Part I 1 Introduction
The purpose of this book is to examine the Real Estate Development Matrix. @REDM 1
The Real Estate Development Matrix combines the seven Stages of the Real Estate Development Process with the eight Tasks that must be completed during each Stage. This 56-cell Matrix captures the real estate development activities in a comprehensive and holistic manner. This broad view of the Real Estate Development Process considers the entire lifespan of a property:
- Land Banking Stage.
- Land Packaging Stage.
- Land Development Stage.
- Building Development Stage.
- Building Operations Stage.
- Building Renovation Stage.
- Property Redevelopment Stage.
This process may take several decades to complete, and then the cycle starts again as property in the Redevelopment Stage goes back to the Land Packaging Stage and the process begins anew. The development Tasks are also considered in a very broad sense as they are grouped into eight categories:
- Acquisition.
- Financing.
- Market Analysis and Marketing Strategies.
- Environmental Issues.
- Approvals and Permits.
- Physical Improvements.
- Transportation and Accessibility.
- Sales and Disposition.
Part I provides the context for the Real Estate Development Matrix while Part II and Part III discuss the Stages and Tasks of development, respectively. Each chapter in Part II will discuss the essential elements of each Stage in terms of how economic value is created in that Stage, and then review the following aspects:
- key players;
- critical Tasks;
- controllable costs;
- major risks.
In Part III, each chapter discusses a set of real estate development Tasks and explains how those Tasks are accomplished during the various Stages of development.
The aim of this book is to present the readers with a conceptual framework in which to discuss, question, and analyze the Real Estate Development Process in the context of their own skills and experiences. The discussion is non-technical and almost free of jargon.
THE REAL ESTATE DEVELOPMENT MATRIX COMPANION WEBSITE @REDM 2
This textbook is supported by a website that is based on the Real Estate Development Matrix. The website has an interactive Matrix that allows the user to move from one cell to another to better understand the interactions between the Stages of development and the development Tasks. The website also has an archive of numerous case studies and examples of the topics discussed in this book. The website notation of @REDM indicates that more information is available in the website. There will also be a URL in the endnotes for each website notation. The website has a tab labelled Textbook URLs that lists the URL addresses by chapter in the order that they appear in the text. Finally, these case studies and examples can also be accessed under the Examples Tab by designating the Stage, Task, and Title filters. The website also has a Special Skills tab where numerous analytical skills are presented, discussed, and demonstrated. Readers are encouraged to use the website to supplement the material as they read this book.
Unique characteristics of real estate and real estate markets
Real estate has several unique characteristics which affect its physical development, as well as the economic markets in which it is traded. 3
Fixed in space
The physical immobility of real estate has many consequences for its development. Real estate as a physical asset and tangible asset is readily observable, so the general public recognizes its existence. Therefore, it is easily taxed and regulated. Also, because of its physical immobility, it affects and is affected by its neighbors and adjacent land uses. 4 The fixed physical mobility of real estate tends to make its market local in nature; that is, real estate values are determined more by local economic conditions than by regional or national conditions.
Complex ownership
Ownership of the tangible real estate is defined as a “bundle of rights,” which are intangible rights or assets. Real estate ownership is defined as real property and inherent in this definition are personal property rights that can be owned by private individuals, public corporations, or governmental jurisdictions. These rights are limited by public land use controls, as well as private land use restrictions. Consequently, the market place for these rights is very technical and characterized by high transaction costs.
Large capital investment
Real estate can be defined as a financial asset in terms of debt capital, equity capital, or a combination of both. The large amount of capital to develop or to buy real estate usually requires both debt and equity. Consequently, ability to buy real estate depends on access to both the equity and debt markets.
Long economic lives
Most permanently constructed real estate projects have expected economic lives of 20 to 30 years, and physical lives of 40 to 50 years. The consequence of this durable asset is that the real estate property will experience several business cycles as well as multiple users and multiple investors.
Real estate obsolesces, both economic and physical, result from the properties’ long economic lives in the context of changing construction and operational technologies, as well as the users’ changing tastes and preferences.
Lengthy and complex production functions
As we will discuss in the following chapters, it takes a long time, numerous players, multiple skills, and lots of capital to change real estate from cornfields to a shopping mall. Consequently, the supply of real estate cannot respond quickly to changes in demand. If demand falls, the supply of real estate stays fairly stable in the short run, so the property will experience higher vacancy rates and a loss of value. On the other hand, if there is an increase in the demand for real estate, developers will take several years to respond to, and increase, the supply and the demand may decline while the real estate is being produced. In the long run, real estate markets can respond to changing market conditions, but in the short run they are fairly unresponsive. This market feature tends to cause real estate to be over-supplied at times or owners to charge monopolistic rents at other times.
General themes
Throughout this book, several themes continuously emerge although they may not be addressed directly in the material. Developers create value by accomplishing Tasks in the various Stages of the Real Estate Development Process. The creation of economic value is the heart of the process. As we work through each Stage, the most important takeaway will be the answer to the question, “How is value created during this step?” This question will be answered in each Stage overview. Successfully creating value means that the finished product has more economic value than the sum of the costs incurred to create it. The challenge is not to create value equal to the costs, but rather to create value that exceeds the costs. This increase in marginal value is what the Real Estate Development Process is all about.
Sustainable development and green building technologies
Sustainability and green building technologies are no longer a choice, but they are now the market standard in real estate development. These are not articles of faith, but rather they provide us with the language that we use to discuss and convey the impact of the development process. In today’s world, no one brags about developing a new “brown” building.
Globalization
Globalization is also part of our professional world (financing, materials, trade agreements, communications, and technology). While real estate development is considered a “localized” phenomenon, we are working in a global environment that affects all aspects of development. National and world events impact lenders, investors, materials, and occupants; therefore, it is important to keep a global perspective when reviewing all possible opportunities or solutions to each challenge.
Entrepreneurship
A continued theme in real estate development throughout the ages is entrepreneurship; it is in the developer’s DNA. Adam Smith, the father of economics, defined the factors of production as land, labor, and capital. Therefore, entrepreneurs are the people who combine these factors of production, so the value of the product is worth more than the total cost of production. This is what real estate developers do. Each real estate development is an entrepreneurial endeavor that involves risk taking with the expected commensurate rewards. It is not uncommon for a successful real estate development company to spawn several new real estate development companies as successful employees aspire to become players and run their own businesses.
The three commandments of real estate development
There are three commandments for real estate developers; to break these commandments is a mortal sin and perhaps economically fatal.
Know thy markets
Keeping a keen eye on real estate trends, both locally and globally, is essential for making better assumptions about future returns. ...