Property Development

Commercial real estate goes through several phases for investors; this article is going to focus on one of the earliest phases of the commercial real estate process: Land development. Without developers, commercial real estate would lie fallow; the aim of developers is to buy plots of land that are in useful locales and improve them for resale; it's sort of the Ur-value for the buy-and-flip strategy.

There are several details to consider as developers. The first is figuring out what your local market and demographics will cover in terms of land value and appreciation for it. As with all things related to markets and imperfect information propagation, there are trends to spot in commercial real estate developments, and generally by the time they become noticeable, they've crested and it's time to move on.

Conventional wisdom with property development is that land prices go up, while the value of a building depreciates over time due to wear, tear and weathering. Land prices mostly rise because of the value of property around them. The more businesses that seed the neighborhood, the higher the value of the land under the property. This has caused a lot of city development boards (and developers) to focus on urban redevelopment. Converting outdated and outmoded office space into realistically useful office space that can host a business is the ultimate aim of commercial redevelopment strategies.

As in all things with commercial real estate development, your strategy is important. So is your execution. Focus on what you intend to achieve, and stick to that. Let the agents and bankers do their jobs while you do yours - which is making the property appreciate in value, using the basic context of surrounding parcels. Fortunately, developers have some allies in this - most city planning and development boards also want to see new businesses hosted and thrive. They don't make as much out of the deal as you do, but they do want to make businesses grow in their community.

When focusing on your strategy, ask yourself what sort of commercial real estate you're developing? Is it enclosed office space, light warehousing, or retail? Each of these will have different inflection points and executables to manage. For example, light office space is contingent on new businesses growing; there's a lot to be said in developing office parks and industrial parks. Meanwhile, retail outlets should be planned around traffic flow and expected urban growth/suburb patterns. While it's a mantra of our times, most urban areas are built around automobiles rather than pedestrians.

If you are working in urban redevelopment, your hands may be somewhat tied; parking is at a premium in most downtown areas, so making your facility pedestrian friendly is important. Developers should always work with the city planning commission to make this happen.

When looking at parcels to acquire developers should look at land usage patterns. The first and most common usage pattern is converting old farmland and pastureland into suburbs and housing developments; even with the fiscal crisis caused by the subprime mortgage rate meltdown, there are new housing starts going. With new housing going on, the place to be is the person building the shopping mall that's accessible to the new development.

Likewise, if a new employer is coming to a part of town, developers should look at the demographics of their workers. Decide if the demographics suit building multiple unit dwellings or single-family homes, and look at developing and acquiring land that's close to the new plant. Again, doing your homework to spot the commercial real estate trends before they crest is important.

All in all, real estate development is the first step in a long process of commercial real estate investing. It's not one to be neglected, but it is the one that's most capital intensive. It's also the one that's likeliest, on cash in to cash out basis, to make a consistent profit for you.