failing to achieve a promised reset of relations.
Once pushed aside, Wilson-Raybould wrote a Fatal accidents involving U.S. passenger airlines
public letter about, in part, the importance of judi-
cial independence. On Feb. 7, the Globe and Mail Number of deaths
reported that Trudeau had pressed her last fall to Number of accidents
intervene on behalf of SNC in fraud and corruption In 2001 there were 266 Colgan Air A woman died on a
charges related to the company’s construction proj- deaths in two accidents, flight Southwest Airlines flight
including the crash when an engine failure
ects in Libya. Wilson-Raybould initially fueled the of American Airlines sent debris into her
story by staying silent, and later by retaining a for- Flight 587 in Queens, N.Y. window, causing her to
be sucked partly outside
mer Supreme Court justice to advise her on what New
she would be “permitted to discuss in this matter.” regulations
passed
Trudeau’s path to victory was far from clear in
2015. When he launched his campaign at that sum-
1998 2001 2009 2018
mer’s Vancouver pride parade, he was the young-
est contender and polled in third place. He’s now
the oldest of the three major party leaders, the
incumbent, and, despite everything, still the front- FIGURES EXCLUDE CARGO FLIGHTS AND CRIMINAL ACTS, INCLUDING THE SEPT. 11 ATTACKS.
DATA: NATIONAL TRANSPORTATION SAFETY BOARD
runner. How he weathers the Wilson-Raybould scan-
dal may set the tone for the preelection season. But
his majority—and potentially his job—may depend There have been 90 million flights on U.S.
on voters’ willingness to tolerate what they don’t like The airlines in the past 10 years, carrying billions
about him in favor of what they do. —Josh Wingrove Bottom of passengers, according to National
Transportation Safety Board records. That’s
THE BOTTOM LINE The main opposition candidates for Line a pretty good safety record.
prime minister haven’t posed much of a threat to Trudeau. More
problematic is his penchant for getting in his own way.
The world doesn’t
need another word
for fear.
Unease. Heebie-jeebies. Alarm. The willies.
There are dozens of words for fear in the
English language. But just one for exceptional
home security. SimpliSafe. It blankets your
home with award-winning 24/7 protection
that stands up to the unexpected, from
blizzards to burglars to blackouts. As millions
of our customers know, fear has no place
in a place like home.

Right now, get free shipping

at SimpliSafe.com/bbw
Bloomberg Businessweek February 18, 2019

REAL SPECIAL
ISSUE 37

ESTATE
The housing crisis circles back around 38
Open app, sell house 40
Now’s the time to buy that London penthouse 46
Brad Pitt tried to save the Lower Ninth Ward. Hasn’t worked 50
Sit at home and stare at your Porsche 56
How the five-over-one conquered all 58
Read the fine print on that solar agreement 62
Everybody wants to be the next Blackstone 68
 Bloomberg Businessweek REAL

THE A decade
removed from
LONG the housing

R
bust, we’re
still feeling its
effects, only
now in different

E
ways

By Peter Coy

38

A
C
H
OF THE
LAST CRASH
ESTATE February 18, 2019

If you’re looking for good news in the housing market, there’s HARDLY OVERHEATING
this: Prices aren’t likely to crash the way they did in the historic
bust of 2006-09. During the last boom, buyers, lenders, and ○ U.S. single- ○ UBS Global Real Estate Bubble
builders were swept up in speculation, and prices soared even family housing Index, score as of September 2018
starts*
as a flood of new homes came onto the market. That unsus- U.S. city
tainable combination doesn’t exist today. “A crash is just not 1.8m
Under- Fairly Over- Bubble
something that I see in the cards, even at the local level,” says valued valued valued risk
Greg McBride, chief financial analyst for Bankrate.com.
HONG KONG
Rather than heading for another bust, we’re still feeling the 1.0
MUNICH
effects of the last one. Aggressive homebuilders were wiped
TORONTO
out, and the survivors are cautious about working on spec.
VANCOUVER
Smaller builders that rely on borrowing can’t supercharge 0.2
AMSTERDAM
construction, even if they want to, because their bankers are 3/2000 9/2018
LONDON
afraid of making loans. Even after a gradual rebound from its ○ U.S. Housing STOCKHOLM
nadir in early 2009, the rate of starts on erecting single-family Affordability
Index PARIS
residences remains below the level of the early 1960s, when
SAN FRANCISCO
the U.S. population was less than 60 percent of what it is today. 200
FRANKFURT
Instead of an oversupply of homes, there aren’t enough
SYDNEY
being built. That’s propping up prices at levels that exclude
LOS ANGELES
many Americans from ownership. “We are underhoused,” 150
ZURICH
says Aaron Terrazas, a senior economist for Zillow Group Inc.
TOKYO
The shortage is being aggravated by low unemployment,
GENEVA
which is making it hard to hire workers. Not-in-my-backyard 100
NEW YORK
zoning rules are exacerbating the issue of an already small 3/2000 9/2018
BOSTON
pool of construction-ready lots, and developers claim regula- 100 = a median-
SINGAPORE
tion is driving up costs. In March the National Association of income family can
afford a median- MILAN
Home Builders told Congress that edicts involving lead paint, priced house; 39
CHICAGO
endangered species, and worker safety go too far. a higher value
indicates greater
A tight supply has caused housing prices to climb steadily. affordability -0.5 0 0.5 1.5
Owning a home is simply out of reach in some cities. In the *SEASONALLY ADJUSTED ANNUAL RATE, SHOWN QUARTERLY.
DATA: U.S. CENSUS BUREAU, NATIONAL ASSOCIATION OF REALTORS, UBS
Los Angeles and San Francisco areas, the number of houses
sold in December was the lowest for the final month of the they couldn’t afford. Down payment requirements are mostly
year since 2007. In Manhattan the median price of a condo has higher. These changes have made it harder for people to buy a
topped out at about $1 million (page 48). People who want to house, which isn’t necessarily a bad thing. When Fannie Mae,
buy a place are forced to keep renting, live with their parents, the government-controlled mortgage-buying giant, surveyed
or move to an area with more stock for sale at lower prices. housing lenders recently, only 1 percent blamed tight stan-
Pending home sales were down 9.8 percent in December, dards for credit and underwriting for the weakness in sales.
pushing them to their lowest level since December 2013. Forty-eight percent cited an “insufficient supply.”
Bubbles, which generally involve overbuilding, are more The government is still cleaning up the mess from bad
of a risk in other countries. Last year, Hong Kong was No. 1 loans made before the bust. The U.S. Department of Justice
in UBS Group AG’s Global Real Estate Bubble Index, fol- has accused many companies, including Quicken Loans Inc.
lowed by Munich, Toronto, Vancouver, Amsterdam, London, and Freedom Mortgage Corp., of improperly underwriting
Stockholm, and Paris. San Francisco was the sole U.S. city to Federal Housing Administration loans and then filing claims
make the top 10. Below it were Los Angeles, New York, Boston, for government insurance after borrowers default. (Freedom
and Chicago—the only city on the global list rated underval- Mortgage settled for $113 million in 2016. Quicken, calling the
ued (and that was before the polar vortex). The index takes complaint a “shakedown,” is fighting it in court.)
into account price-to-income and price-to-rent ratios, among Rising mortgage rates also depressed the market in 2018.
other factors, to determine how frothy markets are. While strong economic growth gives more people the where-
But even outside the U.S., there hasn’t been a lot of specu- withal to buy, it leads the Federal Reserve to raise interest
lative building, says Jonathan Woloshin, head of Americas real rates, which makes mortgages pricier. Tendayi Kapfidze,
estate investment strategy at UBS Global Wealth Management. chief economist for LendingTree Inc., says higher rates also
“Nobody asked the question back during the bubble, ‘What shrink the inventory of homes for sale: People are less willing
would happen if prices went down?’ ” he says. “Better to move if their next purchase will have a costlier mortgage.
questions are being asked today.” On Jan. 30 the Federal Open Market Committee signaled it
Tighter regulation has ended dangerous practices, such will be patient about raising rates further. In 2019, that will
as no-documentation loans, which got people into houses just have to count as optimism. 
 Bloomberg Businessweek REAL

