What Is A Real Estate Developer?
A real estate developer is a person, firm, or other institution that develops raw land or redevelops existing sites. Real estate developers either work on their own account, or they can offer their services for a fee. As part of private industry, developers are entrepreneurs.
Developers can also be government entities, nonprofit organizations, or other institutions that create or renew built environments where private markets do not address the particular needs of the community.
What Do Real Estate Developers Do?
What real estate developers do is create the structures that serve the needs of our society and reflect our communities. In the private sector, this means developers embark on an entrepreneurial endeavor to respond to demand for a particular type of space, building, community, or other built environment.
Once a real estate developer comes up with an idea that caters to a need in the market or community, they bring together the people and resources necessary throughout the development process to turn an idea and a vision into a reality. This means the developer must manage the people and the process to see the project through.
The point of completion of the project depends on the developer’s exit strategy. If the developer is a homebuilder, the developer is involved once the home is sold and the keys are handed over to the new homeowner.
If the project is to be sold as an investment, the developer will be involved in the project through the initial marketing and lease up process. However, some developers keep their projects as their own investments which they will operate.
Developers Respond To Needs In The Community And The Market
The needs that developers fulfill are infinitely diverse in scale and variety. This is reflected in the scale and diversity of the built environment that surrounds us any where we go.
Each type of property, development, and planned community that exists represents a need for space that a real estate developer has responded to and created. Office buildings, industrial warehouses, shopping centers, apartment buildings, and planned communities are all examples of property types and built environments that a real estate developer has built to fulfill a need in the community.
Industrial buildings respond to a company’s need to store goods or manufacture products. Retail shopping centers respond to a community’s need to shop for products, congregate, and socialize. Housing developments reflect the need of people to have a place to live.
Real estate developers must identify and measure each one of these needs. They must then come up with an idea and vision of how to respond. The developer puts everything together and manages the process until the project is completed and put to use. Of course, the developer does this in conjunction with the local community and local government.
To illustrate the concept of how a developer identifies and fulfills a need, imagine a software company that has 50 employees. The company will need a place for its 50 employees to work. If the company needs 250 square feet of office space per employee, the company needs a total of 12,500 square feet of office space.
A real estate developer identifies and measures this type of need in the market. Realizing the need of the software company, the developer responds by developing an office building that responds to the software company’s need to house its 50 employees with 12,500 SF of office space.
Developers Create And Respond To Ideas And Visions
Once a need is identified, the real estate developer needs an idea or vision of how to cater to that need. That idea will have to be turned into a concept that corresponds to the ultimate use of the project. If the concept corresponds to the market and it is feasible, it leads to a design that the developer can move forward with through the development process.
The real estate developer may come up with an idea on their own, or the idea may result from a collaborative approach with the consultation of other real estate professionals such as brokers and architects.
A real estate developer may also be working as a fee developer, in which event a client has hired the developer to manage the process. In this case, the real estate developer will be executing someone else’s idea or vision for a project.
Many ideas can be tried and true. Some developers may have a standard formula and set of plans they’ve used before. Small apartment complexes can be an example. Retail chains often have their own designs and systems that they use time and again. In fact, these retail chains often have their own real estate and development departments or subsidiaries.
Other real estate developers are less visionary. If a developer sees an opportunity in the market with a financial upside, they may defer the majority of the inpiration and vision to the architect, or effectively try and duplicate something they’ve seen elsewhere. Their goal is more to take advantage of a window of opportunity and get a project built and sold before the window of opportunity in the market closes.
Developers Must Justify The Viability And Feasibility Of Their Idea
Once a real estate developer has an idea for a project, it needs to be studied an analyzed. In effect, a developer must conduct due diligence on whether there can be a valid business plan behind the idea, and whether the idea is feasible.
Real estate developments can be extremely capital intensive. Once a need in the real estate market is identified, there needs to be a profitable business model behind it to make the idea financially justifiable.
Most projects will involve different forms and stages of financing. Financial institutions, lenders, and investors will all need to see a project’s financial potential and assess the projects risk before providing any monies. Even if a developer self finances, a developer won’t remain in business for long running at a loss.
With a solid business plan behind a real estate development, there are many other factors that can thwart a development project’s success.
Legal restrictions, regulations, concerns in the community, politics, and the length of the entitlement process can diminish the probability of success of even the greatest idea.
Real estate developers will have to conduct a feasibility study on any project before moving forward to avoid potential pitfalls and losses.
Once the financial viability and feasibility of the project have been established, the developer can begin turning the idea into a reality by engaging the various professionals and firms necessary to execute the project.
Developers Bring People Together
Whether in house or contracted out, real estate developers bring together multiple people and parties throughout the development process. For a project to move forward, the developer must be able to assemble an lead a team. The team might be in house professionals, or outside firms and professionals.
Developers may also need to bring together outside stakeholders. Neighbors and members of the community may have an opinion or interest in a project. Local government officials have a say. Their concerns can impact a project.
Consequently, it is in the interest of the real estate developer to listen and understand the concerns of all stakeholders so everyone can find common ground.
Real estate is a people business. As a result, a good developer will have good people skills. Issues will arise among the various parties. People’s concerns will have to be addressed. As the lead stakeholder in the project, the real estate developer will need to make sure people come together so the development process can come together.
Developers Manage The Process To Completion
Although very creative, real estate developers undertake a highly comprehensive, complex and technical process to deliver real estate product to the real estate market.
The process requires tremendous amounts of time, capital, and coordination of a multitude of people and interests. Furthermore, the economic environment must remain conducive to the project until completion.
