Real Estate Development opportunities: limited?

Been thinking about this for a long time, and figured I’d discuss it here.


From my uninformed POV (I’ve only been working in CRE for a year), it seems like real estate development is quite limited in terms of opportunities due to production inputs being limited.


In most cases, businesses stop growing because a mature market is filled with competitors and there’s no more demand to supply to, rather than supply constraints.


In RE, it seems like the bottleneck isn’t demand, but finding the adequate inputs (i.e. land) to supply the needed product.


Although land is abundant, valuable land near productive places (that is, cities) is already very expensive, and often controlled by players looking to develop it themselves. In turn, dev opportunities are limited due to having no access to land inputs or being unable to get control of the land because a bigger player can afford to pay more than you can.


So most valuable RE opportunities markets where development is worth doing are bottlenecked by the landowners or the well-capitalized folks, and smaller players can’t afford to get in the arena.


Is that the case? With so many people here wanting to go out on their own, it seems that everyone would end up fighting for the same pieces of land in the same places, making dev spreads way less attractive.


Something could also be said about product differentiation, where tastes are quite homogenous, and thus developers can’t really have an edge beyond the quality of design/materials and location.

 

You starting out on your own on your first big boy deal are most likely not chasing the same dirt as Hines. There are always plays out there for people willing to think creatively. 

Commercial Real Estate Developer
 

Development leads to more development.  I always say a new luxury apartment building today is an affordable building 30 years from now.   Extending the urban fringe two miles, makes the previous fringe more in-fill, potentially more valuable.
 

The development skill set is valuable because when overlapped with other skills, say of a different industry such as higher education (universities), health care (hospitals, clinics, etc), to manufacturing, to retailers, to sports entertainment.  If expansion includes the physical world, such as real estate, your combined experience will be useful and rare.

Have compassion as well as ambition and you’ll go far in life. Check out my blog at MemoryVideo.com
 

MonitorStand

Interesting. Mixing up a skillset is for sure a good idea. Thank you for the insight.

You are also missing another component to value creation in RE: platform creation, strategic acquisition/development and entrepreneurship. Your original posts says the words “why so many go out on their own” “fight for the same land” “homogenous” “can’t really have an edge”.  

That’s because you think of development so narrowly.  As if you can only work for a development shop.

Development should be looked at as a skill set.

I don’t get excited about most real estate acquisitions if there isn’t a bigger picture (business or personal).  I think the same goes for the LP’s I work with.

I don’t like normal market risk.  I want to be special.
 

This is where my “operator” hat comes on.  To the right operator, you can achieve the best and highest use (aka make the most money) while setting up a business where your leasing risk is zero (you also own the Lessee company) and it’s tied to a growing book of contracts and business.  We paid the most money for the property to win it, then changed the use, and moved our tenant company in.  

For example, DaVita is a kidney dialysis company with a near monopoly.  They look at real estate differently than how you described.  They make a ton of money on the operating business.  They want to be in best locations and expand their footprint further and further creating a business moat.  
 

When founding such company (I’m generalizing), “physical world” expansion is an important component.  A development skill set helps.  An investment skill set helps.  An accounting skill set helps (you’re most likely going to oversee all financial activity).  Money folks have to trust you.  An operating skill set helps (industry operational knowledge).  You want to be a cog in the wheel and a bit player?  Or you want to be an original co-founder with a life changing equity stake?  
 

In reality people get into RE from all different backgrounds.  Some stay working for real estate companies, others get their experience and pursue beyond real estate.  But use the skill set they honed.
 

If you’ve ever been kicked off of the hamster wheel like I have (fired from job, great brand names mentioned on here), there is a world beyond that is less siloed.  Risk, perseverance, luck, focus all factor in.  

What I’m saying is get your development experience and then go get operational experience (what kind of business?  That’s up to you.  What excites you?)  If you really love the nuts and bolts of development, then you can do that full time (great description from Jarstar).  I did not have the personality for that long term and my boss recognized that and I was eventually let go.  The company didn’t need me anymore and they could hire anyone they wanted.

For those of you unemployed.  In 2017, I was an unemployed, 35 years old and I worked a $15 per hour job to get real world, Main Street operational experience in a field I wanted to transition to.  I did this for 7 months.  Eventually co-founded a couple companies and exited last year.  
 

