Why is residential RE looked down upon?
What is it about residential real estate that people think is inferior?
When you’re developing a $300M subdivision with over 500 homes, why do people look at it as less prestigious than building a single commercial building worth $50M?
I’ve worked in both and honestly cannot figure out why residential is looked down upon so much. What’s the deal with this?
Who looks down on this? I'm genuinely curious. When I clicked on this thread I assumed it was about residential brokers or something.
Especially outside of the industry sometimes people hear residential and are instantly disappointed. Maybe they think I worked in residential brokerage.
This is a completely understandable question and one that I've asked myself many times. However, over the years I've come to appreciate why this is the case more and more. Let's lay out a few things,
I'm sure there's plenty of more that I'm not thinking of off the top of my head. But the above is a glimpse into why this is not generally viewed as favorably on some basic comparison points.
Awesome response.
On a similar note to your point about "widgets", it's worth pointing out that even though you're building 500 units, they're going to be exceptionally cookie cutter by nature. You might have 5 basic designs that get replicated 100 times each. The construction itself is also pretty easy and low effort. Putting up a 4,000 sf, two story single family home is just a lot easier from an engineering and architectural standpoint than building a 100 unit mid rise building. There just isn't the same degree of complexity, and I'd argue the average useful life of many single family homes is a lot less than a well-designed and engineered MF building.
Since I've never worked on the kind of subdivision development being discussed, this is sort of hearsay, but there is also a bit of a hand-to-mouth aspect to it, even within the same development. @KingEsque mentions it too, when talking about recycling capital. But effectively you might really just be financing the first 50 homes, then using the proceeds from that to keep rolling over into further phases. That just requires a less... intense, maybe, financing process than you'd find where you're taking on tens of millions of dollars of risky construction debt to build a single asset, for which even minor delays can cause huge debt service issues.
Great analysis. I didn’t think as much about how it looks from the finance side of things. The comparison to manufacturing makes sense. While the residential projects I’ve developed have been much bigger and more significant overall than the commercial ones, I can see why to some investors the commercial would have more significance.
On the subject of master-planned communities, the ones I’ve worked on have always been broken into many parts, with several home builders developing and expanding portions of them. These communities can have 20k+ homes, but I’ve always seen them as more of a group of subdivisions put together. But there is a high degree of sophistication to the planning for sure.
This right here. Great response.
I interviewed for a Land Acquisitions role with TB awhile back and turned down an offer because it just seemed so cookie cutter.
Going to have to disagree with a bunch of these IMO... Anyone who follows the commercial real estate sector and resi market will know during COVID the best play with in residential assets, specifically SFR and now BTR. Institutions are putting a significant amount of capital into that space through JVs or creating their own property managers, and this is everyone from large PE shops (KKR, Cerberus) to Asset Managers (Nuveen). These players are utilizing warehouses to get capital at decently cheap rates, and this includes both capital call lines and revolving warehouses, so balance sheet is not as much of an issue as you'd think. To top it off to the securitization market has been robust.
There is a significant amount of capital inflow & demand here with diversification away from traditional CRE. Resi homebuilders are partnering with institutional capital to create more assets (unless someone like AH4R are doing it in house). The fact of the matter is a trade that was thought of the be like quoted above ended up actually being false - the ability to achieve economies of scale was proven out, and the demographic trends of the US support the larger investments in the space.
You can look at John Burns RE Consulting to see a sizable amount of the deals that have been struck in this resi space.
While what you wrote may have been the norm even just a few years ago, this mentality is changing.
This has nothing to do with the question, though.
Institutional investment in SFR may be the hottest thing going, but that doesn't make it particularly interesting compared to other commercial real estate investments. Additionally, the OP was specific in discussing development, which is an entirely different ballgame.
Building white box last mile warehouses might also be exceptionally lucrative in 2022, but that doesn't mean that's interesting, or challenging, either. Being a residential broker in the suburbs might also pay really well, but that doesn't mean we should think of a Coldwell Banker broker as the end all and be all of real estate, either.
It might be looked down upon in the sense that it's not as "sexy" as silly high towers, but that's a narrow view.
A few points against:
1. Especially with work from home being a shift, residential is experiencing changing tastes (and change is opportunity etc), and given the need to upgrade crumbling stock + environmental requirements it's surprisingly dynamic.
2. While I can agree with the design point, long term more modular design will hit the shelves for the mass market ... But hey if you want to work in luxury penthouses you can, in practise the asset class is huge.
3. This is the biggest one, if you are known as someone who can raise capital or can provide it, you can do very cool things within residential. Start your own little portfolio, or get institutional backing and partner with a site manager who knows their numbers. Maybe you won't be the biggest listed firm, but Jesus those margins will make you retire rich. Residential is a space where you can really go an entrepreneurial route if you are bold enough.
Further, you can often mix and match, a massive resi block is obviously an opportunity for businesses so you will invariably peek at other asset classes.
The question I am curious about - are duplexes and small apartment units considered Residential or Commercial Assets?
I was looking at duplexes from the start but I need a stable living space for now, so most likely a condo first then refinance the first year to then get another condo or house and rent the first one out to start a portfolio.
1-4 units are residential
First, there's a major difference in executing $300mm single-family development deals and what most people consider to be "residential development" which is building luxury homes one at a time. For reasons that are probably obvious as to why it's not looked upon as highly..there's way less moving parts, and it's pretty cut and dry "gambling" that someone will pay $X for your house more than the house next door because they have nicer countertops. There really isn't clear math to backup these assumptions and why a lot of those guys go bust. It's more of an art form than a science and pricing completely varies depending on so many different aesthetic factors that you can't really even project. You're also not dealing with lenders and working through term sheets for loans because these aren't going to used like fixed income and the lenders you interact with really only care about asset value vs. coverage ratios, market, etc.
