thoughts on small dev shops?
Feeling out the job market right now as I think I want to try and make a move in the next year. Currently stuck with limited growth opps on the LP capital partner side, if I stuck it out for ~2 more years I could be in a better spot but I’m frustrated with lack of upwards movement right now. An opportunity came up at a small mid-Atlantic/sunbelt shop of about 8 people, on the GP developer side. Looks like it formed in the last few years and the team has big known developers on their resume. The projects however seem nice in quality/reviews but also just your basic 300 unit wood frame deals in tier 2/3 cities. Less exciting than what I’m used to seeing. Obviously jumping the gun on this but what are some red flags or green flags I should be looking for?
I spent 7 years at a small development shop.
The biggest concern anyone should have with these types of firms seems to have already been addressed, that is, do the partners actually have stroke. Anyone can "start a real estate company" but no everyone can actually put a deal together and get it funded. From the sound of it, the partners there have a resume and have actually done deals on their own. In my case, the two guys I went to work for were the #2 and #3 people at their respective shops prior to going out on their own and absolutely hit a grand slam on their second deal. Working with and for pretenders will trip you up faster than anything, so if they aren't, then you're solid.
Beyond that, it's less about green flags or red flags and more about what to expect.
Comp can be all over the place. I was underpaid salary and bonus-wise the entire time I was there, but I also got % of the pref at exit from the day I started, so every time a deal sold I got a check. Considering the run the industry had the last decade plus, some of those checks were quite nice. If they're churning out wood frame apartments, I would try to ask for a similar arrangement. People don't do those deals to win awards, they do them to make money. If you aren't part of the making money aspect of it, the appeal wears off pretty quickly.
If you are coming from a very corporate environment, I would not expect that whatsoever. Everyone at my old company chipped in doing the random things one has to do to run a business. I helped renovate our office at one point, was in charge of ordering snacks in the break room for years until I passed that one off to my associate, ordered and mailed the annual company Christmas cards, and took the lead on updating our company website. Another guy was the de-facto tech support person any time our server went down. Another one arranged company events like holiday dinners or closing dinners. In the absence of support staff, you kind of have to pitch in and do random shit to keep the business afloat. There are also some absolute weirdos at these firms that would not exist in a more corporate environment, like our comically racist head of construction who kept two loaded guns on him at all times and quit in a rage mid-day only to be lured back with the promise of a raise. He wasn't very good at his job either, but he was one of the owners' boys from years ago. We also paid 2x-3x what we should in marketing costs because one of the owners' wives "ran a marketing company." Totally not ripping investors, his partner, or the rest of us off with inflated costs that indirectly go into his pocket. Totally.
All of that said, I wouldn't trade it for the world. I learned so much so fast because I had to. There was no structure. There was no backstop. There was no support system. I was not silo'd at all and ultimately ran the development process from inception to disposition, every step of the way. I got to stand up and present the deal in city meetings, forge relationships with lenders and equity partners, command the room in construction meetings, put amenities into projects and features into units for no other reason than because I wanted to, and generally do things that I otherwise would have had to wait 15+ years to do elsewhere.
Development has become very structured and silo'd and corporate. People call themselves developers when they are responsible for one tiny little part of a deal. If you go work for a small shop, even if what you produce isn't that exciting, you'll get what I consider the real experience. It may not look as cool on LinkedIn, but if you ever want to do this on your own, you're not going to be developing the same way a Hines, or a Greystar, or a TCC, or an Alliance does. You're going to be starting out just like the people who started that 8 person company did, and it is invaluable, IMO, to see how that actually works.
Absolutely nailed it - well done.
what was it like going back to bigger shop? Started at a firm with a ton of red tape and silos and investment committee. It was ok.
Left for tiny shop in terms of headcount. Literally no structure. I love it. Can’t imagine doing things the way my old firm did.
What was it like leaving your firm? I dread the day I have to move on, the pace slows, and I’m writing IC memos and whatnot again.
Never did. Went from one small shop to another.
I interned at a big brand name shop, and while I’ve flirted with going back to that life every couple years, I never have.
To add a different story to this, moved to a small dev shop in a major city to get out of a lesser known brokerage.
Principal was successful JVing with a very established but low regarded developer (read sketchy) and hit a homerun on a few deals coming out of 08 by betting everything.
Comp was way undermarket, they treated even employees there after 3-5 years terribly and it was the opposite of an institutional firm in terms of principals attitude, comments, and questionable actions with lenders, partners, and other tactics with employees (read verbally promising x, getting it then them saying we didn't have it written down) which happens but wtf.
Now they've lost projects and they have people coming and going out of the door due to the terrible culture (even seniors leaving in 6 months, 4 people left withing a 2 month period at a less than 25 person company, and others leaving after a day lol). Be wary of the smaller firms you join, have seen in general the top 1 or 2 guys make tens of millions but screw the #3 guy on.
Junior guys were not trusted to run a process like the above and everything was very disorganized, senior people would blame juniors for things that they sent out years before they joined because they were embarrassed when it was pointed out. I did get to see a lot and there were no backstops, so you had to figure it out but they weren't established enough to build even a small fund and go after deals so activity would wane. Instead of giving you positive feedback and constructive criticism, it was all negative and work harder to deter from asking for raises/bonuses. Even then heard of someone getting a 1.5% raise that was split up over the year (half in first 6 months, etc).
