There Are Always Opportunities to Develop
Editor’s Note: Ben Stevens is a real estate developer in Chicago and the founder of The Skyline Forum, an online interview series with developers, architects, and urban planners. He was a guest on the Strong Towns podcast in early March, when he and Chuck Marohn talked about incremental development, housing affordability, why the creation of a building is a complex (and not merely complicated) undertaking.
This article is adapted from a chapter in Ben’s recent book The Birth of a Building: From Conception to Delivery.
Three mixed-use buildings in downtown Quincy, Illinois. Image credit: Randy von Liski
How much work is there still left to be done in real estate development, and in related industries like architecture and urban planning? If you’re thinking about a move into one of these fields, it can be an unnerving question. Many cities seem to have enough buildings to house their companies and residents already. And the pandemic has raised the possibility of a significant drop in new projects. How do you find new opportunities? I’d like to take you on a tour of what I have learned about this question over the years. There are two basic ideas to grasp.
1. There will always be opportunities somewhere, especially for small developers.
The nature of the undertaking—creating physical spaces—means that there will always be new opportunities. Let’s consider a few of the reasons why.
The Physical World
Buildings quickly become obsolete. Most buildings in the world will need to be replaced within 75 years.
Tastes change rapidly, and many people demand the latest in aesthetics and technology for their spaces.
Natural disasters wipe out buildings every year.
New transit projects shift traffic patterns and create the need for spaces in new areas.
Social History
As the population grows, those people need extra space.
Companies may decide to relocate to new areas, bringing thousands of people with them. And those people will need places to work and live.
Cities may decide that certain blighted areas deserve subsidies like TIF and opportunity zone funding, making development feasible in new areas.
Any company can seize on these opportunities, but there are also opportunities for which new or small firms have unique advantages over larger companies:
Scale
It will always be possible to build a single house, single duplex, single fourplex, or single small commercial space to get started. A large company won’t take the time to do such small projects.
As other firms grow and take on bigger opportunities, they stop chasing smaller deals, clearing out space for you to enter.
Evolution
There are “immature” markets—outside the major metros—where the biggest firms won’t focus their energies. If you pick the right one, you can get established before the competition gets fierce.
There are new asset classes which need to be created and big firms don’t usually innovate in that way. Recent blockbuster examples of this are self-storage, assisted living, and luxury student housing.
Because a robust industry of support services has evolved, a start-up can “farm out” most of the things for which their small scale doesn’t allow a full-time employee. It will cost them some return, but it allows them to compete with bigger players.
Ingenuity
“Assembling” several smaller pieces of land into one larger piece creates new possibilities, but bigger firms usually don’t want to take the time to do so. If you do it well, you’ll have a unique advantage.
Only you have your network and relationships. You may learn of off-market opportunities, or non-public information, that the bigger companies don’t have. This can be the key to a successful project.
In short, the kinds of opportunities which developers hope to capitalize on are inherent. They are baked in. They will never cease to be the case because of the nature of the industry itself. And that should be reassuring to anyone who hopes to make a living by having a positive impact on the built environment.
But there’s a catch.
2. There’s no Google or Facebook of real estate development, and that’s to your advantage.
A duplex in Portland, Oregon. Image via Unsplash.
I don’t spend much time reading the news. But every time I do, some version of the same business story seems to be in the headlines. It’s the tale of how a few companies are coming to dominate the entire world. They’ve created ecosystems of products which get more useful as you use more of them. Other companies must build their products to fit into these ecosystems, and then they’re forced to share their profits for having done so. The articles always conclude by saying that the trend is unstoppable and that the larger companies seem to consolidate more power every day.
The news is received differently depending on who you are. If you’re a consumer, you may not care. Maybe you like the consolidation because it means you have to deal with fewer providers. If you’re an entrepreneur, on the other hand, it may be disheartening. You create an app and Apple demands 30% of your revenue every month just for listing it in their app store. They line their pockets while you scrape by.
Whether or not this story is true—and whatever you make of it, if so—it bears virtually no resemblance to the real estate development industry. There is no Google or Facebook of real estate development, and there never will be. This claim files in the face of prevailing views about how business is evolving, so let’s consider a few anecdotal pieces of evidence for it:
In 2018, the largest apartment developer in the U.S. built only 1.32% of the total number of units created.
The top 25 developers created only 17.8% of total units.
To capture even a 50.1% market share, a company would need to have developed 214,129 apartment units in 2018 alone—greater than the total number of apartments built that year in Texas, California, Florida, New York, Colorado, and Illinois combined.
It’s harder to get statistics like this for office space, but I recently read an article about the forty largest office projects under construction in Chicago. I was not surprised to see that there were only a few companies that are responsible for more than one of the projects. There wasn’t a single company that was building more than two of them. If that’s the case, it seems unlikely that they somehow have a gigantic market share based on many much smaller projects. And this isn’t surprising.
The kind of scale one can achieve with an app—with hundreds of millions of users, and little additional cost per user—is simply not possible for a physical industry like real estate development. The process does not become exponentially cheaper, easier, or faster once you have done it many times. And no one has the time or capital to develop, say, half of the new office space in Los Angeles. Apart from the obvious manpower limitations, such an undertaking would require many billions of dollars in capital. And the risk exposure you would have to a downturn in that single market would be intolerably high.
The Implications
People spend 87% of their lives indoors, and the number is probably rising. For this and the reasons I shared above, I believe there will always be opportunities to enter the market and innovate to create new developments. But the same factors that create this opportunity—the mammoth size of the task—mean that no one will ever be able to completely dominate it. There are, of course, famous firms, and they may be large. But they’re normally dominant in one town, or in one particular subset of an asset class. That is to say, despite their size, they’re specialists. And there’s always room for one more specialist.
This article has been adapted from a chapter in The Birth of a Building: From Conception to Delivery by Ben Stevens.
Want to learn more about why incremental development is an important tool for your community’s prosperity—particularly in response to the current pandemic and economic shutdown? Don’t miss our free webcast featuring Gracen Johnson of the Incremental Development Alliance, on Tuesday, July 7 at 12 p.m. CDT.
For more information, click here. To claim your spot now, register below:
About the Author
Ben Stevens is the author of the recent book The Birth of a Building. He is a real estate developer in Chicago, and the founder of The Skyline Forum, an online interview series with developers, architects, and urban planners. You can connect with Ben on Twitter, LinkedIn, and at his website.
On this episode of the Strong Towns Podcast, Chuck continues answering housing questions submitted by Ohio State University students, covering topics from building codes to local action.