Controllable Risks

Lessons from Millennium Tower: Managing Risks in Development

As a developer, few scenarios that are as disastrous as the situation with San Francisco’s Millennium Tower come to mind.

First, it’s located in California, the most litigious state in the country.

Second, it’s a residential condo project—an absolute magnet for construction defect lawsuits. Many developers avoid condos altogether because the lawsuits, while frequent, are often frivolous.

Third, it’s in San Francisco, arguably one of the U.S. cities hit hardest by the pandemic’s economic fallout.

Fourth, the residents have significant resources to pursue legal action. I can’t help but wonder how many of them are lawyers themselves. At one legal hearing, it reportedly took 45 minutes just to allow all the attorneys to introduce themselves.

Fifth, and most critically, the defects of the building are real and absolutely detrimental which has created a long-lasting stigma which has slashed resale values.

The article highlights less obvious consequences for these condo owners. For example, the exorbitant insurance premiums that are passed along to residents, and the difficulty in securing financing because the property itself is compromised.

A developer’s role is to identify and mitigate controllable risks. This includes hiring competent engineers, contractors, and architects, ensuring quality construction, and managing appropriate levels of debt. While I haven't looked into the details of why the building is sinking, no doubt decisions led to mistakes.  At some point a  risk arose that could and should have been managed. When controllable risks aren’t mitigated, even minor uncontrollable risks can cause the entire project to collapse (or sink)—whether it’s a global pandemic, a spike in interest rates, or the exodus of businesses and residents from San Francisco.