There Are 3 Different Kinds of Developers
Developers are a major source of political influence in cities large and small, but also a major political football—you've no doubt heard claims like "(Such-and-such city council member) is backed by developers" or "Developers are pushing for (such-and-such plan or proposed law)." The reality is probably that a much more specific subset of people are doing it. And that's important to understand. Overgeneralization is not helping your ability to understand the forces actually shaping what gets built in your community and where, let alone change it.
There are actually different types of developers who operate by almost completely different business models. They build different types of buildings, in different places. They use different sources of financing. Local rules and regulations affect these different groups very differently, and—importantly—their interests often do not align.
If we focus specifically on residential developers, we can group them into three rough categories that barely overlap with each other.
Type 1: The Big National Homebuilder. You've heard the names of these national, often publicly-traded companies: Lennar, Pulte, D.R. Horton, etc. They build suburban subdivisions and master-planned communities. When they venture into built-up urban areas at all, it's likely only to do a massive project on a big tract of land, like the redevelopment of a closed military base or golf course. The number of new homes in America built by these kinds of companies dwarfs all other home construction.
There are often regional companies that work closely with them. For example, Lakewood Ranch in Florida, one of the largest master-planned communities in the U.S., is officially developed by Schroeder Manatee Ranch, Inc., a local company that essentially exists only to develop Lakewood Ranch. SMR controls the enormous tract of rural land being converted (at a breathtaking pace and industrial scale) into suburban Lakewood Ranch; it did the master plan and shepherded it through local zoning approvals. But the actual home subdivisions within Lakewood Ranch? Visit them while under construction and you'll see the big national names like Pulte.
MId-rise development in Seattle. Photo by Joe Wolf via Flickr.
Type 2: The “Big Urban Box” Developer. These are moderately big local and regional development corporations, but not nearly as big as Type 1. They're less likely to be household names, but they are still likely to be influential in local politics. You know the boxy buildings you see popping up around your downtown, in that one trendy urban neighborhood, or as redevelopment around a dated shopping mall? The buildings everybody calls "luxury condos" for shorthand, whether they are or not? Type 2 developers are the ones building them.
For example, in the Twin Cities of Minnesota—the region where I’m most familiar with the Type 2 development set—these are names like Alatus, Ackerberg, Doran, Exeter, Schafer Richardson—but every major region will have its own different list of names. You won't recognize that list unless you're someone who pays a lot of attention to development news. But if you visit their websites you can see the kinds of projects that a Type 2 developer works on.
Sixplex in Oregon. Photo via the Sightline Institute’s Missing Middle Housing image library on Flickr.
Type 3: The Incremental Infill Developer. These are the people whom our friends at the Incremental Development Alliance are dedicated to championing and teaching how to get started. They work at smaller scales: mostly individual, scattered lots, almost always in already-established neighborhoods. They tend to build a lot of Missing Middle housing, rarely over 3 stories or more than 20 apartments or houses in one project. They are often sole proprietors, subcontract locally, and often live in and are personally invested in the neighborhoods where they work. They often, in fact, live in the very same buildings they've built or renovated—because getting a home for yourself out of the deal is one way to afford to do these projects on a limited budget. They don't have organized clout or speak with one voice, so they're not The Developers™ in the same boogeyman sense that critics of outsized developer political influence usually mean.
It should be noted that there are commercial analogues for these types too, though this article focuses mostly on residential development:
Type 1 (Commercial): They do things like malls, "lifestyle centers," and big-box shopping plazas. Formula retail has the most access to Wall Street financing because it's a standardized product with predictable cash flow.
Type 2 (Commercial): They do smaller commercial and office buildings, but still often sell/rent to and have relationships with chain tenants for the higher rents and predictable access to financing that comes with that choice.
Type 3 (Commercial): These do small-scale urban commercial or mixed-use projects which are often idiosyncratic new buildings or rehabs of old ones, and are the most likely to end up occupied by a locally owned, non-chain business. (For some insanely cool examples, check out Guerrilla Development in Portland.)
Different Business Models
It often surprises people that Type 1 companies have almost no overlap with Type 2 or especially Type 3 development. The difference is not just about single-family homes versus apartments: there are often apartment complexes and mixed-use buildings included in those new master-planned communities built by Type 1 builders. (We have them going up at colossal scale in Lakewood Ranch.) But this is fundamentally different from the ones being built in your downtown or trendy urban neighborhoods.
Why? Because the business model is fundamentally different.
In urban infill, every building is custom: there are just too many variables involving the context and the site conditions. Things like terrain, underlying geology, the need to work around existing buried infrastructure such as sewer and gas lines, what’s located next door, and many more factors can affect the cost and timeline of a project. Because of this, you can't have a simple template. As Ben Stevens, author of The Birth of a Building put it in a Strong Towns Podcast interview with us, every building is a startup.
Yes, you still get the ubiquitous, mix-and-match design features on these buildings almost regardless of region or climate, and financial constraints and material costs have a lot to do with that. But it's not the same thing as an identical model home being duplicated over and over. Each project carries a lot more unique risks and opportunities. And unique risks and opportunities mean a different type of investor—local, someone who gets the market—paying a different type of close scrutiny. The Type 2 profit model is about making a successful bet on a promising location or a specific set of amenities, ideally in a place where others have underestimated the demand and you can be the one to get there first. It’s also about timing the market well: build a building that appreciates and sell it when rents are hot.