40

By Patrick Clark
Illustration by Jay Daniel Wright
ESTATE February 18, 2019

WANTS TO

Known for price gawking,

the real estate app plans to buy
homes by the thousands

41
S
SA
F
FO
AL
OR
LE
R
 Bloomberg Businessweek
ith its tan stucco exterior and red tile
roof, the Rittenhouse home on South
Star Canyon Drive looks a lot like the
other houses in Power Ranch, a large
planned community southeast of
Phoenix.
Mark, a meat buyer for a grocery
chain, and Anne, a nurse, bought the
house for $293,000 in 2010 during the
42 U.S. foreclosure crisis, which hit
the Phoenix area particularly hard. At
the time, local home prices were down
about 50 percent from their peak in
2006. By late last year the market had
recovered, and Mark and Anne were
thinking about moving on.
They still liked Power Ranch, which
had good schools and a network of
parks and hiking trails where they
walked their golden retriever. But a
quirk in the 3,000-square-foot home’s
layout was grating. The kids’ rooms
were the size of typical master bed-
rooms, and the master was even big-
ger. But the living room was the only
usable common space, a vexing issue
when the family’s two boys brought
friends over. Mark suggested they could
throw up a couple of walls and create
a teenage quarantine zone. Anne shot
him down. They needed a new place—
fast. So they went house hunting.
To buy a new home, the Ritten-
houses would have to sell their old
one. They started pricing repairs and
debated whether it made more sense
to sell first and move into a temporary
rental, or if they should try to manage
two transactions at once. Then they
met a buyer willing to pay cash, who
wasn’t hung up on the big bedrooms or
a little bit of dog damage. Their dream
buyer? An algorithm.
The company behind the algorithm
was Zillow Group Inc., better known
for operating apps and websites that
help buyers find homes. In May 2018
the Seattle-based company, whose
home value estimates—“Zestimates,”
they’re called—have become a sort of
Kelley Blue Book for American homes,
started an “instant offers” business.
Zillow would buy houses, fix them up,
and resell them, earning a fee for pro-
viding a simple, fast transaction.
For the Rittenhouses, who sold their
home to Zillow for $513,800 and bought
one with more living space, the process
was easy enough. They entered some
basic information into a website and
then set up a time for a Zillow home
inspector to come by. After that, it was
a question of setting priorities. They
could sell their home the traditional
way. “Or we go with the Zillow route,”
Mark says. “We just accept their offer
on the house and, you know, we don’t
have to worry about anything.” For the
privilege of taking the no-fuss all-cash
offer, they paid Zillow a fee. The com-
pany charges 6 percent to 9 percent,
more than the 5 percent commission
typical for real estate agents in Phoenix.
For decades, selling a house in
the U.S. was a low-tech, high-stress
affair. You hired an agent, fixed your
mind on a number, and decided how
much time and money you wanted to
spend repainting walls, redoing bath-
rooms, and making other repairs that
had seemed too costly or inconvenient
to make for your own benefit. You
locked up your pets, lit some scented
candles, and opened the door to a
“People expect to
press a button and have
magic happen”
REAL
parade of strangers. Then you waited
for an offer—ideally, more than one—
and hoped your agent would be able
to deliver the price you needed so you
could afford your next abode.
There has long been another way,
selling to the kind of investors who
post signs under the highway overpass
promising cash for ugly houses. Those
home “flippers” have an unsavory rep-
utation, partly because they’re seen as
pushing lowball offers to those behind
on their mortgage payments or other-
wise desperate—the newly divorced, the
widowed, or the unemployed.
Zillow is part of a new breed of high-
tech home flippers, sometimes called
“iBuyers,” that also includes Silicon
Valley startups and a small group of
adventurous real estate brokerages that
have instant-offer operations. Armed
with Wall Street and Silicon Valley cap-
ital and algorithms designed to make
granular predictions about home prices,
these investors are buying homes on a
massive scale, wringing tiny profits out
of each flip. That makes them valuable
to the Rittenhouses and the thousands
of other Phoenix-area homeowners who
used them last year. It also makes them
potentially scary to real estate agents,
big-data skeptics, and anyone who
remembers the recent history of inno-
vations in housing finance.
Zillow was started in 2005 by
Rich Barton and Lloyd Frink, who
wanted to do for the housing market
what their previous startup, Expedia
Group Inc., did for air travel—that is,
make it more transparent for consum-
ers. Before online travel agencies such
as Expedia, the best fares were gen-
erally available only to professional
bookers. Likewise, before Zillow, as its
 ESTATE
THE IBUYERS’ EXPANDING DOMAIN
founders would tell the story, shopping
for a home was a bit like shopping in the
dark. Zillow’s mission, they claimed, was
to turn the lights on.
Barton and Frink created the
Zestimate, the company’s effort to use
public data to approximate home prices.
Suddenly, people could look up the mar-
ket value of any home in the U.S. in real
time in the same way they might track
the price of an ounce of gold or a share
of a blue chip stock. Zillow included
property records in all its listing pages,
making it easy to look up how much
your neighbors (or your exes) paid.
Such voyeuristic curiosity accel-
erated the company’s growth. So did
Zillow’s decision to buy its main U.S.
competitor, Trulia, in 2015. An average
of 186 million unique users visited the
company’s websites and mobile apps
each month during the third quarter
of 2018, roughly triple that of Realtor
.com, which averaged about 60 million
users during the same period. Zillow
DATA: COMPANY REPORTS
makes money by offering its big audi-
ence to real estate agents, who pay
for the privilege of putting their smil-
ing faces and contact info in front of
all those house hunters. The company
expects 2018 ad revenue to be about
$1.3 billion.
If agents resented Zillow’s market
power, they generally reserved their
sharpest complaints for the Zestimate,
which they’ve long said creates unre-
alistic expectations, leaving clients
irate when offers come in below the
expected number. Employees developed
an arsenal of stock phrases explaining
why a number was too high or too low.
It’s a Zestimate, not a Zappraisal, Zillow
would say. If you want to know how
much your home is really worth, sell it.
That’s more or less the argument Zillow
used when, in 2017, it was sued unsuc-
cessfully by a group of Chicago-area
homeowners who said the company was
undervaluing their houses.
At the same time, Zillow went out
of its way to position itself as a partner
to real estate agents, not a disrupter,
and at first resisted the iBuyer trend.
Spencer Rascoff, chief executive officer
since 2010, liked to point out that Zillow
sold ads, not homes. But as the pio-
neer Opendoor, which has raised more
than $1 billion in venture capital since
February 18, 2019
○ Knock gives owners the chance to
“trade in” their home for another
one. Co-founded in 2015 by two
former Trulia employees, it’s
raised more than $600 million.
○ Offerpad, co-founded in 2015
by an executive who helped build
the Blackstone Group’s single-
family rental empire, has raised
$410 million.
○ Opendoor, the pioneer and
biggest iBuyer, counts PayPal
veteran Keith Rabois as a
founder. It’s spending about
$4 billion a year to buy homes.
○ Perch is led by Court
Cunningham, formerly of ad-
tech company Yodle. It’s raised
$30 million and operates in the
San Antonio and Dallas-Fort Worth
metro areas.
○ Redfin, which launched its
tech-powered brokerage service
in 2006 and went public in 2017,
is buying and selling homes in
five cities.
○ Zillow plans to be buying and
selling houses in 14 cities by
fall 2019.
43
its 2014 founding, grew—and copycats,
including startup Offerpad and bro-
kerage Redfin Corp., started their own
efforts—Zillow executives reconsid-
ered. If getting an offer from an iBuyer
became a crucial step in the selling pro-
cess, they worried, Zillow could lose
its audience and its advertising base.
What’s more, market researchers kept
finding that consumers said they’d pay
a modest premium to get a cash offer.
“People expect to press a button and
have magic happen,” says Rascoff, a
43-year-old former Expedia execu-
tive who’d earlier started the travel
search engine Hotwire, which he sold
to Expedia for $700 million. Getting into
the business of buying homes directly,
Rascoff says, was “the only way to
remain in a leadership position.”
By the time Zillow began buying
homes last spring, Rascoff had con-
cluded that the new business would
play to the company’s strength in valu-
ing homes and could be profitable in
its own right. If the company were
the buyer in 5 percent of transactions
in the country’s biggest housing mar-
kets, the business would generate
 Bloomberg Businessweek
more than $1 billion in annual profit,
he said during a call with investors in
May. Three months later, after Rascoff
announced Zillow was acquiring a mort-
gage company, he did some more back-
of-the-envelope math, determining that
Zillow could take in $800 million a year
in fees for making home loans. The
company has also said it will sell leads
to real estate agents who want to reach
sellers who’ve already turned down a
Zillow offer, a business that could be
worth an additional $1 billion in rev-
enue, according to Mike DelPrete of
the University of Colorado at Boulder.
Wall Street has seemed more inter-
ested in the risks of Zillow’s pivot than
any possible payoff. Shares in the com-
pany fell 7.3 percent, to $49.84, the day
after Rascoff made his announcement;
they’ve declined sharply since. A slow-
ing housing market and some unpopu-
lar changes to Zillow’s ad-sales model
arguably had a bigger impact on the
stock, which is at about $36 per share.
44 Concerns that the new business would
require large investments and distract
from the company’s main business hav-
en’t helped either.
Zillow, the skeptics said, was mov-
ing from a high-margin business—online
advertising—into a capital-intensive,
low-margin one. (Infomercials notwith-
standing, home flipping is generally a
hard way to try to get rich.) The com-
pany would have to add billions of dol-
lars in debt, expose itself to the risk of
declining home prices, and hire thou-
sands of workers to inspect, repair, and
manage its properties.
Steve Eisman, a well-known inves-
tor who famously bet against subprime
mortgage bonds ahead of the fore-
closure crisis, told Bloomberg Radio in
“A person who’s lived in a
house for 10 years has a pretty
good algorithm in their head”
August that he’d decided to short shares
of Zillow. Flipping distressed homes is
a decent business in a good economy,
he said, but it’s a small business at best.
Moreover, making offers at fair-market
prices, as Zillow intended, is a lot risk-
ier than traditional home flipping,
because sellers will pull the trigger only
if they know they’re getting a good deal.
“Why would a nondistressed seller sell
their home” to Zillow, Eisman asked.
“There’s only two possibilities for that.
Either, one, Zillow has mispriced the
house,” he said. “Or there’s something
wrong with the house.”
Rascoff doesn’t like to
describe his company’s homebuying
business as flipping, because of the
stigma, and more important, because
he says it undersells the size of the
opportunity. Only a small number of
people will take a large discount to
sell in a hurry; a greater number will
pay a smaller amount for the con-
venience of not having to deal with
agents and open houses. The corollary
is that Zillow needs to sell its homes
quickly to limit the amount of time it’s
on the hook for mortgage payments,
home-ownership-association fees, and
insurance premiums. It also needs to
keep renovations to a minimum to pre-
serve already small margins.
Not far from the Rittenhouse home,
Zillow’s bare-bones approach was on
display at a three-bedroom house in the
Phoenix suburb of Chandler, where a
group of workers changed lightbulbs,
refitted electrical outlets, and groomed
the succulents. With a kidney-shaped
pool and a classic split layout (the mas-
ter suite on one side of the living room
and the kids’ bedrooms on the other),
REAL
○ Zillow’s stock price
Zillow says it will
buy homes
$70
50
30
10
2/13/15 2/12/19
the house is nice, if unremarkable.
That’s also part of Zillow’s strategy:
Suburban boxes are easier to value
accurately, since there are so many of
them selling at any given time.
Zillow paid $335,300 for the
Chandler house on Sept. 27, collect-
ing a 6.5 percent fee from the seller, or
a little less than $22,000. It budgeted
$8,000 and 10 days for the renovation
and about four months to resell it. That
gave it time to replace the refrigerator
and microwave, repair a leaky toilet,
and make some basic cosmetic fixes,
such as repainting the pool decking.
The outdated master bathroom, on the
other hand, and a purple accent wall
in the living room were left untouched.
“In my past life, I might have added
a closet to the den or put in new tiles
in the master bath,” says Leo Sanchez,
a senior director in Zillow’s Phoenix
office, who previously worked in the
single-family rental industry. “If we
can get away with a touch-up, we’ll do
it that way and save a dollar.”
Of course, renovations are
beside the point if Zillow can’t value
a home properly. In its early days,
the company’s home-price estimator
had a median error rate of 14 percent.
The algorithms improved, but not in
every case.
In 2016, Rascoff sold his four-
bedroom home in Seattle’s Madison Park
 ESTATE
neighborhood for $1 million, 40 percent
lower than what his app claimed it was
worth. Later that year the Zillow CEO
paid more than $1 million above the
Zestimate on a 13,000-square-foot man-
sion in the Brentwood section of Los
Angeles. The company recently awarded
a $1 million prize to a team of computer
scientists whose work is supposed to
help it push its error rate below its cur-
rent 4.5 percent.
But even a 4 percent margin of error
could be problematic in the instant-
offer business. Zillow says it shoots for
a 1.5 percent profit margin on every
house. That means even a small miss
on price can eat into the profit margin
fast. The Chandler house sold at the
end of December for $1,800 less than
the company bought it for, highlighting
Eisman’s concerns.
This isn’t just a problem for Zillow.
“You could argue that because our algo-
rithms are so powerful, we understand
real estate prices better,” says Glenn
Kelman, CEO of Redfin. “You could
also argue that a person who’s lived in
a house for 10 years has a pretty good
algorithm in their head.”
Pricing a home, meanwhile, is easy
compared with managing thousands of
investment properties. A few months
pass from the time Zillow signs a con-
tract to buy a home to the earliest time
it can hope to sell it, meaning the com-
pany has to predict future prices. It
also has to manage risk across its port-
folio, like a quantitative hedge fund that
uses data to invest in houses instead
of stocks. Losing a little money on
one house isn’t a big deal if the com-
pany is making money on others; if the
assumptions it uses to invest turn out to
be wrong on a large scale, the mistake
will be magnified.
Zillow stresses that the company
isn’t making offers based on Zestimates.
It keeps its homebuying business sep-
arate to prevent any appearance of
DATA: COMPILED BY BLOOMBERG
algorithmic monkey business. (The
company could theoretically set
Zestimates low to help it buy homes
cheaply, or set Zestimates high to try
to sell homes for higher prices.) A
human real estate expert lays eyes on
every offer before it goes out, to make
sure the pricing software doesn’t go
haywire. In December the company
sold homes for an average of 2 percent
more than it bought them for, locking
in a profit of $6,000 per home in addi-
tion to the fee sellers paid, according
to Matthew Brooks, a senior analyst at
Macquarie Capital USA Inc.
Zillow says if housing prices
dropped, it could slow its pace of buy-
ing. It could also adjust its fees, rais-
ing them to compensate for the risk
that prices will fall. Even a full-on
housing-market crash, such as the one
that defined Zillow’s early years of exis-
tence, “would present a huge opportu-
nity for us to popularize this type of
○ Phoenix home prices, Case-Shiller Index
700
500
300
100
2006 2019
method of home selling,” Rascoff says,
because sellers would be more eager
to accept cash offers. The question in
that hypothetical “is would we have the
gumption to push through and the forti-
tude to hold hands and say, yeah? And
hold our breath.”
The three main iBuyers in
Phoenix—Zillow, Opendoor, and
Offerpad—bought roughly 4,700 homes
last year, or about 4.5 percent of the
market, according to the University of
Colorado’s DelPrete. Another institu-
tional buyer, the startup Knock, began
operating in the city this month. Brooks
predicts the iBuyers will soon get to
20 percent of sales in the Phoenix mar-
ket. In fact, there are now so many
February 18, 2019
players making “offers” that another
company, HomeLight, recently unveiled
an Expedia-like comparison-shopping
tool to make it easy for homeowners to
get the best price. Zillow, which began
buying homes in Houston on Feb. 11, is
aiming to operate in 14 cities by this fall
as it races to keep up with Opendoor,
which has said it plans to buy and sell
homes in 50 markets by the end of 2020.
The opportunity is “scary, unknown,
dangerous, huge, and awesome,” says
Barton, Zillow’s co-founder and exec-
utive chairman.
In suburban Arizona, which has
mostly recovered from the financial
adventurism of the previous decade,
not everyone sees demand for the ser-
vice Zillow is selling. “I don’t know
what it is about Phoenix that it attracts
every experiment in real estate,” says
Wendy Shaw, an agent at Realty One.
When the first iBuyers showed up in
2014, Shaw figured the businesses were
providing a service nobody needed.
Five years later, she concedes the 45
companies are here to stay and hopes
most buyers will use them to estab-
lish the minimum amount they’ll sell
for. “Instant offers give me a thing to
compete against,” she says. “Sellers are
coming to me saying, here’s my floor.
Now what can you do for me?”
For his part, Mark Rittenhouse is
less enthusiastic about the process now
than when he sold his house. He appre-
ciated the convenience of the deal and
thought he got a fair price, but after
deciding to sell to Zillow because he
wanted to strike a fast deal, he walked
away feeling like the whole thing was a
little rushed. His family’s new home is
close enough that they still walk past
the old one, which is languishing on
the market.
Zillow listed the Rittenhouse home
for $530,900 at the end of October, and
has knocked $11,000 off the ask over
the course of three small price cuts, a
common technique designed to make
a stale listing seem current. That’s led
Rittenhouse to wonder whether Zillow
had applied the best possible strategy.
“We thought they started a little
high,” he says. 
 Bloomberg Businessweek REAL ESTATE

