The Perfect Question

is Jay Shidler’s answer for success

July, 2007

On a hot afternoon in early June, workers are putting the finishing touches on the Shidler College of Business’s new paint job. The colors – shades of light gray and brown – aren’t particularly eye-catching, but the fresh coat of paint has taken some of the rough edges off the University of Hawaii at Manoa complex, which is designed in the stark, “brutalist” style of architecture, popular on college campuses in the ’70s.

The school’s central courtyard has surrendered some of its concrete to sandstone walkways, canopied tables and lush grass. Throughout the grounds hang banners with large portraits of UH business school graduates – CEOs, business owners and other captains of Island industry – as well as some of the school’s fresh-faced current students. On the perimeter of the buildings grow newly landscaped gardens of varying sizes and designs, some featuring large, dramatic canopy trees like milo and monkey pod. Other areas, with collections of native Hawaiian plants, resemble small, private rain forests.

Plants, pride and optimism seem to be growing everywhere.

The college’s extreme makeover comes courtesy of one of its graduates and its new namesake, commercial real estate magnate Jay Shidler, who, on his 60th birthday last fall, donated $25 million to the school. The gift, the largest single donation through the University of Hawaii Foundation, included $1 million in cash and in-kind donations for the repair and renovation of the business college’s buildings. The budget has since grown to $2 million, thanks to an additional $1 million Shidler donation, specifically for landscaping in and around the University Avenue and Maile Way complex.

But Shidler didn’t just sign the checks. When the renovation began last spring, students, faculty and staff began reporting “Shidler sightings,” as the detail-oriented businessman started visiting the campus, first on weekends then nearly every day, personally supervising the project.

“We were surprised to see him and his hands-on approach, managing the design implementation and the whole thing,” says Shidler College of Business Dean Vance Roley. “He goes from the real big picture all the way down to the smallest detail, like pointing out exactly where a new tree needs to be planted. Watching him work has been a remarkable experience.”

Transforming and improving buildings is what Shidler, founder and managing partner of The Shidler Group, does for a living. But being able to see the forest for the trees is what has made him rich and successful.

Seeing the Unseen

“Basically, in our business you have to buy smart. You’re not only looking at the numbers and what the return is, but you’re looking at things like heating, ventilation, air conditioning and electrical systems,” says Larry Taff, managing partner of The Shidler Group. “In the meantime, you’ve got your eye on the real estate markets as well as the capital markets. No one is clairvoyant, but Jay is really good at seeing something other people haven’t seen yet, and figuring out what others haven’t figured out yet.”

Since opening its doors in 1971, The Shidler Group has managed and acquired more than 2,000 properties in North America. In addition, Shidler has founded and been the initial investor in public and private companies issuing in excess of $8.5 billion in debt and equity securities. Four of those companies are now listed on the New York Stock Exchange. In Hawaii, The Shidler Group owns seven Class A office buildings (see sidebar on page 31 and 32), or about 13 percent of Honolulu’s office buildings, making it the largest investor in commercial real estate in Hawaii.

In 2006, Shidler formed Pacific Office Properties Trust, a real estate investment trust, which owns and operates 2.8 million square feet of 10 Class A office buildings in Honolulu, Phoenix, Los Angeles and San Diego with a combined value of $578 million. Later this summer, The Shidler Group plans to take the new trust public, anticipating a growth of $250 million in assets in each of its first two years as a publicly traded company.

Shilder’s real estate career began early and quickly. The son of a well-traveled U.S. Army officer, he enrolled at UH as a freshman in the fall of 1964. The university was his 13th school in 13 years. In his sophomore year, with a cursory interest in real estate, Shidler got a part-time job as office boy for ’70s real estate superagent Mike McCormick. After shuffling paper for a year, Shidler realized that buying real estate was far more interesting than selling it. He then got a job with a real estate appraiser, with whom he would learn the intricacies of property valuation.

One day at the office in 1966, Shidler saw a newspaper ad for a home for sale on the corner of Pensacola Street and Wilder Avenue. The house was dilapidated, but the lot was centrally located. He quickly put together a white paper, which analyzed the feasibility of building a high-rise condominium on the site. He showed the document to people at work. It seemed to ask all the right questions and answer most of them correctly. They decided to go ahead with the project.