The way a Type 1 developer makes a profit is different. It’s all about standardization and cost cutting at every part of the development pipeline. You save on architecture by reusing floor plans. You save on site preparation costs by just clear-cutting and leveling large areas, treating them as blank slates. You save on materials by buying in large quantities, on labor by employing hyper-efficient processes and having relationships with large-scale subcontractors. Type 1 is essentially the industrial mass production approach to development.
Here’s a table compiling some more of the differences between these three groups:
|
|
Type 1 |
Type 2 |
Type 3 |
|
Project Scale |
Hundreds to thousands of homes |
Dozens to hundreds of homes |
One home to a couple dozen |
|
Project Budget |
Hundreds of millions of dollars |
Tens of millions of dollars |
Thousands to a few million dollars |
|
Where They Work |
Greenfield (previously rural or undeveloped) land |
Large vacant sites in urban and suburban areas—often a city block or larger |
Small vacant sites or renovation projects: typically single urban lots |
|
Financing |
Wall Street banks, institutional investors, regular retail investors if the company is publicly traded, municipal bond market in the case of a CDD |
Some Wall Street but predominantly local banks and local private investors. Most likely group to take advantage of TIF or grant programs such as Community Development Block Grants (CDBG). |
Predominantly local banks and individual investing partners who put in their own money (and are bought out when the building is done). "Sweat equity." |
|
Political Influence |
Lobbying organizations such as the National Association of Homebuilders. Campaign donations. |
Campaign donations / local political relationships, less organized lobbying. |
Individuals may be politically active, but this group rarely presents a united front. |
|
Profit Model Depends On |
Scale economies, construction and labor cost-cutting, standardization / template designs. |
Savvy site selection, detailed knowledge and timing of local market, local relationships |
Lots of "sweat equity" up front, often live in their own buildings, often see selves as investing in quality of neighborhood (which will raise the value of their own projects as well) |
Why This Matters
This is important because the interests of those groups often don't align, and people who make blanket statements about what policies do or don't serve "developers" often miss that.
For example, Type 2 developers often benefit from convoluted regulations and high barriers to entry. Why? Less competition. These are companies that know the ropes, they know the zoning and building codes and the idiosyncracies of a particular market. They know that regulatory complexity is going to weed out the smaller builders first, and leave them as big fish in a small pond.
Here’s a telling anecdote along those lines: when Minneapolis was debating allowing fouplexes citywide (it eventually became triplexes, in a zoning change which is still a work in progress) a prominent local developer, Kelly Doran, was quoted outright scoffing at the idea in the local paper.
This kind of reaction is common. Doran, a Type 2 developer, had no interest in doing Type 3 and said so. Scattered-site, small infill is not his business model. It’s even less the business model of Wall Street-backed production builders like Lennar. These reactions give the lie to the notion, advanced by critics, that the Minneapolis 2040 zoning reforms were a ploy for well-connected big developers to "bulldoze neighborhoods."
The big national builders and their local partners often have massive political clout in suburban / growing areas. Their interest is usually in reducing regulatory barriers or things that would raise their costs, keeping in mind that standardization is a big means of cost-cutting for them. Their interest is not necessarily in reducing all restrictions on development. In particular they don't necessarily want to eliminate regulatory complexity or delay: many of these companies are a-okay with a complex, time-consuming process that ultimately allows them to build exactly what they want with predictability.
Type 1 companies are building at such huge scales—giant master-planned communities—that every project is going to be a negotiation with the local government anyway. (New subdivisions are virtually always Planned Unit Developments in which the whole project is granted permission, including any needed changes or exceptions to the zoning, in one fell swoop.) And they can afford to hire the best land-use lawyers in the business to handle that negotiation. The important thing to them is that they come out of it with the ability to operate at a huge scale: to control a vast area of land, build a large number of homes on that land, and space out that process over the course of years.
Type 1 and Type 2 developers are thus not reliable supporters of changes that would make the process of getting permission to build something simpler and more straightforward. Many of them prize their ability to be “big fish.” The phenomenon of oligopoly—market dominance by only a few companies—is a big problem in real-estate development, and our convoluted regulatory approaches contribute to it. And this is to the detriment of real public influence over development.
Whom do heavy regulatory burdens—high fees, strict parking and setback requirements, a long permitting process, or a lot of opportunity for delay or community opposition to force changes—fall upon most heavily? The smallest developers—Type 3—because these fixed costs do not scale with the size of the project. (See the accompanying graphic.) For a small project, they are a bigger share of the total cost, and they can easily doom it to oblivion.
At Strong Towns, we believe our cities need armies of hundreds, even thousands, of incremental developers, working at small scales on projects rooted in a deep understanding of the local context and market. We've frequently profiled the work of such developers: for just a few examples, you can check out these links:
A July 2020 webcast featuring the stories of seven incremental developers
A podcast and a written interview with Dallas-area developer Derek Avery on neighborhood revitalization without gentrification
A profile of Joel Dixon, founder of Urban Oasis in Atlanta
A guest post by Neil Heller and Cary Westerbeck on how parking minimums affect the viability of incremental development
A guest post by Andrew Frey on the growing incremental development movement in Miami
Former Strong Towns staffer Kea Wilson’s account of her foray into the world of small-scale building rehab
Understanding the needs of incremental developers is essential to understanding the policy landscape around growth and development, and who certain rules and processes actually help or hurt.
(Cover image: “survival of the fittest” by Chris Homan from the Noun Project)
Everyone has an entry point on their journey to taking action for their place. For Bernice Radle, it was witnessing the steady depopulation of Buffalo, NY, and seeing a landscape of unused, unloved buildings headed for the wrecking ball.