I was the only one on my team who knew what a “development spread” was.  In fact probably the only one who knew much about finance.  That’s “skill set leverage.”
 

I feel like generally speaking real estate roles choose you.  Hear me out.  The mid 2000’s was a capital boom.  I worked for an institutional LP in acquisitions.  The Great Recession, unemployed.  Got operations experience.  2010, real estate recovery.  Development was hiring before anyone else.  Did that for 6 years.  Got let go.  There was some juice left in the bull market and rode that, went back into the field I got operational experience in during the Great Recession.  With exceptions, the market today - Development is not choosing you.  The magic 8 ball in my gut says, now is the time to either get operational experience in an industry you want to apply your RE skill set, or hunker down in RE for the long term and wait for the boomers to retire and you take the reins.  My real estate career was a leaf floating on a Rocky sea, and then I became a problem solver in an industry I was passionate about and more or less I’m detached from the macro.  Now very much feels like that time to think about your next 10-20 years.  Expand yourself if you’ve broken free from the hamster wheel. 
 

It’s a good time, OP the biggest limitation about development/real estate is your imagination.  Also, learn accounting. 

Have compassion as well as ambition and you’ll go far in life. Check out my blog at MemoryVideo.com
 

It’s not any more restricted than acquisitions.

there are only so many existing building to buy as well. 

 

Would you say acq is even more limited? Some friends of mine have started doing value-add deals in the last few years, and it seems like many smaller players are all fighting for the same few ''diamonds in the rough''. 

 
Most Helpful

The real bottleneck is zoning, NIMBYism and construction costs. Most T1/T2 cities are chock-full of sites that are economically underutilized. Think about how many parking lots, single-story retail, vintage 4-story office buildings, etc. litter urban cores/rings. The issue is typically there is some combination of FAR/height limits, minimum lot size requirements, minimum parking requirements, or affordability requirements that handicap developers.

This plays hand-in-hand with NIMBYs and high material/labor costs in the following example: Say you found a great urban site that would make a great apartment building, it has the right blend of location, rent level, etc. But the construction costs are too high to justify doing a by-right 4-story building, so you want to get a zoning change to let you build to 6 stories, but the NIMBYs are mad that it will be taller than the surrounding 4-story historic buildings and they're concerned new apartments will put strain on the already-crowded street parking. So they want setbacks on all floors above L3, and 2 spots of parking per unit, which now pushes your height to 7 stories to get in the same FAR, and bumps your construction cost since you need to go down another level for the additional parking. In order to justify the additional cost you need to add some more units and make it 8 stories, which just further enrages the neighbors. You finally placate them and get the local zoning board to approve your variances, but it took you three years and your carrying costs have eaten into your profit and construction prices went up 15%. Now you need to generate even more revenue so you update the finishes to make the units ultra-high-end, and the neighbors now want 25% affordable to counteract your greed, and they stop you at the City Council vote. Time to start all over again with a 9 story building this time. 

Solving that problem is the biggest bottleneck to development. You can find jurisdictions that do not have strong zoning constraints or NIMBY protections, and they've had development skyrocket over the last decade, just look at Texas, the Sunbelt and South Florida. Construction pricing ebbs and flows with the cycles of your local market, but governments have a lot of levers they can pull when it comes to making development easier or harder, starting with zoning and affordable housing requirements, but also going as far as utility connection fees, parks and rec fees, and school assessments. 

The real differentiation in development isn't the product, as you mentioned, it's being able to navigate the issues outlined above. Local developers who use local architects and attorneys to build projects that fit the desires of the neighborhood, and who have the connections and goodwill with local business leaders, government officials, politicians, etc. are able to get more projects built than some outsider who comes in and tries to ram their 35-story condo or 1 million+ SF industrial building down the city's throat. A good developer knows what buttons to push and where to give concessions. You want setbacks? Fine, I can rent the units for more with balconies, but I'm not going to sacrifice on FAR. You want street-facing retail? Not a problem, but I need the curb cuts at my locations to optimize my building layout and zero front/side yards. Etc. Etc. I've seen developers get projects deemed impossible approved because they know how to navigate the system, appease the right people, communicate with the neighborhood, all while still maintaining their financial interests. 

 
jarstar1

A good developer knows what buttons to push and where to give concessions. You want setbacks? Fine, I can rent the units for more with balconies, but I'm not going to sacrifice on FAR. You want street-facing retail? Not a problem, but I need the curb cuts at my locations to optimize my building layout and zero front/side yards. Etc. Etc. I've seen developers get projects deemed impossible approved because they know how to navigate the system, appease the right people, communicate with the neighborhood, all while still maintaining their financial interests. 