The development of 1111 Wilder Ave. was more than Shidler’s first foray into real estate development, it was also a lesson in capital acquisition. With a 25 percent interest in the project, he set up his first investment group, collecting money from his fraternity brothers. Meanwhile, still a full-time student, with no writing and little real estate experience, Shidler convinced the editors at the Pacific Business News to let him contribute a weekly column on real estate.

“I actually only had enough material to write two or three columns, but I figured what better way to learn about real estate. I’d have a deadline staring me in the face like signposts on a freeway, so it forced me to get organized every week. It was also pretty good publicity for a kid just starting out,” says Shidler.

Shidler wrote his column for nearly three years. He continued to write for the weekly business journal after graduation and throughout his subsequent two-year stint as a second lieutenant in the Army – sending in his copy from Fort Benning, Ga., and then from the DMZ along the border between North and South Korea. The writing and research forced Shidler to keep abreast of the latest happenings in the real estate world and prepared him for his life as a civilian. But more important, the practice of organizing thoughts on paper into a clear and concise narrative would be a key component in the Shidler way of doing business.

After the Army, Shidler returned to Honolulu and founded The Shidler Group in 1971, opening a small office in the Hawaii Tower of the former Amfac Center, now Topa Financial Center. The company focused on purchasing existing properties and improving them through renovation, addressing the three types of obsolescence that affect all buildings: architectural style, physical plant and functionality. The strategy is still the focus of The Shidler Group, which now has ownership in more than1, 500 buildings.

With little capital and even less experience, The Shidler Group adopted a disciplined approach to business, which combined meticulous due diligence with long-term planning and envisioning that border on soul searching.

A Shidler “frontloading” session, held in a small conference room in the company’s downtown Honolulu headquarters, is reminiscent of a scene from the movie A Beautiful Mind. In the Academy-Award-winning film, brilliant mathematician John Nash (played by Russell Crowe) has a penchant for writing his complex equations on windowpanes, scratch paper and any available flat surface. But Shidler isn’t mad, just inspired. He also prefers white boards to write on, which cover three of the four walls of the conference room, and he’s fond of washable markers, which allow him to erase mistakes. He admits that there are a lot of mistakes.A Beautiful Mind Trick

Shidler starts sketching out a business plan on one end of the room’s white boards and continues till he reaches the other side, trying to account for every imaginable cost, market condition, staffing issue, competitor and unexpected contingency. Above all this brainstorming, float a couple of simple questions: Why should this company exist? Why does this company deserve to be successful?

After the white boarding, Shidler and his management team sit back and “squeeze,” analyzing the business plan for its flaws and determining whether the venture is worth the investment of time and money, whether there will be enough juice left to drink. If the idea passes this litmus test, Shidler’s beautiful notes are rewritten into a narrative, an easy-to-read five-page executive summary that in turn is closely scrutinized.

Next comes a simple but ingenious mind “trick.” Shidler calls in the major players of the potential company, including the CEO, and has them compose two press releases dated five years in the future. One of the releases announces the company’s overwhelming and unexpected success. The other chronicles the company’s equally stunning demise.

“It [writing the bogus press releases] is a way of tricking the mind and getting it out of the moment,” says Shidler. “Everyone focuses on the success. They forget to ask where are we going to make the mistakes.”

If the business plan survives the press release stage, it is expanded into a 20-plus-page “flip-book,” or PowerPoint presentation, which should anticipate and answer every question one page before it is asked. If the plan and the flip-book pass this final test, then it becomes a Shidler business. The process, from frontloading to flip-booking, takes as long as six months to a year to complete.

Maybe he is a little mad. But probably not.

According to Shidler, his multilevel, nearly microscopic process can be applied to any business, in any industry or location. He believes that businesses fail not from a lack of capital or markets, but because of a lack of knowledge: specifically, a lack of curiosity about what a businessperson doesn’t know or doesn’t want to know.