The real estate developer is at the center of this process from inception to completion. From the initial idea to the lease-up or sale of the property, the real estate developer is ultimately the party that must manage, control, and coordinate each step of the development process.
The development process includes, design, financing, obtaining entitlements, securing land, negotiating contracts, construction, marketing and sales.
Throughout the various phases of a project, a real estate developer will engage many different professionals, trades, and areas of expertise. The various professionals developers will interact with include banks, investors, architects, engineers, land use consultants, building contractors and sales persons to name a few.
Developers will also interact with various government agencies to obtain permits and authorizations and ensure development projects are in compliance with regulatory requirements and processes.
The real estate developers will have to successfully manage and coordinate each step of the development process, either directly or through a team.
Developers Must See Each Project Take On A Life Of Its Own
Any building or structure by itself is an inanimate object. It is built for a purpose, and it has no value or function until it is put to use. Once the project is occupied and put to use, it takes on an life of its own.
The real estate developer’s role in seeing their project take life depends on their exit strategy and business model. Some developers build properties to hold on to as income producing investments once the project is completed.
A commercial real estate developer may build an office building or shopping center with the intention of keeping it, renting out space, then collecting the rent afterwards. In these cases, the developer will remain as the investor in the property. They may, or may not outsource the management and leasing of the property themselves, but ultimately remain involved and responsible in the operation of the property after the development process is completed.
Other developers may build a property with the strategy of selling the project once it’s completed. A community developer or homebuilder that builds a housing tract will build homes just to sell them.
Homebuilders have no intention of remaining involved in the project once the homes are sold, but they generally conduct the sales and marketing of the homes they build. The community takes on life once the homes are sold to the residents who will live there.
Similarly, a commercial real estate developer can build a commercial property that will be sold to investors looking to purchase an income stream. Once the project is complete, the point at which the developer exits depend on the type of investor the developer has targeted and their core competencies as a business.
As an investment asset, the project has its greatest value once it generates an income stream. This means the developer can remain involved in getting the property operating and occupied. The developer can then sell the property as an investment with an established income stream to earn their profit and recover their capital to move on to the next project.
Real Estate Developer Strategies
Real estate developers can use different strategies in approaching their business. Their strategy needs to be aligned with the needs of their clients or target market. Given the needs of their market, they can employ various strategies that vary in terms of the level of risk and capital investment born by the developer.
The traditional development strategy used by a developer is for the developer to buy the land. Given the highest and best use for the location, the developer designs, builds, then markets the property.
Upon completion of the project, the property is then sold to the occupant, or leased up and sold as an investment. This approach is the most capital intensive for the developer. The developer owns the project from the day the land is acquired to the day the project is sold.
Building On Spec
When a project is developed without a specific tenant or buyer in mind, the development is built on speculation. The term “Built On Spec” means the developer has built a project on speculation that there will be demand in the market. There is no buyer or tenant under contract. Instead, they build the property first. They subsequently hope to sell or lease it.
Building on spec puts an increased burden of risk on the developer because they haven’t sold or leased the property at the time of construction. They have put their time and capital invested in the project without any guarantee that the property will be sold or leased.
Land Acquisition And Location
Sometimes, a real estate developer will start with an idea or strategy. They will then search for a specific location to acquire in an area they are interested in. Other times, a developer may buy the location first, then try and determine the highest and best use for the property.
The reason real estate and investors or developers acquire land before having a specific development in mind are numerous, but the strategy adds a level of risk to the developer. Some developers see an opportunity in a market to acquire property and pursue the acquisition because they know they can figure out what to do with the property afterwards.
Opportunities may be constrained in certain markets. Developers may have a line on a property and a chance to get it at a discount.
Other times, developers come into the business because they have come into large tracts of land through inheritance. Many businesses have also accumulated significant amounts of property throughout their history and have embarked on developing the property as an additional business line.
A rail road company can be an example of this. Rail roads acquired huge tracts of lands throughout the United States, both in cities and rurally. With large property holdings they no longer need, they essentially become developers to maximize the value of their assets and take advantage of their position.
Build To Suit
Instead of building a property on speculation, a real estate developer can also custom build a property to suit the needs of a specific client. The client specifies their exact requirements to the developer and architect. The developer will then build the property specifically for the use of the occupant.
This reduces the risk to the real estate developer. The developer contracts to sell or lease the space before construction begins. Build to suit transactions commonly occur for retail tenants as well as new tenants in industrial parks. The lot is available, and a developer is brought in to build a custom building for the tenant to their specifications.
Fee Developer
Real estate developers can also outsource their services. Instead of investing their own capital and becomeing a principal in a project, the developer can higher out their services for a fee. This can be useful for institutions or entities that need to develop a property, but do not have the skills. The solution for them is to hire a developer and pay them a fee.
What Skills and Attributes Should A Developer Have?
Some real estate developers may seem like dreamers, but every project has to be built on a solid ground. Each development project is subject to the realities of the market, the legal environment, and the successful execution of a business plan. For this reason, developers must be able to draw on a broad set of skills and attributes.
The complexity and time frame of the process means there can be tremendous risks involved. For this reason, real estate developers must have a bit of an entrepreneurial spirit.
One key trait of an entrepreneur is a higher level of risk tolerance, or a superior ability to manage risk. The higher risk can be compensated by extraordinary rewards, but can also lead to financial downfalls and bankruptcies.
In addition to being creative and tenacious, real estate developers should have great communications and people skills. Real estate development involves relationships, networking, salesmanship, and managing diverse groups of people with various interests.
Real estate developers must also understand their final customer as people to create the product that will resonate with them the most. Real estate developers must be perceptive in understanding the occupant’s use and experience.