THE UPSIDE
OF A GLOBAL
To lure house hunters, sellers of high-end homes are slashing prices by as
much as 30 percent. Many metro areas are succumbing to downward pressure
from the U.S.-China trade war, uncertainty in Europe, rising interest rates,
D
or a combination of all three. Of course, all real estate is local, so some
discounts are better than others. Here’s where policymakers, central bankers,
and developers are creating an environment for juicy deals today—or
O
W
even better bargains tomorrow. —Jack Sidders

N
One Hyde Park Private jetty in Avalon Beach

46 T
U
SYDNEY
BY THE NUMBERS Australian home foreign buyers, such as higher
prices have fallen more than sales taxes, have only made

R
6 percent since their October it worse for investors, with
2017 peak. The decline in many pulling out of the market.
Sydney has been sharper—about Because interest rates are at

LONDON 12 percent—making this the

worst slump in four decades.
record lows and the country’s
economy is growing modestly,
Economists have predicted that it’s hard to see the window

BY THE NUMBERS Home values in the
city’s prime neighborhoods are
19 percent below their 2014 peak,
according to broker Savills Plc.
WHAT HAPPENED? Few sellers anywhere
have faced such a poisonous economic
cocktail as those in the Chelsea,
Kensington, and Westminster
districts, where tax changes on
luxury properties have hit hard.
Add in Brexit and an anti-money-
laundering crackdown on cash from
Australia’s most populous city
could see an additional 8 percent
drop this year.
WHAT HAPPENED? Easy credit
caused prices to go crazy, then
policymakers stepped in with
a series of cooling measures
including a restriction on banks
from issuing interest-only
loans popular with speculators.
Regulations designed to deter
N
for bargain shopping closing
anytime soon.
ACT NOW! This four-bedroom home
in Avalon Beach in Sydney’s
Northern Beaches district
comes with a private jetty,
a boathouse, and a koi pond.
Listed for A$6.9 million
($5.3 million) in December 2017,
it’s now going for A$4.3 million,
a 38 percent discount.

40%
countries such as Russia and China,
and demand for high-end homes has
dried up. The discounts were enough
to lure hedge fund billionaire
Ken Griffin to spend £95 million
($122 million) on a mansion near
Buckingham Palace in January, a
cut of almost 35 percent from the
original price.
ACT NOW! A five-bedroom home in the
city’s most expensive apartment
block, One Hyde Park, has been
languishing on the market for
two years. The asking price is ○ The discount you’d get on a London property buying with
£50 million, down from £55 million. U.S. dollars at the start of this year vs. 2014
 A Mayfair by the Sea 8 apartment
SPAIN’S LOPSIDED REAL ESTATE REBOUND
○ Percentage change in number of
new building licenses, 2008-18
Biscay
LONDON: IAIN MASTERTON/ALAMY. SYDNEY: COURTESY FINE & COUNTRY. HONG KONG: COURTESY MAYFAIR BY THE SEA 8. DUBAI: COURTESY SAVILLS
Madrid
Málaga
DUBAI
BY THE NUMBERS Dubai’s
residential prices are down about
25 percent since their 2014 peak,
according to broker Jones Lang
LaSalle Inc.
WHAT HAPPENED? If politicians
and central bankers are to
blame in most other places,
overzealous developers in Dubai
are responsible for the emirate’s
slump. Dubai is planning to erect
a record 31,500 homes this year,
double the annual demand of the
past five years, raising the risk
-100
Barcelona
Alicante
NOTE: DATA ARE FOR JANUARY TO JULY OF EACH YEAR.
DATA: MINISTRY OF PUBLIC WORKS, SPAIN
that prices could fall further,
according to JLL.
ACT NOW! A typical six-bedroom,
7,000-square-foot Signature
Villas home on the artificial
archipelago of Palm Jumeriah,
among the desert city’s most
expensive neighborhoods, costs
20.5 million U.A.E. dirham
($5.6 million), according
to Savills. That’s down from
22.75 million dirham in 2014,
the broker says, an almost
10 percent discount.
HONG KONG
BY THE NUMBERS Home prices have been clipped
almost 10 percent since August, according
to Centaline Property Agency Ltd.’s Centa-
City Leading Index. Several forecasts expect
another 10 percent fall in 2019, depending on
the direction of interest rates, with broker
JLL warning in November that prices could
plummet by 25 percent in 2019 if the U.S.-
China trade war worsens.
WHAT HAPPENED? Because of the Hong Kong
currency’s ties to the U.S. dollar (it
effectively imports American monetary policy),
borrowing costs have gone up as the Federal
Reserve has hiked rates. Also weighing on
prices: an upcoming vacancy tax designed to
stop developers from hoarding empty apartments
in the hopes that they fetch better prices
later. There are signs that investors are
already unloading empty units in anticipation.
ACT NOW! At Mayfair by the Sea 8, a development
in the Tai Po neighborhood, apartments are
selling for an average of HK$16,000 ($2,039)
a square foot, more than 10 percent lower than
the price of nearby developments last summer.
0 20
25%
○ How much prices could plummet in Hong
Kong in 2019 if the U.S.-China trade war
worsens, according to broker JLL 47
Palm Jumeriah
 Bloomberg Businessweek REAL ESTATE

6
A HOUSING BOOM GOES BUST OUTSIDE BEIJING

○ Year-over-year price changes show

slumps in the area, 2016-18
+100%

75

○ Number of years 50
Steven Cohen’s penthouse
has been for sale 25

-25
g

ng

an
u
in

ji

in

ia

gh

an
ko

fa

’
ij

an

od

nj

an

ch

Gu
ia

ng
Be

Ti

Ba

Ya

Xi

Da
gj

La
an
Zh
DATA: CHINA REAL ESTATE INFORMATION CORP.

VANCOUVER
West Vancouver

BY THE NUMBERS Home prices fell

4.5 percent in January from a year
earlier, and they’re now 8 percent
below their June 2018 peak, according
48 to the Real Estate Board of Greater
One Beacon Court Vancouver. High-price districts are
faring much worse; properties in West
Vancouver, which had been attractive

NEW YORK to overseas buyers, are down

BY THE NUMBERS In the last quarter of
2018, the median price of Manhattan
condos dropped below $1 million for
the first time in three years, down
5.8 percent from a year earlier,
according to broker Douglas Elliman
Real Estate. For the most expensive
homes, the market is worse: Sales
of Manhattan properties priced at
$5 million or more dropped 22 percent
last year from 2017, their steepest
decline in a decade, according to
Stribling & Associates Ltd.
WHAT HAPPENED? A postrecession
building boom led to a glut of
condos. The annual inventory of
homes for sale rose 15.4 percent
in 2018, according to real estate
website StreetEasy. At the same
14 percent from the previous year.
WHAT HAPPENED? After prices surged
about 63 percent from December 2013
to December 2018—putting owning a
home beyond the reach of most locals—
Vancouver’s market developed an
unhealthy dependency on foreign cash.
China’s clampdown on money fleeing
the country and local measures
in Canada, including a 20 percent
foreign-buyers tax, have discouraged
the overseas high-rollers. At the
same time, the Canadian government’s
new tighter mortgage rules have
made it even harder for locals to
afford homes.
ACT NOW! A five-bedroom house in
West Vancouver for sale since
December 2017 is now listed for
C$6.9 million ($5.1 million) after a
C$1 million price cut in November.

63%
time, federal changes that limit
deductions on property and state
taxes and mortgages have encouraged
people to flee to lower-tax states.
More than 8 percent of New York
state residents will face higher
taxes for 2018, with 29 percent of
the highest earners seeing a hike,
according to the Tax Policy Center.
ACT NOW! In January, hedge fund
manager Steven Cohen slashed the
price of his penthouse at One Beacon
Court to $45 million, a $70 million
cut from its asking price of ○ The uptick in Vancouver home prices from
$115 million in 2013. December 2013 to December 2018
 The Ailesbury Victorian

February 18, 2019

○ How Do You Say

“Penthouse” in German?*

DUBLIN One city ripe for a future correction:

BY THE NUMBERS Prices in Dublin’s
most desirable districts, including
the D2 and D4 postal codes, fell
2.8 percent last year, according to
broker Knight Frank LLP. That ended
five years of price growth following
a 56 percent collapse citywide
starting in 2008.
WHAT HAPPENED? Given how
interconnected Ireland’s economy is
with the U.K.’s, Brexit wobbliness
is at least partly to blame for the
falling prices, according to Knight
Frank. The weak pound is deterring
wealthy U.K. buyers, and limits
introduced in 2015 by the Irish
Central Bank on the amounts that can
be borrowed have also helped cool
the market. First-time buyers, for
example, now have to put down at
least 10 percent of the price.
ACT NOW! A five-bedroom, five-
bath Victorian home on Ailesbury
Road, one of the most sought-after
Dublin avenues, is now listed at
€6.5 million ($6.8 million), a
13 percent discount from its 2016
asking price.
Munich. It saw a 9 percent increase
in home prices last year, and they’ve
doubled in the past decade. While all
of Germany’s big cities have seen rapid
price appreciation from the influx
of migrants and record-low interest
rates, the Bavarian capital has been
particularly affected by the global
corporations that call it home, such
as Siemens, Allianz, and BMW. Gross
domestic product growth in Munich has
significantly outpaced that of Germany
as a whole, and unemployment is at its
lowest level in 20 years.
*ANSWER: Penthouse

The Bosphorus DISASTER PRICING

KWAN
○ There are outliers, but climate change seems
to be driving down U.S. home values

49
NEW YORK: ANDREW HARRER/BLOOMBERG. VANCOUVER: RAMUNAS BRUZAS/ALAMY. DUBLIN: COURTESY SAVILLS. ISTANBUL: DIEGO CUPOLO/NURPHOTO/GETTY IMAGES

