Real estate developers face an awesome responsibility. The communities and buildings they create become the fabric of our civilization. They influence people’s lives in a multitude of ways. What they build affects how near or how far people come to realizing the lifestyle of their dreams. Developers play a key role in determining the financial health of cities and the everyday experiences of their inhabitants. Where people play, work, and shop; how long it takes them to get there; and the quality of the amenities and environment that they find all depend to a large extent on the work of developers.
Developers face a much more complex world than they did even 20 years ago. Everyone has a stake in their activities. The days are past when a developer could unilaterally decide what he wanted to build and then build it without consulting community leaders, neighbors, and others affected by the development. The political, environmental, and financial context is changing just as rapidly as the market itself. In the 1990s, the development industry went through the most wrenching adjustment since the Great Depression as a result of overbuilding in virtually all segments of the industry combined with the collapse of the S&L industry. In the wake of the global financial crisis of 2008–2009, the real estate industry once again endured wrenching changes as commercial mortgage-backed securities (CMBSs) and other securitized financing vehicles collapsed, 8 million homes went through foreclosure, unemployment rates soared, and burgeoning debt forced enormous cutbacks in government spending and private debt. The latest cycle has had very different impacts from those of the S&L crisis, with more regional differences depending on the extent of overbuilding.
Three major changes have occurred over the last ten to 20 years that have affected the development industry dramatically: globalization and institutionalization of ownership, securitization in the financial markets (notwithstanding the CMBS collapse), and the technological revolution. These changes create both opportunities and obstacles for beginning developers. Entrepreneurial development is harder today than it was 30 years ago—it requires more capital to get started and more time to get projects off the ground.
At a time when the development industry is undergoing such rapid change, why do we need a book on how to develop real estate? First, if sound development principles had been practiced by all the developers of real estate who lost their buildings in the recent down-cycles, much of what was built would have never been conceived, let alone financed. Second, the recovery phase of the real estate cycle is the best time for newcomers to enter the development business.
Third, qualified developers will always be necessary, and they should have the best possible training. The incredible pace of development in emerging markets such as Brazil, China, and India creates an enormous need for people with development skills. Development is not for amateurs. When projects go bankrupt or are poorly designed, the whole community loses, not just the developer and his financiers. Why should tenants have to put up with poorly designed spaces? Why should communities have to suffer the tax losses of ill-conceived projects and unoccupied buildings?
Successful development requires understanding not only how to develop good real estate projects but also how to determine their impacts on neighborhoods and cities. Long-term real estate values are directly tied to the quality of the urban areas where they are situated. Developers must take an active role in protecting and enhancing the long-term economic health of the cities in which they build.
Although this book was conceived as a practical guide for developing five major real estate types—land, residential, office, industrial, and retail—it is intended to do much more. Successful developers must have a thorough understanding of urban dynamics, of how and why cities grow. They must be informed critics of architecture; they must be knowledgeable about construction, law, public approvals, and public finance; and they must have the fundamental real estate skills in finance, market analysis, leasing and sales, and property management. Real estate development is the art—and, increasingly, the science—of building real estate value by managing development risk. Development expertise can be applied to much more than building new buildings and subdivisions. Development talents are essential for such activities as buying empty office buildings and leasing them, renovating older warehouses, repositioning shopping centers by changing the tenant mix, securing development entitlements for raw land, and buying distressed debt and workout properties from banks and turning them around.
Development is exciting because it is dynamic. The conditions that enabled developers to be successful in the latter part of the 20th century are different from the ones that will govern in the 21st century. As the conditions change, so will the skills that developers require to be successful. This book presents the collective wisdom of developers in both successful and unsuccessful projects, acquired throughout their careers. It is organized by property type to emphasize the different risks and concerns of particular products. The overall steps, however, are the same.
The challenge of building more livable cities can only be met by qualified developers working together with other real estate professionals, public officials, and neighborhood representatives. Perhaps the greatest challenge is to evolve a fairer and more efficient development process—one that reflects the needs and aspirations of all groups while eliminating the many hurdles that raise the costs of development without providing commensurate benefits. Of one thing we can be certain: the expertise that developers require will be different tomorrow from what it is today. Let us hope that tomorrow’s developers are equipped to meet the challenge.