Old Formula, New Field

The first Marshall Field, who made much of his $100 million fortune/- in land speculation during the late 19th century, once remarked: "Buying real estate is not only the best way, the quickest way and the safest way but the only way to become wealthy." For decades, major U.S. industrial and financial corporations ignored the Field formula, leaving the business of real estate largely to its own local operatives. Now the trend is running the other way. So many huge companies have been expanding into real estate and building that the nation's largest industry, construction, is undergoing a remarkable change.

Last week, in the biggest venture of its kind for many years, three giants hammered together a joint enterprise. Hartford's Aetna Life & Casualty (assets: $8.6 billion) agreed to go into a partnership with California-based Kaiser Industries and Kaiser Aluminum & Chemical Corp. They expect to move into commercial, industrial, residential, recreational and agricultural real estate. The three will pool $175 million in cash and properties. Among the latter are Aetna's 630-acre Warner Ranch near downtown Burbank, the Kaiser Companies' 6,000-acre Hawaii Kai residential and resort complex in Honolulu and the 87,500-acre Rancho California project 80 miles southeast of Los Angeles. In a similar venture, American Standard Inc., the plumbing potentate, joined last week with Herbert J. Kendall, a New Jersey builder, to erect a 715-acre community ten miles from Princeton.

Loosening Old Ties. Industrial corporations have increasingly been drawn into building and development deals by the opportunities to use borrowed money and tax advantages for an exceptionally high return on their own investment. Developers commonly borrow 90% of the funds they need to operate--a ratio that would worry executives involved only in manufacturing.

Insurance companies have entered building to loosen their historic ties to a fixed return on investment; the old policy has lost appeal because of inflation. Last month, Chicago-based C.N.A. Financial Corp., a major insurance combine, agreed to acquire Los Angeles' Larwin Co., the nation's largest privately owned home-building concern (1968 sales: $50 million). The price: $100 million in C.N.A. stock. Prudential Insurance recently bought a half interest in southern California's Westlake Village, a new town being built by Shipping Magnate Daniel Ludwig.

Chrysler Corp. is investing about $2,000,000 a week to become the landlord of projects ranging from a shopping center in Knoxville to a group of 360 town houses in Ann Arbor, Mich. Olin Mathieson Chemical Corp., the chemical manufacturer, recently bought the Yeonas Organization, a home-building firm in a suburb of Washington, D.C. International Paper picked up American Central Corp., a Lansing, Mich., developer of leisure-time property. The Penn-Central railroad is not only one of the nation's largest real estate owners but also depends on realty income to stay out of the red. Norfolk & Western Railway went into the field last year, and now has three projects under way, including a $100 million residential and commercial development near Kansas City.

Logical Mergers. Companies that supply goods and services to the construction industry regard real estate as a logical diversification. U.S. Plywood-Champion Papers runs 35 residential developments in eight states. National Gypsum last month agreed to acquire Florida's Behring Properties Inc., which is building thousands of homes near St. Petersburg and Fort Lauderdale. From its original base in timber, Boise Cascade expanded into both land development and construction by picking up five companies in three years. Now the Idaho-based company aims to become a truly nationwide builder of homes, so far an almost unheard of goal in the highly localized housing business.

The entry of big corporations into a field long dominated by small operators should add powerful momentum to the nation's ambitious goal of almost doubling housing production (to an average of 2,600,000 units a year for the next decade). Even if enough mortgage money were available, the old-line construction industry would not possess the entrepreneurial or technical base for so rapid an expansion. In any case, craft labor unions, archaic local building codes and the industry's fragmented organization inhibit mass production and inflate construction costs. Big combines might ultimately even do for housing--the biggest investment most families make--what Henry Ford did for the car. In many sectors of the U.S. economy, today's wave of corporate combines raises legitimate fears that concentration may threaten competition. In real estate, there is still too little of either.

/- Worth approximately $370 million in 1968 dollars.

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