Dubai: What goes up must come down

I remember sitting on a beach in Florida several years ago reading an October 17, 2005 New Yorker article about the real estate boom in Dubai and thinking two things: First, this must be one of the biggest and most amazing construction booms in human history; and second, this will not end well. Three and a half years later, it is ending very badly.

The New Yorker article described a real estate construction boom of unimaginable size. It mentioned one Mohamed Ali Alabbar, founder and chairman of Emaar, a real estate company then "valued at $25 billion, and the developer of a building -- the Burj Dubai -- that will be the tallest in the world. He [was] also erecting the world's largest shopping mall and the world's largest aquarium." This was only the most gaudy part of Dubai was had "a mile-long line of modern skyscrapers 30-, 40-, 50-stories high and a beachfront of artificial islands," according to the New Yorker.

But this real estate boom is ending and all the foreign workers who flooded into Dubai to take advantage of the money are leaving. And with good reason -- they borrowed money to buy apartments, lost their jobs, and if they don't pay back the money they borrowed, they could end up in debtor's prison. So they've reportedly been driving to the airport and leaving their cars -- 3,000 cars sit abandoned -- with notes of apology prior to fleeing. Statistics tell the story: real estate prices are down 30%, Dubai is canceling 1,500 work visas for foreigners every day, and luxury cars are selling at 40% below the asking price.

Dubai used its oil wealth to fund a big real estate boom. Perhaps the idea was to diversify Dubai's economy so it would be in better shape if the price of oil fell. But the diversification effort, which might have created an upscale retail paradise in the Middle East, looks poised to leave miles of unfinished skyscrapers and empty buildings along with billions in unpaid debts.

As the New Yorker article suggested in 2005, Dubai spent much of its history as a poor strip of sand in the Middle East. It was a small trading port until the 1960s when oil began to flow and now it looks like it may go back to that status. But this time, it will have unfinished buildings as monuments to a failed effort at diversification.

Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

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