I met with a Senior VP (25+ years experience) at a development shop that focuses on some large institutional multifamily products, 250+ units per project in major US metros. All projects are ground up. developments. What was most interesting in my conversation with him was that he was mentioning profitability was simply not there due to higher cost. He had mentioned costs have gone up substantially, as an example he talked about the fees paid to a property management company costing so much more because their portfolio was so small or limited, but the upfront costs was eating their pockets. A lack of economies of scale is what he referred to it as. He mentioned only boutique or mega developers will continue to survive.
I'm kind of curious if any out there can attest to this?
I know mega developers make their projects work in markets with high barriers, but they're only successful if it's a large scale project. Are boutique developers really the only guys out there that can capitalize on the markets with lower barriers?
I don't think so. I have found many regional/mid sized developers to be better locally/politically connected, enabling them to move forward with complex deals that many mega developers would not waste their time on.
Furthermore, I would imagine a lower return tolerance for mid-size guys that tend to syndicate with HNW money as opposed to institutional investors with rigid timing and return thresholds.
Larger firms generally have lower costs of capital...
I think another question I have with this is what fits under the definitions of "boutique" and "mid-sized"? What would influence this? Number of employees relative to the portfolio size? scale of projects?
In my experience it's less about firm size (although there are definite correlations), and more about business strategy. My firm is intentionally small, we are very picky about projects, and we don't like to compete for marketed development sites. This means we miss some of the upside in the early stages of the cycle, but we avoid almost all of the downside risk that comes with being aggressive. It's not a strategy for everyone, but our pipeline is full of enough interesting deals that we will continue to build, make money, and have fun while other shops are shedding people in a downturn.
Large developers can flatten risk by being active in multiple markets, which (in my opinion) is an even bigger advantage than their low cost of capital. Unless you're EQR with a $2BN revolving credit line that let's you do basically whatever you want!
I know lots of smaller, boutique developers who see the writing on the wall. They got really aggressive in the last cycle, tied up lots of land at top dollar, and thereby assumed a ton of market risk, particularly with construction cost escalation. Most of those firms are not likely to survive the next recession.
Yeah, this seems right.
To the OP, it sounds like that SVP means that he can't make money easily anymore and actually has to work for shit now. Which is how it should be. I'm really only familiar with the NYC metro area market, but I know a lot of folks are complaining about market conditions right now, because a lot of people (especially those under the age of 35) have only been in the business during a huge market boom cycle. You could have bought anything, at effectively any price, from 2010-2015 and just printed money. Now things are tighter and just building a super-expensive luxury condo isn't an automatic win button. Folks need to be smart, need to control costs, be in the weeds, all that. Have an angle. That stuff is hard and not very glamorous, and folks get frustrated.
Smart developers at every size can still make a killing. The folks suffering are the mid-size firms that had no creativity and no competitive advantages and relied on frothy market conditions to do deals.
This, 100%. SB
DCDigger In what aspects is your firm picky about projects?
The most important aspect is not getting into competitive deals, as I mentioned above. We mostly do off-market deals where we have a competitive advantage in closing speed, entitlement, community relations, or some other relationship-driven consideration.
We generally don't do projects with difficult partners (e.g. investors who want to be in the weeds of development or asset management, or who have onerous reporting requirements), and we avoid people we don't like or trust.
We don't like giving up control over major business decisions, so we don't like it when a partner tries to dictate with designer, contractor, or financing we need to use.
It's mostly about avoiding downside risk and making sure that the deal process flows efficiently. We are small and quite lean. So we need to be able to focus on the work and make decisions quickly. Saying 'no' to most deals and partners is how we maintain this advantage.
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