While each commercial real estate development project is different, all require attention to an array of business decisions. These decisions, if handled properly at the beginning of the process, can help ensure your success.
First, understand the local market and align yourself with an expert in local properties. In other words, find an experienced real estate agent and form a business alliance so that agent can alert you to prime commercial properties when they become available.
Recognize that real estate development isn’t a solo endeavor and requires a solid team of experts. Typically, you will need a good construction company, an engineering firm, a lawyer, a finance guru, a zoning expert and someone who has a thorough understanding of zoning restrictions, licensing and permits. These separate sets of skills are essential to helping you handle the myriad of issues that will arise when you’re building a big development.
Each development project has its own set of risks so it is critical that you understand the various types of risks involved with each project. Some of the risks involved are:
Land value: land acquisition costs and the risk that the value of acquired land changes due to market circumstances.
Planning permits: the risk that no usable planning permit is received or that this process takes longer than expected. This risk also applies to other municipal approvals/permits, such as commercial licenses. Whether or not grants are obtained is also included in this risk.
Construction: this regards pricing, design, quality and possible delays.
Revenue: there are many factors that influence revenues. These include yields, rent levels, sales price levels, inflation and interest rate levels, demand and supply
Project duration: the duration is a consequence of other risks. A delay could also mean that the project has to face adverse market circumstances.
Legal: this covers a broad area of topics: possible objections against changes in zoning, liability risks or contracts which have not been drawn up correctly.
Three measures that can help you mitigate these risk are research, phasing and cost-calculations.
Research is essential in assessing virtually all kinds of risks. Important research areas that you should understand before your begin any project include forecast of yield development, allocation strategies, and investor demand and consumer demand.
By adequately phasing your projects, the steps to be taken are smaller, with possible exit possibilities following each phase of development.
Additionally, by appropriately conducting cost calculations at the beginning of a project you can mitigate the risk of surprises and wrong assumptions during the process. As the design of a project evolves toward final specifications you must remember to take into account such things as inflation levels and price increases as a result of increasing demand etc.
Lastly, real estate development involves a lot of moving parts and requires many people. Effectively communicating your expectations, goals, wants and needs clearly at every phase is vital to seeing your project through to completion and assembling a strong team around you will provide essential support, ensuring you don’t take accidentally take the wrong step.