U.S. HOME PRICES BY RISK OF NATURAL DISASTER

SHAWNA
Very low risk zone Low Moderate High Very high

ISTANBUL

AND
Floods Hurricanes Wildfires +10%

BY THE NUMBERS Luxury home values in

KOC,
the Turkish city dropped 4.3 percent
in the final quarter of 2018 from
0
the previous one, bringing the
12-month decline to 10.4 percent,

CAGAN
according to Knight Frank.
WHAT HAPPENED? An expanding middle
class, readily available mortgage -10
financing, and migration seem to
2000 2017 2000 2017 2000 2017

FATTAH,
be supporting the market for more
affordable homes, but the sharp
drop in the value of the lira has
decimated the top end. Turkey’s
currency is down almost 41 percent TOTAL
against the U.S. dollar in the
past two years amid political PROPERTY
ZAINAB

tensions—with the U.S., within the VALUES

Middle East, and inside Turkey. New York
Additionally, investors have been LOST BY New
spooked by President Recep Tayyip Jersey
ZIP CODE,
Erdogan, who lashed out against
BOURKE,

his central bank, raising concerns 2005 TO Atlantic

about its independence. 2017 Ocean
ACT NOW! About 60 sought-after
mansions on the banks of the
Bosphorus—many of them built during
the Ottoman Empire—were for sale as
CHRIS

of October, according to a survey

of brokers by Agence France-Presse.
Although listings can be opaque, one +$500m
modern six-bedroom home is for sale $300m-$400m
for 55 million lira, which converts $1m-$100m
——W I T H

to $10.5 million now compared with

$14.5 million a year ago.
DATA: ATTOM DATA, FIRST STREET FOUNDATION
 Bloomberg Businessweek REAL

WHEN
T R IED
50

T O
S A VE
T H E LO
N I NTH
ESTATE February 18, 2019

BRAD
PITT His Make It Right Foundation built
109 homes in New Orleans, but
critics say many are badly flawed

51
By Rob Walker

WER
WARD
 Bloomberg Businessweek
In the months that followed Hurricane Katrina in
2005, there was much discussion about how to rebuild the
New Orleans neighborhoods devastated by flooding. Some
even questioned whether certain areas should be rebuilt at
all: The city’s population would likely be smaller; perhaps
its footprint should be revised? The Lower Ninth Ward, for
instance—a working-class black neighborhood ravaged when
a floodwall failed—might be a lost cause, some said, because
it was so severely damaged.
Neighborhood residents and activists pushed back, insist-
ing the Lower Nine deserved rebuilding. One of the most high-
profile efforts to do so came from an unlikely figure: Brad Pitt.
In 2007 the actor founded the Make It Right Foundation, a
nonprofit whose mission was to build affordable housing to
help Lower Nine residents come home. Attracting designs
from prize-winning architects and committing to the highest
energy-efficiency standards, Make It Right pledged to build
150 residences. As Pitt later wrote, the organization aimed to
make “a human success story of how we can build in the future,
how we can build with equality, how we can build for families.”
Over seven years, 106 houses were completed (three were
duplexes, making the total number of residences 109). But
somewhere around late 2015, new construction came to a
standstill. Since then, little by little, the story of the project has
changed. Residents have complained about flaws in design, con-
struction, and materials; last summer a house had to be demol-
52 ished. “Make It Right seems to have made it blight,” a local
investigative publication, the Lens, sneered. Even Architectural
Digest, which years earlier had praised the project effusively,
asked, “Where Did Brad Pitt’s Make It Right Foundation Go
Wrong?” The organization seemed to fall silent. A spokesman
for Pitt declined to comment for this story. Attempts to get Make
It Right officials, former executives, and various associated law-
yers to comment on the record were unsuccessful.
In short, Make It Right has gradually evolved from a bold
example of design’s potential to solve problems into a cau-
tionary tale. The lasting lesson of the project may be that the
excitement that flows from flashy opening fanfare can only do
so much. The test is everything that follows.
Pitt came to know New Orleans during shoots for
movies such as The Curious Case of Benjamin Button; in 2007 he
and Angelina Jolie bought a house in the French Quarter. After
Katrina, Pitt decried the injustice of the Lower Ninth Ward suf-
fering because a federally guaranteed floodwall had failed.
Floodwater from the industrial canal wiped out block after
block of homes, many built between the 1920s and ’70s. The
“Lower” name refers not to the area’s elevation, which at its
lowest is still higher than low spots in the Gentilly and Lakeview
neighborhoods, but rather to its orientation to the Mississippi:
It’s on the downriver side of the canal. Rebuilding in the area
lagged, and when government programs proved inadequate,
a slew of nonprofits emerged.
Pitt connected with green-focused initiatives to rebuild in
the Lower Nine. With an evidently genuine interest in architec-
ture, he was able to attract designs from both local architects
REAL
and some of the field’s best-known global names: David Adjaye,
Shigeru Ban, Frank Gehry, Thom Mayne. He was also willing to
listen, recalls Steven Bingler, of Concordia in New Orleans, one
of the Louisiana architects brought in early on. Bingler helped
organize community meetings that led Make It Right to priori-
tize former residents of the most devastated chunk of the neigh-
borhood. Pitt, Bingler says, was “100 percent committed” and
willing to make tough decisions.
The new houses weren’t free, but at about $150,000 (and
often generously financed), they were much less than they
cost to build. Featuring solar panels and other energy-efficient
details, they promised low utility bills. The designs were mod-
ernistic, with idiosyncratic rooflines. Make It Right buyers could
pick the model they wanted. Pitt committed $5 million of his
own money, and his star power helped to draw big donations at
celebrity-studded galas, plus financial support from the Clinton
Global Initiative and other sources. By 2009, with millions in
funding, the project had completed its first half-dozen homes.
At its founding, Make It Right worked with
Cherokee Gives Back—a philanthropic offshoot of the
Cherokee Fund, a North Carolina private equity company
specializing in cleanup and redevelopment of contaminated
sites—on construction planning, logistics, and back-end
organizational support. Tom Darden, the son of Cherokee’s
PHOTOGRAPHS BY BRYAN SCHUTMAAT FOR BLOOMBERG BUSINESSWEEK. PREVIOUS SPREAD: MARK MAINZ/GETTY IMAGES. *RESEARCH PROVIDED BY RESIDENT CONSTANCE FOWLER
founder, became Make It Right’s executive director. Youthful
and confident, Darden presented a charismatic face for the
organization. Plenty of residents seemed to be fans: “He
cared about us,” says Kamaria Allen.
But multiple sources who worked with the organization say
its early years were better intentioned than they were man-
aged. Thom Pepper, executive director of Common Ground
Relief Inc., a nonprofit formed shortly after Katrina that was
a member of Make It Right’s advisory committee, recalls the
foundation spending lavishly on equipment rental and other
overhead. “They would have us come to these brunches at
Tipitina’s,” he says, referring to the New Orleans music venue.
Common Ground built one Make It Right house, but the pro-
cess was chaotic, with design specs that seemed to change daily.
Pepper says the group chose not to build for Make It Right again.
A confidential May 2014 Make It Right board report suggests
the organization, which had so far taken in $48 million in gifts
and grants, was grappling with money problems. Make It Right
by then employed 27 staffers and eight independent contractors
to manage work on 100 or so houses. The report noted that an
upcoming fundraising gala, featuring Bruno Mars, Chris Rock,
and other stars, was lagging financial expectations.
Back in the Lower Nine, five years after the first houses went
up, “unexpected repair costs” totaled $1.8 million, the report
said. Notably, 37 decks and porches had been “identified to have
structural issues involving product failure.” These were, the
report said, mostly connected to an experimental lumber prod-
uct called TimberSIL. At the time, 19 decks had been replaced at
a cost of roughly $500,000. Make It Right later sued the maker
of TimberSIL, then settled, though the details are confidential.
The problems weren’t universal or insurmountable, one
ESTATE February 18, 2019

53

VACANT MAKE IT RIGHT HOUSES IN THE LOWER NINE*

 Bloomberg Businessweek REAL

former Make It Right employee says, but the organization
was focused on a happy public image. “They just didn’t want to
say: ‘Sorry, we screwed some things up,’ ” this person says. Bus
tours rumbled through the area, offering a peek at name-brand
architecture in what had been a disaster zone. In August 2015,
Pitt told the Times-Picayune, “I get this well of pride when I see
this little oasis of color and the solar panels” and when residents
tell him of their low utility bills. “It’s a reminder of why we push
like we push. It makes it all worthwhile.” This seems to have
been his last substantial public comment about Make It Right.
Multiple observers say 2016 marked a kind of turning point
for Make It Right’s relationship with the neighborhood. Darden
left, with no public explanation. The neighborhood meet-
ings Make It Right used to host petered out. The organization
stopped talking to the press; residents say they were ignored.
Its website fell out of date and is peppered with dead links,
and the nonprofit doesn’t appear to have made the requisite
tax filings for a 501(c)(3) since 2015. In September 2016, Pitt and
Jolie announced their divorce, and subsequently sold their New
Orleans property. The foundation’s staff dwindled to a hand-
ful. As Pepper, of Common Ground, recalls, “All of a sudden,
nobody’s there.”
Allen now shares a Make It Right-built house
with her parents and brother. It’s on the same lot, she says, as
the house she grew up in. She and her family are precisely the
54 kind of Lower Nine residents the nonprofit was meant to help.
Allen bought a Make It Right house of her own in 2011 for
Floodwall breach Make It Right vacant parcel
Make It Right house Other building
$130,000, one of several in the neighborhood designed by
Adjaye Associates of London that featured a top-floor deck cov-
ered by a flat roof. She loved it, but within months mold and
mushrooms started cropping up inside. She says Make It Right
didn’t make the structural and material changes she believes
were needed to fix the problem permanently. In 2013 the orga-
nization agreed to buy the house back from her. Almost six
years later, it remains vacant, with the lawn neatly trimmed,
but the flat roof notably bowed. Flat roofs feature in several of
the most troubled Make It Right properties; critics say they’re
a bad idea in New Orleans, which endures much heavy rainfall.
Adjaye Associates didn’t respond to a request for comment.
Another owner, Constance Fowler, bought her Make It Right
home in 2014, when the organization started making them avail-
able to teachers and first responders as well as former Lower
Nine residents. She became concerned about a Make It Right
home next door that was no longer occupied. An extensive
repair process had stalled, and Fowler says the house stood
half-complete for more than a year, its roof removed and
replaced by a tarp. Convinced it was a mold-spawning health
hazard, Fowler—who hasn’t had serious problems with her own
house—complained repeatedly to the city. Make It Right paid
for the building’s demolition.
Fowler walked me around the neighborhood, pointing out
potential problems and past repairs. Working with a visiting
graduate student doing a thesis on Make It Right, she’s com-
piled a spreadsheet detailing the problems. Of the 105 remaining
Make It Right structures, she says, 44 have undergone notable
L

When the canal floodwall

N A

failed in 2005, hundreds LOWER NINTH WARD

of homes were irreparably
C A

damaged or destroyed
outright; today the
Lower Ninth Ward has only
one-quarter of its pre-
Katrina population
ST. CLAUDE
A L
R I