“It’s human nature to want to always have the perfect answer, but it’s more important to pose the perfect question: Does the world really need another company X?” asks Shidler. “My observation is that people don’t asks those questions, because they create ambiguity and uncertainty and most folks have a low tolerance for them. They don’t want to just stand there and do nothing, they want to run out and start a business.”

For the record, Shidler admits to also having an aversion to uncertainty, but knowing the narrative of a new business and having an easy-to-read flip-book quells nearly all of his anxiety.

Shidler believes this type of business-plan soul searching is essential to any company’s success, but it may be even more important for companies in isolated locations, far from their markets and any relevant business models. Places like Hawaii. But he says that distance is no longer an excuse for a business to fail. Being thousands of miles away from its operations or customers is a challenge, but usually it just exacerbates fundamental flaws in the original business plan.

“Everyone loves good food. Every city has great restaurants. So how can Eddie Flores [L & L Hawaiian Barbecue owner] keep on opening restaurants all over the Mainland?” asks Shidler. “Obviously, he asked the right questions. There are all kinds of examples out there. I’m not the expert. But you need to ask: What have we got here? What do people want from here? What can we do from here and what makes it better? It sounds simple, but it always comes down to knowing your business, knowing your business, knowing your business.”

Shidler the visionary has also spotted something beyond the horizon, and it bodes well for the Islands.

“I know there have been great expectations for Hawaii, expectations that haven’t been fulfilled. I’m not really knowledgeable about all the prospects, but I have a notion that change is afoot,” says Shidler. “There is something in the DNA of people who’ve grown up in Hawaii, something about the need for long-distance communication and connection. We have a high school [Punahou] that gave us both the founder of AOL [Steve Case] and the founder of eBay [Pierre Omidyar]. Those companies changed the planet. I believe that in the next five years, we will uncover many more things that we will be able to do from Hawaii. There is nothing missing here, other than a point of view or a frame of reference.”

You can put that in a flip-book.

HONOLULU HOLDINGSThe Shidler Group’s anticipated new public real estate investment trust, Pacific Office Properties Trust, will comprise 10 buildings, or 2.8 million square feet of Class A office buildings in Honolulu, Los Angeles, San Francisco and Phoenix. Here are snapshots of seven Honolulu properties that will contribute to the new trust. photos: Shidler Group
Davies Pacific Center, 841 Bishop St.
In 2003, The Shidler Group purchased the Davies Pacific Center and the Pan Am Building from the California State Teacher’s Retirement System for $90 million. Since then, more than $5 million in upgrades have been made to Davies Pacific’s landscaping, patio and other common areas.
Waterfront Plaza, 500 Ala Moana Blvd.
In 2003, The Shidler Group purchased Waterfront Plaza from New York-based Witkoff group and Michigan-based Kojaian Management Corp. for an undisclosed price. More than $8 million in changes have been made to the building.
Pan Am Building, 1600 Kapiolani Blvd.
The Shidler Group’s purchase of the Pan Am Building from the California State Teacher’s Retirement System in 2003, was the company’s first major transaction in Hawaii in almost a decade.
First Insurance Center, 1100 Ward Ave.
The Shidler Group purchased the First Insurance Center in December 2005. Since then, it has added new landscaping and planter boxes along Ward Avenue and Beretania Street.
Kalakaua Business Center, 2155 Kalakaua Ave.
Last February, The Shidler Group purchased the ANA Kalakaua Center for $30 million from a subsidiary of All Nippon Airways. The building, now called Kalakaua Business Center, is 98 percent leased. Approximately $2 million will be spent to redo the building’s neon lights and common areas.

City Center, 810 Richards St.
The City Center, a 10-story building on the corner of Queen and Richards streets, received upgrades to the common areas in 2004 and new exterior paint the following year.

Pacific Business News Building, 1833 Kalakaua Ave.
The Shidler Group purchased the PBN Building in 1996 for $7.5 million. In April 2004, it listed the building for sale for $12 million but pulled it off the market after six months in escrow. The Shidler Group since then has spruced up the building’s landscaping, elevators and ground floor.

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