Man, this hits close to home personally. So many of the points here are spot on with what I experienced at a small development shop recently. I'm glad i left that shop but it doesn't deter me from wanting to work at another shop it really helps me make sure I know what to spot.
Very insightful and practical response, thank you. As someone coming from one of the T1 developers that you mentioned who is entrepreneurial, has a solid amount of regional CRE connections, and wants to go out and do deals on their own, given the current timing in the cycle...how would you think about 1) finding a lean, up and coming GP and joining with opportunities for early carry vs 2) staring your own GP, bringing in 1 or 2 senior folks with some "grey hairs" and building a lean team?
Way too many variables to accurately respond to this, unfortunately.
First off, depending on which of the shops I mentioned you work at, the answer may be just to stay there as long as you can due to how they compensate higher level personnel. Some of the big corporate shops compensate you so well it almost makes it not worth leaving. Others hard cap you.
The second part is how old are you? Are you really a second year analyst or do you have 10 years of experience? The younger you are, the less it makes sense to literally start your own shop. Equity won’t invest, banks won’t lend, etc. until you have some grey hair on your head and a sizable enough bank statement backing your guarantee. Young kids generally don’t go out “grey hair” shopping for a partnership either - the older, more established people do the hiring or take the more senior partner role.
Third part is what kind of deals are you looking to accomplish? A lot of people think their first deal as a principal will be the same kind of $150M monstrosity that they’re used to developing at the name brand shop. It can be, but it can also be far more effective to try to find something far smaller with a far more manageable budget. Or hell, distribute the $2.5M in GP equity across a number of deals instead of putting it all in one bucket.
Really it’s a bit like dating. People go out “looking for the one” for years and don’t find anything but then bump into the love of their life randomly at a coffee shop on a Tuesday. You never know who you are going to hit it off with or what deal you may stumble upon. It’s less about looking for the perfect opportunity and more about biding your time, making sure you have money and connections, and being ready to strike when an opportunity presents itself.
There are no "T1" developers. Take this tier bullshit and go back to the IB forum.
There are larger national developers who have a presence all over the place. That doesn't make them "better" it makes them better capitalized. There are always going to be local developers, asset-specific developers, etc who are far "better" (whatever that means) than the firms you're discussing.
Fantastic post. So much truth to all of this
I will echo some of the same sentiment. I started my career at a large REIT and knew I wanted to take a shot at development but was never going to get a role in development at this REIT unless I put in another 5-10 years. So I took a director of development role in a smaller shop (~50 people but I’m one of three guys on the development side). My boss worked at a large multifamily REIT and jumped to the company I’m at now which was a big reason for me wanting to join.
I can’t stress the difference between a large REIT and small shop company. At times when I first started, I was frustrated, no processes and it felt very wild west but in time I began to love it. I’m touching every component of the development cycle, land use, architect, civil, politics, anchor leasing, underwriting, construction, community meetings, contract negotiations with seller/third party developers, etc. We do large mixed use town centers so retail and multifamily. I’m 32 with 7 years of experience and have been given the reigns on all design/entitlements. Maybe I would have been successful at the large REIT but I told myself if I took this development role at a small shop by the time I’m 40 I would be a more versed professional, and I truly believe that decision will pay off. The grass isn’t always greener so make sure you do your research before you make your decision.
Went from an institutional shop to a small one and would never go back, but you have to be very careful on who the group is. Like a lot of the poster's mention, there is a difference between going to a wild west developer with no real track record or experience on the institutional side, to working for someone who has cut their teeth working at big shops and going off on their own. You want to try and find a group where you can learn "the right way" while also getting experience in all different facets of the business.
Small developers are fine, as long as they have a track record and a pipeline.
To be clear, "the principals have 40 years combined experience and have developed $3bn of real estate over their careers at [insert firm here]" is not relevant experience. Or not from your perspective, anyway. For a potential investor, that's material. For someone gauging whether a new, small development shop is likely to survive and thrive, everything that happened before the principals opened their doors under their own name may as well be dogshit.
So yeah, if you're browsing their website and thinking "I see a lot renderings, or a lot of deals that pretty clearly were bought/built before the company was founded" then that is a huge red flag. A team that is bragging about deals that haven't actually finished, or deals they did in a previous role, is a team that has nothing substantial to point to, successful or otherwise.
This will become very apparent in an interview and by applying the smell test. Are your potential colleagues the kind of people who seem ubiquitous on the panel and convention circuit, but only ever seem to talk about "the markets" and not the actual brass tacks deals they're developing? Red flag. In the interview, are they spending way more time testing you and talking about the firm, instead of the pipeline of deals you'll be working on? Major red flag. These have several employees and nominally have a pipeline, you say... so you should certainly expect that they have a specific project or two you should be working on. Push on that. If they can't give you details about the exact roles and responsibilities you'll be taking on, that's a red flag! I know it contradicts all common sense, but I've run into so freaking many shops that go on (relatively) massive hiring sprees because they care so much more about the appearance of being a busy, successful developer instead of the reality of hiring people to execute deals well. I can think of half a dozen shops in NYC that were/are open for only a couple years and ended up massively overstaffed, with people just churning through every OM that got blasted to them just to keep busy.
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