It is exciting to think about developing a new building. It is often perceived as the “fun” part of commercial real estate. Yet, it is wise to proceed with caution.
There are numerous types of new building development projects, each with their own set of important criteria and each with its own risk profile. Development can be complex, and it is advisable to have an experienced team on your project. What may seem straightforward can quickly fall into “you don’t know what you don’t know” and missteps can quickly turn into very expensive learnings. A few of the types of new development structures include:
Multi-tenant properties (office, industrial, retail) for investment
Multifamily properties for investment
Build to suit to own and occupy as a tenant
Build to suit for lease as a tenant or to a tenant
We cannot possibly cover all that you need to know if you want to develop a new building, however, below is a list of a few key factors to keep in mind:
Pay attention to:
The market fundamentals. What are rents, vacancy rates, construction costs, cap rates? There may be a reason no one else is building.
Submarkets are important. Large metro areas are not one size fits all.
Do not fall into the trap of “if we build it, they will come”.
What to think about if you are the tenant or an investor/owner:
Make sure you understand your strategic objectives. Leasing and owning have different financial impacts and opportunities for your balance sheet and P & L.
Have your leadership team fully engaged, not just your CFO but your HR leader and business segment leaders. How much will you grow? How will new ways of working change your need for space or influence the type of space that is best for your company? Make sure you have an internal team that has the time to participate throughout the project to the end.
Make sure your owner’s representative or developer guide you realistically but with a more conservative approach. Good surprises are better than bad ones. Include adequate contingencies and run numbers with room for the unexpected.
Make sure you have the necessary cash for pre-development expenses before your financing is secured.
Build a development team that is right for your project. We highly suggest an owner’s representative that knows the local market and the team players; architect, general contractor, legal and others to help you build a team that knows your product type and fits your corporate culture—a team that can be synergistic to drive to your desired outcomes.
Know that real estate development is an iterative and not a linear process. It is often three steps forward and one step back.
Make sure you build in enough time before you need to make a move. Sometimes the pre-development process is longer than the actual construction of the project. You will need to get advice to understand this timing. Start early!
If you are the owner’s representative or developer:
We think it makes sense to build the full team up front. It may be the many years we spent working for an integrated design/build developer. If everyone is engaged at the start you can leverage the many varying skill sets required for development. For example, an architect and contractor working together produce better budget numbers than one or the other alone.
Resist the urge to manipulate numbers to make the proforma work. It’s easy to adjust cap rates and, “voila”, the outcome changes.
Some proformas are complex, make sure you have more than one set of eyes on them for review.
Be honest. Don’t pretend that you know something if you don’t. Bring on the team members with the expertise and knowledge necessary to fill in the gaps. No one person can know it all.
Be actively engaged in all the details that are not so fun. Do not leave contracts and legal agreements only to the attorneys. Make sure you read every word and advise if the business deal is accurately represented.
Make sure you get way ahead of long-lead items; SAC/WAC and low voltage to name just a few.
Document and leverage any past learnings that can make this project even better for your client.
This is just a snapshot of things to know if you plan to develop a new project. The principals of the KimbleCo team have developed and leased over 6 million square feet of office, industrial and multifamily projects. Our team is available to provide fee development services or consulting services for your project. Give us a call, don’t go it alone, the stakes are too high!