DATA: OPENSTREETMAP, GOOGLE EARTH, ORLEANS PARISH ASSESSOR’S OFFICE

S T
D U
I N

5012 N. Derbigny,
built in 2011,
was demolished in
2018 because of
mold damage

Property records show that

Make It Right owns more
0.1 mi than 40 undeveloped lots,
including a flood-damaged
0.1 km auto garage
 ESTATE
renovation or repair—material replacement, flat-porch roofs
remade at an angle. An additional 17 show evidence, in her
judgment, of mold or rot. At least six are vacant. In 2016 and
2017, multiple residents say, Make It Right sent an engineering
team to inspect its homes but never shared the results, even
with residents who asked repeatedly.
In September attorneys filed a lawsuit seeking class-action
status against Make It Right on behalf of two property owners.
It argues that the nonprofit should be on
the hook for full repairs under Louisiana’s
New Home Warranty Act, plus additional
compensation for mental distress. Make It
Right has filed to have the suit moved to
federal court, and Pitt and other named
defendants have introduced motions to
have themselves removed from the case.
The same month the nonprofit did
some finger-pointing of its own, filing a
lawsuit against John C. Williams Architects,
the New Orleans firm that, according to the
complaint, served as the project’s execu-
tive architect and was ultimately respon-
sible for the final technical drawings used
to build most of the Make It Right houses.
“Moisture and water intrusion problems,”
among other issues, the suit alleged, were F O W L E R ( L E F T )
the result of “defective design work” by
Williams. “Rectifying the problems for all
impacted homes is estimated to cost at
least $20 million,” it claimed. The firm’s
namesake founder, who’d defended the
project against critics in the past, issued
a statement calling the suit “shocking and
insulting” and has moved to have it dis-
missed on technical grounds.
Neither Fowler nor Allen has joined
the lawsuit, which they see as more
beneficial to lawyers than residents.
Fowler wants the city government to get
involved. Allen wants Make It Right to
address lingering problems. She cites a
variety of mold and ventilation issues at
her parents’ house and health problems
she and her family endure. The organi- G R E E N
PHOTOGRAPH BY BRYAN SCHUTMAAT FOR BLOOMBERG BUSINESSWEEK
zation simply stopped returning her calls, she says. She’s
tried to persuade her parents to abandon the property. “We
could rent something,” she says. “I would just walk away.”
If Make It Right’s debut attracted oversize
praise, maybe now it’s attracting oversized criticism pre-
cisely because of its flashy origins. While it remains silent,
some residents, steadfastly committed to the neighbor-
hood, say criticism of Make It Right is overblown. Robert
Green is one. Outspoken and energetic, he’s become a kind
of neighborhood figurehead. He grew up in the Lower Nine,
lost his mother and a granddaughter in the flood, and lived
February 18, 2019
in a Federal Emergency Management Agency trailer on his
family’s land when the area had been reduced to acres of
rubble. He’s a fierce advocate for what Make It Right has ac-
complished. Darting around his airy living room, he picks
through memorabilia and press clippings. “They came in,
and they built houses!” he says.
He points out a set of stone steps, the last remnant of the
house his family owned for decades. “They were able to help
us come back,” he says. “It wouldn’t have
happened without Make It Right.”
Pepper, of Common Ground, says most
of the homes, reflecting homeowner pride,
seem well-maintained. Bingler, whose
Concordia architecture company was
among the first asked to participate, hasn’t
been in touch with anyone from Make It
Right in years. The 10 homes his company
designed—with a pitched roof and promi-
nent, New Orleans-style front porch—have
had only routine maintenance issues.
More important than any problems
with Make It Right’s 100 or so houses,
Green says, “are the 3,000 houses that
are not here.” Now there’s at least a sense
of a place coming back. “I would much
AND ALLEN
rather have a house to complain about,”
he says, “than no house at all. And I’m 55
not complaining.”
New Orleans attracted a swarm of
well-intentioned charitable or quasi-
charitable efforts after Katrina, often
involving people from outside the region.
Many of these efforts sputtered out or
flat-out failed. But some organizations
have persisted.
Right around the time Make It Right
was getting under way, Barnes & Noble
Inc. founder Leonard Riggio started
Project Home Again to build houses for
residents of Gentilly who’d lost their
home. Riggio wasn’t interested in fanfare;
there were no galas and relatively little
press. Home Again fulfilled its mission—
building 101 houses—and kept going. Its designs were simpler
and less conspicuous, and its structure and relationships made
it possible to transition to a successor organization, Home by
Hand, which builds affordable housing across the city. These
efforts have resulted in 171 houses, with plans for dozens more
and a pipeline of more than 130 qualified buyers.
Oji Alexander, Home by Hand’s executive director, empha-
sizes that he has nothing critical to say about Make It Right,
whose mission he admires. But he does note the importance
of open communication, especially with the people his proj-
ect means to serve. “Folks call us before they go to the paper,”
he says. And more to the point, someone answers. 
 Bloomberg Businessweek REAL ESTATE

DUBAI ON
THE ATLANTIC
Luxury-branded residences are the ultimate statement of
wealth—or the pinnacle of ostentation—and they’re as pop-
ular as ever with buyers who like the perks that come from The most exclusive brands
being intimately affiliated with names that cater to the
wealthy. There are more than 400 properties globally, and
are redefining what it means
an additional 110 will open by 2023 for a total 69,000 units, to live in luxury
says Alexandros Moulas, a director of international develop-
ment at Savills Plc, a London property consulting company.
By Frederik Balfour
An idea that started stateside—Four Seasons Holdings Inc.
opened private residences in Boston in 1985—before spread-
ing to Europe, the Mideast, and Asia is taking on new flair.
At the Porsche Design Tower, which opened in 2017 near
Miami in Sunny Isles Beach, Fla., a car elevator takes Spyders
and 911s directly to private sky garages, which are sepa-
rated from apartments by a glass wall. At the Aston Martin
Residences on the Miami River, there won’t be a car eleva-
tor when the building is completed in 2022, but there will
be no mistaking where you are: The brand’s logos will adorn
56 the lobby entrance, concierge desk, and common areas of
upper floors. Amenities include a 24-hour valet service, a
berth for a superyacht, and a clubhouse on the 55th floor
with an infinity pool. A 700-square-foot one-bedroom will
start at $500,000.
Hotel chains such as Four Seasons and Mandarin Oriental
International Ltd. account for the overwhelming majority
of the properties. They offer bragging rights to those living
there (Philippe Starck is a founder of Yoo Residences) and
let developers charge 31 percent more on average than for
comparable nonbranded apartments, according to Savills.
Fashion labels continue to sign licensing deals with devel-
opers to create branded experiences. Bulgari’s London

PORSCHE DESIGN TOWER: PHOTOGRAPHS BY DEVIN CHRISTOPHER FOR BLOOMBERG BUSINESSWEEK

residences, which opened in 2012, are sold out; its Dubai
equivalent, completed last year, features 1,480-square-
foot one-bedrooms for $1.2 million in a 168-unit building
where 24 units remain unsold. The Armani Residences in
Dubai, housed in the Burj Khalifa, the world’s tallest build-
ing, opened in 2010; a one-bedroom starts at $1.3 million ELEVATORS AT VERSACE’S MILANO

and boasts access to services at the adjacent Armani hotel, RESIDENCES IN MANILA (TOP);THE ARMANI

which include 15 percent off spa treatments. A one-bedroom SPA AT DUBAI’S BURJ KHALIFA

at Versace’s Milano Residences in Manila, which opened

in 2015 and is part of a development that includes Trump
Tower Philippines, costs $320,000. “This whole lifestyle has
to appeal to you,” says Chris Graham, managing director of
Graham Associates, a London-based real estate marketing
firm. “You aren’t just wearing the brand, you’re surrounded
by it.”
Simon Cohen, a 69-year-old retired pathologist, closed
on his five-bedroom, six-and-a-half-bath, $6.7 million unit at
Porsche Design Tower in December. He hasn’t moved in yet,
pending the sale of his other home, but when he does, he
plans to display his Bentley, Lamborghini, and two Rolls-
Royces in his four-car sky garage while keeping his Porsche
in the ground-level lot. “The No. 1 factor was the display of
the cars in your unit,” says Cohen, who lives alone, describ-
ing what attracted him to the building. “It’s the ultimate man
cave.” —With Jonathan Levin
AMENITIES AT THE PORSCHE DESIGN TOWER’S
57
BEACH, SPA, AND POOL NEAR MIAMI

