12/9/12: Competing in a Down Market with New Construction

Sooner or later, new construction has to happen – at least in residential markets where the population is increasing.  After all, those new people need someplace to live.

And while home builder confidence is improving, it’s still a far cry from “happy days are here again”.

So how can a small time real estate developer compete in a fragile economy?  We get some great ideas in this episode of The Real Estate Guys™ radio show.

In the studio to talk boutique residential real estate development:

  • Your well constructed host, Robert Helms
  • Special guest, real estate developer Beth Clifford

Real estate development is a great way to “force equity” (a term from our book Equity Happens for making money by changing the use of a piece of real estate).  But when the economy is soft, building properties “on spec” (building without a specific buyer secured) can be risky business.

Big developers look for growing economies that push populations out to undeveloped areas.  This is the famous “path of progress” everyone talks about.  But it takes a growing economy and population growth to feed the sprawl.

Usually development begins around some piece of infrastructure.  Early in a country’s development, it’s usually a river, ocean or some other natural resource or means of transportation.  Later, it’s around existing population centers and just pushes out (downtown to the suburbs to the country, which eventually becomes the suburbs).

At some point, the development sprawl meets some natural resistance point.  It could be physical (like a mountain range or body of water), political (like a border), or the population’s resistance to travel longer distances to access amenities near the center (commute times).

When this happens, the big developers have a hard time because they need big chunks of land to do their huge developments.   This opens the door for small, “boutique” developers to do “in fill” projects on smaller patches of land inside the already developed area.

So whether you’re in an up or down economy, there’s always opportunity for in-fill development.  But in a down economy, you need to be very careful about your project so you don’t end up sitting on inventory you can’t sell.  Soft local economies, especially those where existing product can be purchased for less than replacement cost, will not allow fat margins.  And carrying costs on unsold inventory can quickly erode those thin margins.

Beth says the key is to pick the right market, product type and price point.  Then manage your project carefully.  It may sound obvious, but there are some nuances Beth cautions us about.

In Beth’s case, she’s active in the Washington DC metro.  It’s dense (not just the politicians ;-)), so there are no big developers to compete with.  No one can find a big chunk of land to dump a bunch of inventory on the market.  That’s good for the little developer.

DC is also affluent.  The U.S. Government is a huge operation which pulls in lots of money from all over and dumps it into the local market.  It’s a very powerful market driver.  It also attracts a lot of people to the area, so when it comes to residential real estate you have little supply, high demand and good capacity to pay.  That’s our favorite recipe for equity!

So listen in as Beth shares her practical advice for creating new construction profits – even in a down economy!

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