The other point that I'd make is there are actually a range of strategies within residential. Obviously development is one, but you can take more macro views and work in land strategy, partnerships (ie governments), distressed / turnaround residential. That's not even getting freaky and looking at the nuances of specialist residential such as healthcare driven or off spec (e.g. extremely high security). Anything anyone wants, they need to live in it first to enjoy...
So [KingEsque] gave a great run down that looked pretty spot on. That said, why people should "look down" upon it and put commercial development or just CRE in general up on a pedestal is really just a subjective call, but I am really not the person to say much as I work for firm that pretty much only does the "big stuff" (like small projects are $50m, and big ones north $500m), so I'd be a f-ing hypocrite to make any defense of resi dev here. Yet, I honestly view large scale master planned development to be every bit as "prestigious" as what high rise urban devcos do. Now, I'm talking about those "rare" large scale projects that will have retail/commercial, apartments, and for-sale homes. And I'm not talking about homebuilders (those would just the lot buyers).
Homebuilding is an industry of its own, I wouldn't look down on it, but its its own world. Residential development (talking the land and horizontal infra and planning, etc.) is very complex and engaging, really see it on par with urban commercial IMHO.
If we want to start a thread on over-hyped industries (and I guess over-paid)... I'd like to nominate Investment Banking... they are just sales/brokers.... M&A is just investment sales with more complex models (and don't buy into the bullshit... the valuation methods are just as simple as those in CRE). Anyway... why hate on the resi crew and homebuilders when you can say fuck the bankers!
Personally I think the 22%+ IRRs that you can get on selling lots to builders are sexy as fuck. It's also super easy to manage a big horizontal development where you just have a sitework guy vs. say a multifamily deal where you'll lose sleep over arguments with the GC and spend days of your life getting into the nitty gritty like hallway signage and VEing shower tile height and finding some bike rack spec so that you can satisfy the public space element of your site plan.
A lot of big institutions got really burned in this space in the GFC and stayed away for well over a decade, which is why you can still get decent returns while everything else has been bid up like crazy. But as someone alluded to above, they're all jumping back - capital has to find a home, and it's currently overflowing in other asset classes.
I've done development in the SFR world and in MFR. I think SFR has less prestige in part because the reduced complexity of the construction means that the developer has to be more directly involved in it. Unlike with large apartment developments, it's feasible for most developers to GC the projects themselves, which means that the market ends up basically requiring that. Most homebuilders GC the projects themselves, even if they're subbing out all of the actual labor. In MFR, by contrast, you're typically hiring a third-party GC and thus you're a step removed from the dirty work of buying out and managing construction.
SFR development, in my experience, involves a lot of mundane stuff like dealing with delays from your garage door supplier or framing crews and working directly with the sitework super to determine how to route an electrical conduit trench. You're really a "builder" as much as a developer. Hence the term. I don't think the average person coming out of a fancy MBA program wants to spend their days doing a scaled-up version of something that guys with high school degrees and pickup trucks do. (I'm referring here to the social status of the job, not its complexity. It is actually complicated, since you need to know a lot about the nuts and bolts of the work.)
I have a MBA and I'm at a SFR fund. I'm at the pt of who gives a shit if it's prestigious or not. Does it make money? Is there are future in it? Can you learn how to do it yourself?
Those are the only questions I find relevant. The fact that the competition are basically guys with pickups should be a hint. Can apply business aspects to it to make it more lean and profitable.
Yeah, I agree. Peter Thiel talks about the constant need to win peer competitions as a failure mode among high-achieving people. Got to get into Harvard, then get hired by Goldman, then by some PE firm, etc. At a certain point, if you enjoy something and can be successful doing it, you should do it. The fact that your competition is less sophisticated is a good thing.
Sb +1
This is 100% the correct ideology. Chasing prestige in RE is a powerful cognitive bias that can lead you down the wrong path.
What has your experience been like?
I mean delays cause of simple supply shortages for items like garage doors, panels, etc are very real in MF development as well.
It’s just less prestigious to build a bunch of crappy houses and sell them to middle class America. Contrast that to building a Class A trophy office building with a couple investment banks, consulting firms, and white shoe law firms as your anchor tenants and the mayor shows up at the groundbreaking, your biggest LPs run billion many multi dollar funds and your promote is in the tens of millions. Come on dude doesn’t this speak for itself? Commercial office has a cool, exciting, high profile, glamorous image done the right way. Residential will never get close to that. That’s just the prevailing image I think.
Yea Class A office in Oklahoma City is very prestigious. Institutions are getting in on build to rent now, ya know?
I’m just stating the perception. If you are too big of a pussy for your ego to handle someone else’s perception of what you do then sack the fuck up. I’m in Multifamily at the moment and will likely stay in it. I’d rather make solid returns than work on something some people may consider more prestigious. Apartments are definitely considered less prestigious than office, no question, but who gives a shit
I worked across nearly all product types in real estate, started at a traditional SF homebuilder, and now work at a large RE driven PE fund - in my opinion for-sale, single-family development is the most engaging, rewarding, and complex undertaking. Bar none. I still yearn for the days sitting in a trailer onsite......allocating capital is too easy
What is your education background? Do you work with the realtors directly as well or more indirectly?
undergrad business, MBA from M5
In single family/for-sale development you definitely work with realtors more. It's more wheeling and dealing than institutional asset classes. Which makes it more fun
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