Young aspiring developers - please read this, screenshot it, and then re-read it before bed every night. 

I cannot stress how much more important this is than your excel inputting skills. 

Commercial Real Estate Developer
 

Great write up - accurate and painfully relatable.

The real differentiation in development isn't the product, as you mentioned, it's being able to navigate the issues outlined above. Local developers who use local architects and attorneys to build projects that fit the desires of the neighborhood, and who have the connections and goodwill with local business leaders, government officials, politicians, etc. are able to get more projects built than some outsider who comes in and tries to ram their 35-story condo or 1 million+ SF industrial building down the city's throat. A good developer knows what buttons to push and where to give concessions. You want setbacks? Fine, I can rent the units for more with balconies, but I'm not going to sacrifice on FAR. You want street-facing retail? Not a problem, but I need the curb cuts at my locations to optimize my building layout and zero front/side yards. Etc. Etc. I've seen developers get projects deemed impossible approved because they know how to navigate the system, appease the right people, communicate with the neighborhood, all while still maintaining their financial interests. 

As I've always said, real estate development is a local business. The founder of the institutional developer I used to work for started off as an aspiring politician in my city (a major northeast city). He eventually became the head of urban development planning at the city. After a couple years he abandoned his political aspirations and leveraged his connections with city officials to become managing director/partner of major developers that we've all heard of. During the financial crisis, he founded his own firm and started off consulting for major developers and helping them get their projects entitled because he had the right connections and knew how to play the game. He has grown his firm to become the largest developer in my state in only 10 or so years. Most recently, the city put up a large piece of land located in a not so great part of town for developers to bid on and develop. Each developer has to present their plan/vision to the city. The final round was between my previous firm and Tishman/Related and my previous firm won. My previous boss brought on the local church pastor that was very well respected in that part of town and all our 3rd party consultants (architects, engineers etc...) were comprised of people of color. The neighborhood and city ate that shit up. My ex-boss knew exactly how to play the game.

 

Adding to what CRE said: Your deals as a "small player" won't be the same as institutional developers.

Is your first deal going to be a plug-and-play zoned mixed-use deal downtown in a primary market? No shot

Is there still an opportunity for "small players" to get deals done that pay if they are a bit creative? Absolutely

Obviously, I don't recommend a contentious rezoning case in a hostile neighborhood (ex., highrise MF in a low-density suburb) for your sanity's sake. However, there are still plenty of things you can do if you put in a little work. Inefficient land uses are still abundant in most major metros if you wanted to do an infill deal (still would be a challenge nor would I reccomend for that to be the go to as infill deals tend to have a bit more hair on them) or you could go for land just slightly further out. 

Take Dallas, for example. Is a small-time player going to get an MU parcel in Uptown/Knox, where they can throw up a deal? Probably not. Is there land in surrounding areas (be it the city of Dallas or adjacent towns) that is conducive to development that larger players don't want to deal with or don't meet their criteria? Definitely.

The expansion of major metro areas has been rapid and has produced many new opportunities for many "smaller players" to expand into. Commuting into major metro areas is very commonplace, and people have been slowly expanding out to surrounding cities, which means the land availability and appetite for new developments in growing markets has skyrocketed. You just, as everyone has outlined, have to get more creative to get stuff to work. Also, a lot of properties have been aging out, and that adds more opportunities on land that is already technically developed (ex. Valley View Mall, The Central, Red Bird Mall, Old Cowboys Stadium even though these are being mostly run by institutional players that is where a lot of them are focusing not a 3-5 acre wrap deal in a gateway market lol)

Also - rezoning (which is always a nightmare but hey at least there is a chance)

You're not really a born and bred, traditional aristocrat if you work hard enough to get into Harvard.- Prospie

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