On Greedy Developers

 Developing housing is incredibly risky, and (successful) developers are incredibly risk averse, so they walk away from anything that even smells like it might not be profitable. A lot of people chalk this up to greed, but that kind of misses the point. If you are a developer, anything you do is with borrowed money. And if you borrow money, and can't repay it, no one will ever loan you money again, and your career is over, and your company is bankrupt. So, every developer is incredibly cautious to never let that happen. And the best way to prevent that from happening is to plan for projects that are incredibly profitable. That way, when things go wrong  is to have a project that is planned to have a very high profit margin. Lot of developers won't touch anything with less than 10% profit at the initial planning phase. It's not greed, but a rational reaction to being an investor in a high-risk context--only the risks with the highest potential reward are worth gambling on.

A useful contrast is the Good Samaritan who plans to build housing with 0% profit. When things go wrong (permits delayed, material prices go up, labor costs rise), the project doesn't get finished, and the half-completed construction is ruined, all the money is wasted, and no housing is produced.

Chatting with a not-for-profit housing developer, the way they do the analysis is not to build in explicit profit, but to make plans that everything is going to cost 10% more than they expect. (Not everything does, but when one thing costs 20% than expected, the project doesn't die).

Interest rates, planners, developers

Real estate developers talk endlessly about interest rates, but they don't matter in a planning context. Developers make their living at the margin--they make money when they can land before the owners become aware that an interest rate reduction has raised the value of their land. (When rates rise, development locks up until inflation reprices sticky land-values to match their fundamental value). But in planning context, the average over time generates an equilibrium where interest rates don't matter. Temporary dis-equilbria just average out over time. And if it doesn't, who cares? Development that didn't happen isn't going to get you fired. But if you are a developer, it's an existential issue--can you get planners to permit your development in that window between when rates move and when the ground gets repriced?

Development is a market with imperfect information, with a lot of independent developers responding to the same market signal--rising rents. However, developers have limited information about how much competing supply (new units) are coming on the market. While its possible to know about permits pulled, or development applications, or zoning changes, (and believe me, developers pay attention to that) it's impossible to know how many competing projects are in earlier stages of development.

It takes a while for a long, multi-actor process (involving land-owner, developer, lender, city planner, development review, city council, etc.) to play out, so development tends to happen in booms (minimal supply meeting huge demand) followed by busts (excess supply meeting slackening demand). Early in a development cycle, few recognize or respond to the market signals, and there is a lot of money to be made, and late in the cycle, much to be lost. So once the cycle starts, every developer wants to get their development into production/sale as fast as possible.

"The bottom line is money"

"The bottom line is money. Developers always want to squeeze more units"

Any developer for who money isn't the bottom line isn't a developer for long. Per square foot of construction, more units generate more rents. Two studios generate $600 a month, vs. $900 for a 2-bedroom, for the same floor-space. Three and four bedroom apartments are almost non-existent for this reason.

The only way to get a 3-4 bedroom place in the city is either to buy an hold house, or buy a condo. Houses are attractive, because they can always be expanded by 'sweat equity', at some later time. 

LEED and Developers

LEED refers to "Leadership in Environmental Efficiency in Design". It's a certification program run by the US Green Building Council, as a way to 'brand' sustainability, using a ratings system to establish how sustainable a building has been.

Various Federal agencies, State and local governments have supported sustainable building practices directly. Not just by endorsing LEED, but also by mandating that their own structures be LEED certified--a trend which appears to be spreading. Some places in California have also induced private developers to prefer LEED--in one case by having a separate queue for development review for LEED projects.

Developers are equivocal. While their is a growing recognition that LEED certified buildings do deliver in terms of lower construction costs and lower energy operating costs, LEED is regarded as complicated and time consuming. From developers, I hear: "It takes too long to certify a building--the approval process necessary to get a sticker is not worth the additional time it takes to do the development." In addition, receiving LEED certification required rigorous documentation of source materials and disposal options, resulting in additional cost an uncertainty.

LEED certification is controlled by the U.S. Green Building Council. While a non-profit, there are accusations that the cost of obtaining materials necessary to obtain and maintain certification are too high, and that the process of getting a building certified is tied up in development.

Perhaps city planners LEED certified, so they can check a building, rather than having a certified official at the LEED agency doing so. That would put the burden for development approval on local government. Planning and permitting would need to be able to evaluate LEED as well as compliance with building code, fire code, and zoning code, as well as assessing development impact fees. This seems possible-cities already use uniform national codes for evaluating traffic impacts, fire and structural safety. Most of planner labor (and stress) comes from local, highly specific issues regarding the zoning code. Applying an accepted national standard such as LEED seems plausible.

Understanding Land Developers

Successful businesses are built on the premise of repeating economically profitable processes. Take inputs, add value, sell the outputs. Land Development is a business. The input is 'raw land', 'development' is the value added process, and the output is the *varied types* of building modern society demands. The issue of 'varied types' is key to understanding developers. To a developer, a development is a 'product'. Different developers make different types of products--some do housing developments, some commercial office, industrial, some retail. A few do highly specialized types--museums, student housing, etc.  Regardless, each is regarded as a high-risk, high-margin business with high labor costs, high capital costs, and high financing costs. Getting any specific development project to 'pencil out' so that it is worth attempting, an then actually getting a project built, and then sold (or leased out) is an ongoing struggle. The fewer complications along the way, the better.

Repeating an economic process is made simpler, if your inputs, your process, and your outputs are as similar as possible. In development, none are easy--no two parcels are ever the same, you'll never face the same regulatory environment twice, and the market demand may collapse by the time you get done building it.

Why Mixed-Use Development (MXD) is so hard to do: Low volume. For a developer, it's not worth the time and the trouble to develop the expertise needed for a type of development that you are only going to develop once or twice. Developers conceptualize MXD differently than planners. To planners, it is how all new development should be. To a developer, it's a confusing set of new requirements to be negotiated with the city. When volumes for an economic activity are low, the activity tends to become centralized into a few places where the necessary expertise can be gathered. For MXD, this is more difficult. There are wildly different regulatory and development requirements from jurisdiction to jurisdiction and state to state.