Friday was my last day at a phenomenal RE development shop in Raleigh, NC. I learned a TON about development and what makes a project successful and wanted to share some high level lessons for others who are interested.

Here we go:

Development, out of all of the real estate investment options, is probably the riskiest place to be, but also where the greatest fortunes are made. It is painful, risky, hard work, and a LOT of coordination. But it can be a great way to impact your community while making money.

The skillset involved in development requires speaking multiple languages:

- form (architecture, engineering)
- function (type of development, zoning, local ordinances, legal, etc.)
- finance (underwriting supply and demand).

Here are a few lessons in each area:

Form: this is always an area with multiple tradeoffs. Better architecture / engineering = more costly, but provides real competitive advantages to the project vs. other developments if thoughtfully balanced and integrated into the current built environment.

Form: the bigger the development, the more thoughtful you need to be upfront w/ design choices. e.g. Changing $100 shower fixture in a 376 unit building adds up. Most costs can be reduced to psf basis, and changes to design can add up quickly as a development scales.

Form: most developers defer to architects, but it is the developers building at the end of the day. Architects don't pay for the materials they choose. Developer friendly architects will understand this and will go the extra mile to achieve a great aesthetic at a reasonable price

Function: based on my observations and studying a lot of decent sized developments, here are the main drivers that impact how successful a development is:

- Market demand for product
- Programming
- Conservative underwriting
- Space flexibility
- Location (location, location)

Function: having a good understanding of the local ordinances and zoning regs is a must - often, the entitlements / re-zoning process alone can kill a deal before it ever gets to serious design phase or construction pricing.

Function: the key question in development is always 'what's the best and highest use for this property?'

- Adaptive reuse?
- Tear down / ground up dev?
- Type: Office? Retail? Mixed Use?

Having a grasp of current market dynamics (supply, demand, economic base) are key here.

Finance: Know the numbers cold:

- underwriting assumptions vs. current market conditions
- cap stack: what is the availability of equity, debt, mezz?
- building costs psf
- rent psf
- opex psf
- current int. rates
- unlevered yield on cost
- current cap rates on actual sales

Finance: when building your budget, on smaller developments (sub $20M), 5-10% contingency on the *entire budget* is probably a good estimate. On larger developments over $20-25M, contingency can start to shrink towards 4-5%. Curious if others see this differently?

Finance: It is impossible to know what type of market you will deliver your product into (e.g. covid?!), but what you can know, you should:
- supply: know the sf of pipeline developments for next 3-4 years
- demand: know the sf of absorption of product type over last 3-5 years

Finance: the go-no-go decision comes down to the spread between valuation at stabilization and cost to build. Is there a positive spread and is it worth your time? The entire development process boils down to molding the clay (and the financial model) to your liking.

Finance: In real estate development more than any other line of work, time is money.

95%+ of the time it's best to keep your calendar open and pay up for outside expertise. You are a developer. You get paid to develop, not to be an architect, engineer, or lawyer.

Finance: value your time as high as the market will allow. If you’re going to spend your time developing, make it worth your while because it takes the same time, effort, and coordination to develop a 10 m property as a 100m property.

Finance: the developers in larger deals are often the most levered and have promote structures that allow them to benefit if the project goes well and either sells or the ownership recaps at a much higher appraisal valuation after stabilization.

Finance:

There are many ways to make returns as the developer:
- leasing fees
- property management fees
- construction management fees
- development fees
- promote fees
- event planning
- security patrolling
- maintenance / services contracts

Finance: Exit cap rates drive 80+% of IRRs in development, TV is extremely difficult to underwrite! In my opinion, projected IRR's are trash. I'd rather know what the unlevered yield on cost will be to a high degree of certainty because this is actually in a developer's control.

Finance: It is an exercise in futility to project out market cap rates 5 years down the road, so best practice is to use current rates adjusted upwards 50-75 bps or more depending on the scale of the deal and the dev spread. This is more art than science.

Finance: ownership is everything, so all else equal, push for a recap. The biggest regret I consistently hear is an owner selling too early.

What do mixed use developments of the future have to think about?
- parking (what kind of demand will there be?)
- autonomous driving impact on urban vs. suburban
- personal flight vehicles - I'm serious!
- 5G, IoT, technology integration
- touchless buildings
- energy efficiency

A few observations on how technology is changing development:
- 3D scanning - real time looks at the job site and progress
- cloud coordination platforms - seamless coordination among all subcontractors to keep all documents and contracts and updates in one central location

Tech, cont:
- panelized construction is shrinking the actual assembly / build times massively but also offers less customizability in design up front
- AI-aided design for faster iteration times between design teams and developer
- 3-D printed concrete homes

What else?

If you have any questions on specific topics, I'd be happy to go more in depth if I have anything to add. At some point I would like to do a thread on the predevelopment and due diligence process, but this is enough for tonight.

Always grateful for the opportunity to learn from the best and I welcome any and all feedback from other RE Developers / RE Twit in general.

As a postscript, I believe the greatest developments not only result in financial gains to the developer but also result in gains for the community at large in the form of increased tax base, economic opportunities for labor, and new business startups. Developers aren't all evil!