THE TOWER’S SKY GARAGES LET RESIDENTS SHOW OFF THEIR PORSCHES, LIKE THIS SPEEDSTER
 DOES
REAL

THISTHISTHIS
MID-RISE LOO These buildings are in almost every U.S. city.
They range from three to seven stories tall and can stretch
for blocks. They’re usually full of rental apartments, but
they can also house college dorms, condominiums, hotels,
58 The story—and the or assisted-living facilities. Close to city centers, they tend
toward a blocky, often colorful modernism; out in the sub-
risks—behind the boxy urbs, their architecture is more likely to feature peaked roofs
and historical motifs. Their outer walls are covered with fiber
apartment buildings cement, metal, stucco, or bricks.
They really are everywhere, I discovered on a cross-
that are changing country drive last fall, and they’re going up fast. In 2017,
187,000 new housing units were completed in buildings of 50
America’s cities units or more in the U.S., the most since the Census Bureau
started keeping track in 1972. By my informal massaging of
the data, well over half of those were in blocky mid-rises.
These structures’ proliferation is one of the most dramatic
changes to the country’s built environment in decades. Yet
when I started asking around about them, they didn’t seem
to have a name. I encountered someone calling them “stump-
ies” in a website comment, but that sadly hasn’t caught on.
It was only after a developer described the style to me as
By Justin Fox five-over-one—five stories of apartments over a ground-floor
“podium” of parking and/or retail—that I was able to find
some online discussion of the phenomenon.
The number of floors and the presence of a podium varies;
the key unifying element, it turns out, is under the skin.
They’re almost always made of softwood two-by-fours, or
“stick,” in construction parlance, that have been nailed
Photographs by together in frames like those in suburban tract houses.
The method traces to 1830s Chicago, a boomtown with vast
Laura Buckman forests nearby. Nailing together thin, precut wooden boards
into a “balloon frame” allowed for the rapid construction
of “a simple cage which the builder can surface within and
without with any desired material,” the architect Walker
ESTATE
THISTHISTHIS
K FAMILIAR?
Field wrote in 1943. “It exemplifies those twin conditions
that underlie all that is American in our building arts: the
chronic shortage of skilled labor, and the almost univer-
sal use of wood.” The balloon frame and its variants still
dominate single-family homebuilding in the U.S. and Canada.
It’s also standard in Australia and New Zealand, and pretty
big in Japan, but not in the rest of the world.
In the U.S., stick framing appears to have become the default
construction method for apartment complexes as well. The big
reason is that it costs much less—I heard estimates from 20 per-
cent to 40 percent less—than building with concrete, steel, or
masonry. Those industries have sponsored several studies
disputing the gap, but most builders clearly think it exists.
They’re also comfortable with wood. “You can make mis-
takes and you can cut another piece,” says Michael Feigin,
chief construction officer at AvalonBay Communities Inc.,
the country’s fourth-biggest apartment owner. “With con-
crete and steel, it’s just a lot more work to fix problems.” If
supplies run out, adds Kenneth Bland, a vice president at
the trade group American Wood Council, builders “know
they can run to the nearest big box and get what they need.”
They can also run to the nearest big-box store to find
workers. Stick construction allows builders to use cheaper
casual labor rather than often-unionized skilled tradespeople.
And it makes life easier for electricians, plumbers, and the
like because it leaves open spaces through which wires,
pipes, and ducts can run. Still, there’s a reason why stick
wasn’t the default for big apartment buildings until recently,
and why these buildings are limited in height: Sticks burn.
It was the Great Chicago Fire of 1871, which
destroyed thousands of balloon-frame buildings, that brought
this lesson home. Before long, the city instituted a ban on
wood construction that’s still partly in place today. New York
February 18, 2019
City had declared its downtown off-limits to wood construc-
tion in the early 1800s, eventually extending the proscrip-
tion to all of Manhattan, plus the Bronx, Brooklyn, and parts
of Queens and Staten Island. By 1930, a list of fire-resistance
best practices compiled by the U.S. Department of Commerce 59
was recommending stick-frame bans in dense urban neigh-
borhoods and a two-story limit for everywhere else. Stick
construction had effectively been banished to the suburbs.
By the second half of the 20th century, the suburbs were
where America was moving, and as they evolved from bedroom
communities into a new kind of city, the stick building evolved
with them—into forms such as the “dingbats” of Los Angeles
(one or two stories atop a carport) and the parking-rich
garden-apartment complexes outside Atlanta, Dallas, and
other metropolises. Building codes evolved, too, as insurers
and fire-safety-equipment manufacturers pushed for scientific,
“performance-based” codes that emphasized lab-determined
fire-resistance ratings over specific materials and incorporated
new technologies such as the automated fire sprinkler.
This gospel spread fitfully in a country where codes were a
municipal affair, but it did spread, abetted by three regional
organizations that produced model codes for cities to adopt
or adapt to their own purposes. The most successful body
was the aspirationally named International Conference
of Building Officials, based in Southern California, whose
Uniform Building Code was by 1970 at least partly followed by
9 in 10 Western cities. The UBC, updated triennially, ushered
in the age of the mid-rise wood-frame apartment building.
Some of the details are lost in the mists of time, or at least
in dusty archives, but the tale seems to have gone like this: The
first UBC, issued in 1927, allowed for wood-frame apartment
buildings three stories high. The risk of earthquakes inclined
officials to be tolerant of such frames, which handle shaking
better than brick walls do; the presence of a large timber
 Bloomberg Businessweek
industry in the Northwest was also a factor. In the 1950s the
story limit increased to four if an automatic sprinkler system
was installed. Square-footage restrictions were eased if building
segments were separated by firewalls—initially masonry, then
simpler-to-install gypsum board. By the 1970s it was possible to
build four wood-framed stories atop a concrete podium. Then,
in the early 1990s, came a breakthrough.
Los Angeles architect Tim Smith was sitting on a Hawaiian
beach, reading through the latest building code, as one does,
when he noticed that it classified wood treated with fire
retardant as noncombustible. That made wood eligible, he
realized, for a building category—originally known as “ordinary
masonry construction” but long since amended to require
only that outer walls be made entirely of noncombustible
material—that allowed for five stories with sprinklers.
His company, Togawa Smith Martin Inc., was working
at the time with the City of Los Angeles on a 100-unit
affordable-housing high-rise in Little Tokyo that they “could
never get to pencil out.” By putting five wood stories over a
one-story concrete podium and covering more of the one-
acre lot than a high-rise could fill, Smith figured out how to
get the 100 apartments at 60 percent to 70 percent of the
cost. The building, Casa Heiwa, opened its doors in 1996, and
the five-over-one had been invented. (“Let’s put it this way,”
Smith says. “No one has challenged me to say that they did
it first.”) The public didn’t take note, but West Coast archi-
60 tects and developers did. They could now get near-high-rise
densities at a wood-frame price. Soon, the rest of America
could, too.
Despite the regional groups’ efforts, many architects,
developers, economists, and federal housing officials still
found local codes parochial and backward-looking, charging
that they thwarted innovation and inflated costs. One
response came from legislatures, which began increasing
state authority over codes. Another came from the regional
groups, which in 1994 started work on a single national code.
Faced with a major challenge resolving differences over
building heights and areas, the responsible committee set-
tled on a somewhat radical precept: If a building could be
built under any of the three old codes, it could be built under
the new one. Under the 2000 International Building Code
(IBC), the stick-built mid-rise podium apartment building
was free to migrate eastward.
REAL
These buildings wouldn’t be going up if no one
wanted to move in, of course. Growing demand, brought on
by demographic shifts, job-growth patterns, and a renewed
taste among affluent Americans for city (or citylike) living, has
shaped the mid-rise boom. So have the whims of capital. Most
multifamily developers build to sell—to a real estate invest-
ment trust, an insurance company, a pension fund, or some
other institutional investor. These owners aren’t interested in
small projects, and their bottom-line focus determines not only
materials but also appearance and layout.
The need for scale dictates hulking “superblocks,” and the
desire to break up these blocks a little explains the colorful pan-
els and other exterior choices. Efficiency dictates the buildings
be wide enough for “double-loaded” corridors, with apartments
on both sides, but not so wide that the apartments are narrow
and dark. This in turn favors a structure shaped like a right-
angled U, C, E, or S. Two- or three-bedroom apartments work
best at the corners, so one-bedrooms and studios predominate.
The boom has also been shaped by zoning that sometimes
leaves downtowns and suburban commercial districts as the
only practical spots for new housing. Ordinances requiring a
minimum number of parking spaces per apartment unit factor
in, too: Where minimums are relatively high, as in Texas, the
best solution can be wrapping the building around a parking
deck, a style known as the Texas doughnut. Where they’re
lower, the ground-floor podium will do. City planners also
often require developers to devote street-front podium space
to shops and restaurants.
Yes, the result can be a little repetitive, but repetition
has been characteristic of every big new urban or suburban
housing trend in the U.S. over the past century or two. There’s
lots to like about stumpy buildings that provide new housing
in places where it’s sorely needed and enliven neighborhoods
in the process. A four-story Texas doughnut can get 50 or 60
apartments onto an acre of land, while the most aggressively
engineered West Coast stick-and-concrete hybrid (two-story
podiums are allowed now, along with other variations) can get
almost 200. That’s not far from the range that the renowned
urbanist Jane Jacobs deemed optimal for vital street life.
There’s also lots to like about building with wood, which, as
long as the trees are replanted and allowed to grow to maturity,
is now generally accounted to be a net consumer of carbon
dioxide. Wood’s green credentials have helped spur a recent
ESTATE
worldwide push for more construction with “mass timber”—
softwood lumber glued together and compressed into thick
beams, columns, and panels. The tallest such structure com-
pleted so far is an 18-story dormitory at the University of British
Columbia, in Vancouver. Oregon has already changed its code
to allow mass timber buildings of that scale, and the 2021 IBC
is set to do the same.
The advance of the mid-rise stick building has come with less
fanfare, and left local officials and even some in the building
industry surprised and unsettled. “It’s a plague, and it hap-
pened when no one was watching,” says Steven Zirinsky,
building code committee co-chairman for the New York City
chapter of the American Institute of Architects. What caught
his attention was a blaze that broke out in January 2015 at the
Avalon apartments in Edgewater, N.J., across the Hudson River
from his home. “When I could read a book in my apartment by
the flame of that fire,” he says, “I knew there was a problem.”
Ignited by a maintenance worker’s torch, the fire spread
through concealed spaces in the floors and attic of the four-
story complex, abetted by a partial sprinkler system that didn’t
cover those areas. No one died, but the building was destroyed.
There haven’t been many such fires in completed stick mid-
rises, but the buildings have proved highly flammable before
the sprinklers and walls go in. Dozens of major fires have broken
out at mid-rise construction sites over the past five years. Of the
13 U.S. blazes that resulted in damages of $20 million or more in
2017, according to the National Fire Protection Association, six
were at wood-frame apartment buildings under construction.
These fires often bring a local outcry to restrict stick
apartments. The Atlanta suburbs of Sandy Springs and
Dunwoody enacted bans on wood-frame buildings above
three stories, but they were later overturned by the Georgia
legislature. There’s also talk of new regulations in Los Angeles,
Philadelphia, Massachusetts, and Maryland. But the place
where legislative action seems most likely is New Jersey.
Building permits have been issued for 105,000 new apart-
ments in the state since 2012, and it sure looks like most are in
wood-frame mid-rises. Glenn Corbett, a former firefighter who
teaches fire science at John Jay College of Criminal Justice in
New York, took me on a tour of some of New Jersey’s “toothpick
towers,” as he calls them, pointing out places that fire engines
can’t reach and things that could go wrong as the buildings
age. “You’re reintroducing these conflagration hazards to urban
February 18, 2019
environments,” he says. “We’re intentionally putting problems
in every community in the country, problems that generations
of firefighters that haven’t even been born yet are going to have
to deal with.”
The toughest of the bills before New Jersey’s legislature
would restrict urban stick buildings to three stories and
7,000 square feet per floor. Proposals with a better chance of
passing call for, among other things, masonry firewalls between
building segments and full sprinkler systems for apartment
buildings three stories and higher. The Avalon at Edgewater
has been rebuilt with these measures; Feigin, construction chief
for AvalonBay, the building’s owner, says they’re now standard
for all the company’s new mid-rise developments. The 2018 IBC
adds provisions aimed at stopping fires from spreading through
apartment-building attics, and a proposal approved late last
year, over the objections of builders and apartment owners,
will change the 2021 code to effectively require full sprinkler
systems for all four-over-one podium buildings.
Can we rely on developers’ economic interests and the
model-code process to work things out? Alexi Assmus, who’s
been active in the New Jersey debates and the IBC process,
is dubious. A businesswoman and civic activist who got
involved when AvalonBay built a wood-framed complex in her
hometown of Princeton, she tried to introduce changes to the
national model code and didn’t get far. In theory, anyone can
participate on the International Code Council committees that
submit recommendations to the government officials who vote 61
on the IBC, but in practice it’s mostly trade group representa-
tives who do. “The special interests all have the money to go
there and stay at the hotels,” Assmus says. “Don’t think that this
third-party ICC is going to give us codes that are in the public
interest, necessarily.”
Then again, the reason the ICC exists is because setting
building codes locally came to be seen as not really in the
public interest, either. Deaths in residential fires in the U.S. are
down by almost half since the 1980s, so something appears to
be working. And there are echoes in at least some of the agi-
tation of standard-variety Nimbyism. Some parts of the coun-
try need lots of new housing, and builders of bulky mid-rise
wood-frame apartment buildings have found an economic
formula that provides it. Whether it’s the right formula for
American cities is something we’ll have to wait to find out. 
—Fox is a business columnist for Bloomberg Opinion.
A SELECTION OF TEXAS MID-RISES
 Bloomberg Businessweek REAL

SUN
62

A SUNRUN SOLAR INSTALLATION IN SANTA BARBARA

ESTATE
BURNED
If you own the roof but
not the solar panels,
you may need to do
some figuring
On a rare rainy day early last year, my husband,
Alex, and I toured what, with any luck, would become the
most exciting and daunting purchase of our lives: a cream-
colored bungalow-style fixer-upper, built in 1924, a few blocks
from our rental in Santa Barbara, Calif. What the house lacked
in curb appeal, it more than made up for in charm and utility:
the original built-in cupboards in the dining room, the way
the light streamed in from copious windows, the fenced back-
yard for our wirehaired mutt. Moldy linoleum in the bath-
room would be easy to rip up. A shower head inexplicably
hanging above the kitchen sink would be easy to rip out. The
location was a big draw, as was, at least initially, the fact that
the red pitched roof of the two-car garage was outfitted with
17 solar panels. We’d get to do our bit for the planet.
The solar array was a modern addition to a property
that otherwise hadn’t changed much since 1950, when the
late owner, Michael “Jug” Jogoleff, moved into the home’s
948 square feet as a preschooler with his mother and aunt,
transplants from Iowa. He never moved again.
He grew tall and barrel-chested and remained
a lifelong bachelor, becoming a neighbor-
hood fixture who organized block parties. His
décor reflected his obsession with all things
electronic, in particular ham radio. “Radios
and computers were packed into every avail-
able square inch of space he could find,” and
“his roof bristled with every form of antenna,”
Santa Barbara’s amateur radio club wrote after
he died of cancer at the age of 70 in January
2017. “He was the consummate ‘ham’ and could
build anything—and did! Amateur radio has lost
one of the last of the ‘real hams.’ ”
February 18, 2019
By Esmé E. Deprez
Photographs by
Jason Henry
Two days after walking through Jug’s ham shack, we made
an offer. A week later, just before we entered escrow, we
learned the solar array hadn’t belonged to Jug. It was, in the 63
language of the industry, a third-party-owner, or TPO, system,
belonging to Sunrun Inc., the largest provider of residential
solar in the U.S. I started looking into the TPO model. It’s used
less often than it once was, but it’s been important in mak-
ing residential solar, once out of reach for most people, much
more widespread. The reason is simple: Homeowners usu-
ally pay nothing upfront. A company like Sunrun puts solar
panels on your roof, connects them to your home, and claims
a tax benefit for owning the system. Going forward, you pay
Sunrun to provide the bulk of your electricity needs instead
of your utility.
I’d soon learn that the system was tied to the title of the
house. It appeared that if we bought Jug’s place, we’d have
to assume his lease arrangement with Sunrun. I wasn’t sure
how I felt about this as a buyer, but it definitely piqued my
curiosity as a journalist. I set out to exam-
ine the value proposition carefully.
A Sunrun customer service represen-
tative told me that in the year before he
went solar, Jug’s monthly bill to Southern
California Edison averaged $115. Under the
terms of his deal, he paid $75 a month to
Sunrun. The panels on his garage were
expected to cover 85 percent of his energy
needs. That left him reliant on SoCal
Edison for the remaining 15 percent, at a
cost of about $17 a month. All in, his energy
bills came to about $92, a savings of about
$23 a month.
 Bloomberg Businessweek
I got ahold of a copy of Jug’s contract, and quickly saw
how Sunrun could afford to extend such an offer. It lasted
20 years. The payments escalated annually by 2.9 percent—
they’d be 72 percent higher by 2036. The tax credit was worth
at least $5,000.
Alex and I were living in a condo 50 percent bigger than
Jug’s house (with air conditioning, which Jug didn’t have),
and still our energy consumption didn’t come close to what
Jug, with all his electronic gadgetry, had been using. We’d be
paying Sunrun for more capacity than we needed. A state pol-
icy called net metering meant we could sell back excess pro-
duction to SoCal Edison, earning us about $7.50 a month, but
even so, the utility would charge us $10 a month or more to
remain connected to the grid. Accounting for all these things,
taking on Jug’s lease would translate to us paying at least $30 a
month more. We’d lose money from Day 1. Supporting renew-
able energy is important, and I get spending a little more to
help the planet. But a for-profit company like Sunrun wasn’t
my idea of the right place to do it.
I asked Sunrun if it would take back the system to put it
on someone else’s house. It wouldn’t. The only way to get
out from under the obligation, as far as we could tell, was to
prepay the balance on the remaining 18-plus years’ worth of
payments and buy the hardware outright. The price: $27,300.
By mid-February, we’d reached a standstill. We wouldn’t
complete the deal if it meant taking on the obligation to
64 Sunrun. The trust managing Jug’s assets for his heirs was
refusing to buy out the system. Sunrun was blocking the sale
via a document called a UCC filing, which showed the com-
pany had a financial claim on the property. (Sunrun disputes
how consumer advocates characterize UCC filings: “effec-
tive liens.”) Our lender was refusing to fund our loan with-
out a resolution.
I began to grieve, and then felt like a materialistic jerk for
getting so attached to a wooden box. It wasn’t that simple,
of course. By then, the house represented the place where
Alex and I would—maybe with a child or two one day—build
our future.
A few months later, regulators would vote to make
California the first U.S. state to require solar panels on
almost all new homes starting in 2020—meaning TPO solar
will soon become a lot more common in California. (The
shares of Sunrun and its competitors soared on the news.)
That’s bound to further complicate the homebuying econ-
omy as at least some buyers—or the buyers after them—make
the same calculations Alex and I did.
Lynn Jurich, Sunrun’s CEO since 2015, is a
mother of two young children and a regular on 40-under-
40 and most-powerful-women-in-business lists. Harvard
recruited her to play volleyball and basketball. She chose
Stanford instead, and after graduation took a job in private
equity that required cold-calling CEOs, because she knew it
would make her uncomfortable. A few years later, while at
Stanford Graduate School of Business, she met fellow student
Ed Fenster, who’d also been in private equity, at Blackstone
REAL
Group LP, and his friend Nat Kreamer, a U.S. Navy officer who
was fresh off a tour of duty in Afghanistan. The three began
diving into the challenge of making solar more accessible.
Fundamentally it was a math problem—“a business-model chal-
lenge and a financing challenge,” Jurich told me when we sat
down at Sunrun’s San Francisco headquarters in December.
She, Fenster, and Kreamer founded Sunrun in 2007.
A company called SunEdison had used the TPO model for
years on commercial-scale projects, and SolarCity Corp. had
beaten Sunrun to the residential market, launching in 2006
with $10 million from Elon Musk, cousin of the two brothers
who founded it. For years after its founding, Sunrun watched
as competitors spent wildly to gain market share and new
companies crowded the field.
Eventually, Sunrun’s patience paid off. SolarCity nearly
collapsed under massive debt before getting rescued by Tesla
Inc. in 2016. SunEdison, Sungevity Inc., and others declared
bankruptcy. Sunrun remained focused on improving margins
and making use of government incentives, while speaking the
languages of both environmental righteousness and Silicon
Valley disruption. By early 2018 the company was deploy-
ing more residential megawatts than any of its rivals. It’s
gained market share every quarter but one since mid-2015,
has 218,000 customers across 22 states, Washington, D.C.,
and Puerto Rico (California accounts for about half of them),
and employs more than 4,000 people. Sunrun’s shares have
nearly tripled in value in the past 12 months, and the com-
pany projects that its customer base will grow almost 30 per-
cent in the current fiscal year.
And not so far down the road is the new mandate in
California. Jurich sees this as normalizing solar, making
it feel less risky for homeowners to adopt. More specifi-
cally, she told me, it will be good for companies using the
TPO model. Builders won’t want to offer solar as an owned
part of the home because that will inflate the sticker price.
Instead, she said, buyers will finance the systems via a sepa-
rate transaction—one that Sunrun is in talks with the state’s
10 biggest homebuilders to provide. Sunrun relies on TPO for
85 percent of its business.
Offering rooftop solar setups worth tens of thousands of
dollars for no money down requires weaving an intricate
financial web. The monthly payments in 20-year contracts
provide Sunrun with future streams of cash flow, but acquir-
ing customers, procuring hardware, and paying installers
(and executives) require money today. Government incen-
tives are key, especially the federal Investment Tax Credit,
which allows owners to deduct 30 percent of the cost of a
rooftop system from their federal taxes.
The structure of tax incentives in the U.S. also helps
explain why it’s the only country where the TPO model has
thrived. Homeowners elsewhere buy rooftop solar systems
outright, and for much cheaper; Americans pay twice as
much as their global peers. Australia and other countries
offer substantial upfront subsidies or rebates—at one point,
the Australian subsidies covered some 80 percent of the cost
of a typical system. (They now cover about a third of the
 ESTATE
Offering rooftop solar setups worth thousands
of dollars for no money down
requires weaving an intricate financial web
cost, which is falling.) In the U.S., by contrast, homeowners
who buy systems outright can’t claim the credits until the
next time they file their taxes, and then only if they owe
the government at least as much as the value of the credit.
(Currently the credit can be spread over multiple years.) That
and other factors play to the strengths of Sunrun.
Sunrun finances its initial costs by taking on debt and rais-
ing capital from what are called tax equity investors. Only a
few dozen companies have the appetite for tax credits and
financial sophistication to be in this pool, including Google,
JPMorgan Chase, and General Electric, says Joe Osha, an ana-
lyst who covers energy technology at JMP Securities LLC.
They invest in Sunrun not to generate significant cash returns
but to reap tax benefits: By assuming ownership of thousands
of solar systems they can claim the credits and thus lower
their tax bills from other economic activity. Hugh Bromley, a
solar analyst at BloombergNEF, says Sunrun and its competi-
tors offer solar, sure, but can be better understood as having
created “one of the most sophisticated financial engineering
industries of any sector of the U.S. economy.”
Just 1 percent of U.S. single-family homes—
DATA: U.S. ENERGY INFORMATION ADMINISTRATION DATA AND PROJECTIONS; DATA COMPILED FOR BUSINESSWEEK BY DAVID FELDMAN, NATIONAL
1.8 million—are equipped with solar, and the real estate indus-
try’s general understanding of TPO systems remains limited.
RENEWABLE ENERGY LABORATORY; COSTS FOR CASH PURCHASES INCLUDE $2,000 FOR MAINTENANCE. *AT 6.2 PERCENT INTEREST
Our real estate agent, a 35-year veteran, had never encountered
one. The listing agents for Jug’s property also seemed uncer-
tain. Initially they didn’t mention the system at all. Then they
told us it was owned by Sunrun and that if we didn’t want to
assume the lease they’d remove it. Then, apparently because
they’d learned the full cost of that, they backtracked.
Aided by a local attorney and my father-in-law, a retired
contract attorney, I drafted a letter to Jug’s trust accusing the
○ Residential solar in the U.S., ○ Cost of a $16,000 rooftop solar system over 20 years
gigawatt hours per day
60 $20k
30 10
0 0
1990 2020 Year 1
February 18, 2019
listing agents of failing to deliver title to the property free
of any third-party claims as the agents had said they could.
I threatened legal action. It was a last-ditch effort that none
of us expected to work. Then it did.
On March 1, a representative for Jug’s trust emailed Sunrun
saying it would purchase the system. On March 22, we got the
keys to the house and I stood beaming in the empty dining
room and took a selfie. On March 30, we moved in.
Sunrun calls our insistence that Jug’s trust buy out and
remove the system “incredibly unique and rare.” It’s far
more common for home sellers to transfer the lease to the
buyer—Sunrun says 94 percent of customers do this—or to
prepay the lease and leave the hardware on the roof for
the next owner to use. I’ve been kicking myself ever since
I learned about this latter option. It would have saved the
estate around $12,000 and allowed us to support solar and
get “free” electricity, even as Sunrun remained responsible
for maintenance and repairs. 65
It would have been fine from Sunrun’s perspective, too.
The $27,300 full buyout price is explained by the necessi-
ties of TPO accounting. The federal credits and accelerated
depreciation taken by Sunrun and its tax equity investors
are dependent on systems remaining in operation for five
years; if a system is removed from service before then, the
value claimed can be clawed back by the IRS. Sunrun’s buy-
out price accounted for not only the remaining 18 years of
lease payments but also the lost tax credits and depreciation.
The complexities of these arrangements got me thinking
about Jug. When he signed the contract with Sunrun, eight
months before his death, he’d been battling cancer for years.
Did he understand the implications?
Jug’s saleswoman was part of a vast network of
10-year loan*
TPO contract
Cash purchase
10-year loan*,
with tax credit
Cash purchase
with tax credit
13 17 20
 Bloomberg Businessweek
commission-based salespeople that includes both direct
employees and third-party contractors. Sunrun has devel-
oped sales leads by deploying people to canvass at foot-
ball games and stores (Costco is a gold mine, former
salespeople tell me) and by going door-to-door and cold-
calling. The basic sales pitch is savings of up to 20 percent,
a hedge against unpredictable utility rates, and the emo-
tional rewards of doing right by the environment.
On consumer review sites and in local news reports,
rueful customers warn others to stay away from TPO solar
offered by Sunrun and other companies. State attorneys gen-
eral and politicians have fielded complaints from people who
say they were sold expensive systems they can’t afford after
signing contracts they didn’t understand; or are paying more
now on their electricity bills, not less as promised; or are
having trouble selling their homes because potential buy-
ers are turned off, just as I was. (Customers of Sunrun and
other companies must sign binding arbitration clauses, bar-
ring them from suing or joining in class actions.)
I brought this up with Jurich, who pointed to Sunrun’s A+
rating by the Better Business Bureau and said “massive edge
cases” seized on by journalists don’t fairly represent the typ-
ical customer experience. She pushed back hard against the
idea that her company contributes to the industry’s negative
reputation. To the contrary, “I think it helps us stand out,”
she said. “For any long-term success in a business like this,
66
THE AUTHOR’S GARAGE ROOF, POST-SOLAR
REAL
it’s going to be your reputation first and foremost, so the cus-
tomer experience is critical. ... If I wanted to do something
to just make money I would have stayed in investing. I want
to do something that makes a big impact.”
I spoke with eight current and former Sunrun employ-
ees, some of whom praised the sales culture and said bad
behavior wasn’t condoned. Others said unethical tactics
went unpunished when discovered. “When your paycheck
depends on getting the yes, it’s like love and war: All is fair,”
said Tank Hanna, a salesman-turned-trainer from Arizona. “It
can be done correctly, but it takes a skill level and patience
level and understanding that most reps don’t have and man-
agers don’t want.” Salespeople would cherry-pick data, skim
over crucial details, and prioritize speed above all, he told
me. A trainer from California who listened in on hundreds
of sales calls for quality control estimated that 60 percent of
customers knew no more than half of what they were sign-
ing up for and 10 percent had no clue.
Potential customers often ask what will happen when they
try to sell their homes. The salespeople I spoke with said they
allayed such concerns by saying solar adds value by lowering
carrying costs. Jurich said the same thing during our interview.
For TPO systems, however, there’s no data or reputable study
to back that up. The Lawrence Berkeley National Laboratory, a
publicly funded research organization in California, has found
that an owned system is an asset. TPO systems weren’t shown
ESTATE
One trainer estimated that 60 percent of
customers knew no more than half of what they
were signing up for—and 10 percent had no clue
to provide any net gain—they’re neither assets nor liabilities.
(Although, tell that to Jug’s trust.)
One former Bay Area employee sent me a Sunrun training
manual he said was current when he resigned in April 2017. It’s
called “Power Play 2.0: The Guide to Successfully Sell Sunrun.”
(The company confirmed its authenticity.) It instructs sales-
people to sow distrust in and disdain for traditional utilities
and appeal to customers’ emotions. Over 61 pages, pain is
cited at least 31 times and fear at least a dozen. When review-
ing a customer’s traditional utility bill, the trainee is told,
“amplify the pain significantly.” Among “components of suc-
cess”: “creating pain and fear.” Among the “five fatal flaws”
to avoid: “failing to build pain or fear.”
Jurich didn’t hesitate to defend the tactics when I brought
them up in our interview. She called pain a “fair characteriza-
tion of the experience that people have” paying their utility
bills. “We are selling a substitute for traditional electricity, so
you would want to demonstrate why your product is a superior
product.” Spokeswoman Georgia Dempsey later followed up
in an email: “ ‘Uncovering Pain’ is widely attributed to David
Sandler, who introduced the Sandler Selling System,” she wrote.
“Sandler defines Pain as ‘finding the prospect’s reason to buy
and gaining a commitment to resolve any issues keeping the
prospect from greater success.’ Our growing customer base is
evidence of households’ desire for the superior energy service
offered by home solar and batteries.”
Consumers want to go green, but above all, as
Sunrun underscores in company filings, they want to save
money. The company promises to produce these savings by
offering initial rates that undercut the prevailing electric-
ity costs in a given area and then increasing its rates more
slowly than those for traditional electricity. This is premised
on claims that traditional energy prices have “skyrocketed”
in the past and predictions they’ll continue to. Sunrun works
from the assumption that electricity costs will rise 3.76 per-
cent annually. That’s more than double the average increase
over the past decade nationally, according to U.S. Energy
Information Administration figures. (Average consumption
has also been falling, as household appliances have become
more efficient.) Sunrun argues rates will rise faster in the
future than in the past, in part because utilities need to spend
on grid upgrades in coming years.
Regardless of what energy costs end up doing, a well-
designed, fairly priced rooftop system should lower the power
bill of most Americans. Buying one outright is a better deal for
people with the means to do so. That isn’t everyone, or course.
February 18, 2019
TPO solar, with its simplicity and convenience, can be alluring.
There’s one more twist in this tale. Months after all the
drama had played out, I came upon a surprise.
When I originally called Sunrun, I was told that Jug’s SoCal
Edison bill in the year before he went solar averaged $115 a
month. That turned out not to be true. His file, a second
Sunrun rep told me, indicated that it averaged $79. Remember
that his solar panels were designed to meet only 85 percent
of his electricity needs, making his actual total monthly out-
lay in the first year with solar $87. That’s $8 more than he’d
been paying. When I asked Sunrun about these new figures,
Dempsey, the company spokeswoman, said Jug was “a happy
and satisfied customer” who “valued the peace of mind” the
system provided.
I hadn’t wanted to bother Jug’s family or friends, but now
I had to learn what I could about his motivations for signing
up with Sunrun. I tracked down two cousins from Iowa and
two close friends here in Santa Barbara to ask whether Jug 67
had been a gray green—an older person committed to saving
the planet. They all scoffed—he did things to save money. He
lived by his mother’s doctrine to buy everything in cash and
had the means to do so, they said. They all wondered aloud
whether he’d been misled. “Why would he sign a 20-year con-
tract when he knew he wouldn’t live that long?” said Kathy
Backus, a fellow ham who met Jug through the Amateur
Radio Club two decades ago and stood vigil as cancer ate
away at his physical and mental well-being. “Something
stinks. It smells like three-day-old fish.”
There’s more to the story, including the fact that Jug’s
solar panels never worked at full efficiency. This was because
of what Sunrun characterized as “severe shading” caused by
the next-door neighbor’s tree. That’s right: Sunrun installed
the system beneath a big old tree. This makes me again ques-
tion the judgment of Jug’s salesperson. Sunrun has a pro-
duction guarantee—if the system underperforms, you get a
credit. In Jug’s case, $203 was credited to his account on July
17, 2017, half a year after his death.
As I write this I’m pregnant. The life Alex and I pictured
the first time we walked through Jug’s house, now our house,
is taking shape. And let me tell you about our electricity bill.
Had we assumed Jug’s lease, we’d be paying $79 a month to
Sunrun (the second escalator would have kicked in) plus at
least $10 to SoCal Edison to stay on the grid, minus $7.50 for
net metering. We’ve been in the house 10 months, and our
average SoCal Edison bill is $30. Compared with becoming
Sunrun customers, we’re saving $50 a month. We’re going to
give some of that to help protect the environment. 

WITH BLOOMBERG OPINION
LAST THING
W I L L
B L A CKSTONE’S
R E A L ESTATE
M
BY
A
STEPHEN
G
GANDEL
IC RUB OFF?
In January the 800 Fifth tower in Seattle was sold for
$540 million—the biggest commercial real estate trans-
action in the Northwest in three years. The buyer isn’t a typ-
ical developer, but investment firm Blackstone, a longtime
leader in private equity. The company also recently bought
68 five office blocks and a mall for $1.3 billion in Shanghai. Last
fall, Blackstone and a partner bought thousands of railroad
arches in England, many of which have been converted into
retail spaces, for $1.9 billion.
With everything from hotels to office buildings to
single-family homes, the Blackstone Group LP—much bet-
ter known for leveraged buyouts and its chief executive
officer’s taste for lavish birthday parties—is now the world’s
largest landlord. Its portfolio, at $136 billion, is bigger than
the market value of the largest real estate investment trust
in the S&P 500.
That portfolio is also the cornerstone of what’s known as
the Blackstone model. Real estate has more deal flow and
liquidity than buyouts, so it’s helped the company get big
and diversified. Blackstone, which is publicly traded, has a
market value of $41 billion, double that of its closest rival,
KKR & Co. And Blackstone trades at 13.3 times this year’s
earnings, vs. multiples of 9 and 10 for Carlyle Group LP and
Apollo Global Management LLC.
Perhaps that’s why other PE powerhouses are eager to
get into real estate. Carlyle last year closed on a $5.5 billion
fund that will expand its real estate business by 50 percent.
In October, a KKR-led group paid $1.9 billion for a prop-
erty in Seoul that will eventually include offices, shops,
and a 263-room five-star hotel. Private equity companies
as a group have more than $900 billion in real estate invest-
ments, according to Preqin.
Can this model be replicated? Blackstone’s is partly
DATA: PREQIN
a right-place, right-time story. The value of its property
business more than doubled in 2007 with the $39 billion
changes to Bloomberg Businessweek, P.O. Box 37528, Boone, IA 50037-0528. Canada Post Publication Mail Agreement Number 41989020. Return undeliverable Canadian addresses to DHL Global Mail, 355 Admiral Blvd., Unit 4,
Bloomberg Businessweek (USPS 080 900) February 18, 2019 (ISSN 0007-7135) S Issue no. 4604 Published weekly, except one week in February, April, June, July, September, and two weeks in December by Bloomberg L .P.
the U.S. Patent Office. Single Copy Sales: Call 800 298-9867 or email: busweek@nrmsinc.com. Educational Permissions: Copyright Clearance Center at info@copyright.com. Printed in the U.S.A. CPPAP NUMBER 0414N68830
Mississauga, ON L5T 2N1. Email: bwkcustserv@cdsfulfillment.com. QST#1008327064. Registered for GST as Bloomberg L .P. GST #12829 9898 RT0001. Copyright 2019 Bloomberg L .P. All rights reserved. Title registered in
Periodicals postage paid at New York, N.Y., and at additional mailing offices. Executive, Editorial, Circulation, and Advertising Offices: Bloomberg Businessweek, 731 Lexington Avenue, New York, NY 10022. POSTMASTER: Send address
REAL ESTATE
$325B
○ The “dry powder”
in private real
estate funds—
that is, money
raised but not yet
invested.
The commercial real estate
market could feel crowded
if private capital digs in.
acquisition of Sam Zell’s Equity Office Properties. The com-
pany had enough time to flip properties at the peak—and
enough resources to pick up a list of buildings in the wake
of the financial crisis.
Blackstone, like other PE companies, has also benefited
from a multidecade period of falling interest rates. Low
rates tend to raise the value of assets such as property. The
U.S. Federal Reserve’s recent dovish turn is a reminder
that rates can stay low for a lot longer than market pundits
expect. Still, it’s fair to worry that in the long run money
might not be as easy as it has been.
Another risk for Blackstone and its rivals may be PE’s
ever-growing shadow. People have noticed that they’re
both big employers—KKR’s portfolio companies have
almost 1 million workers—and giant landlords. Last year,
KKR and others were pressured by Senator Elizabeth
Warren to create a fund for workers fired when retailer Toys
‘R’ Us went bankrupt. If the market turns down, lawmak-
ers may want to give Big PE some of the same regulatory
scrutiny big banks deal with. But at least for now it appears
the scaffolding of the Blackstone model is on its way up. 
—Gandel is a finance columnist for Bloomberg Opinion
Trade options like you went to school for it.
Options trading doesn’t have to be intimidating. TD Ameritrade provides educational courses,
expert trading support, and online coaching to help you learn to trade with confidence.

Get up to $600 when you open and fund an account.

Visit tdameritrade.com/tradeoptions to learn more.

Options trading is subject to significant risks and is not suitable for all investors. Options trading privileges subject to TD Ameritrade review
and approval. Before trading options, carefully read Characteristics and Risks of Standardized Options. Contact TD Ameritrade at 800-669-3900 for
a copy.

See tdameritrade.com/600offer for offer details and restrictions. This is not an offer or solicitation in any jurisdiction where we are not authorized to do
business. TD Ameritrade, Inc., member FINRA/SIPC. © 2017 TD Ameritrade.