How big development has control of our community’s future
In the real estate game, development is where the money is. If you’re outside the game, development is a dirty word.
Today in pop culture if the bad guy isn’t a terrorist they’re probably a developer. It didn’t use to be like that. Developers started getting bad press with Mr. Potter in, “It’s a Wonderful Life” and never stopped.
Some other examples where developers are the bad guys? The Goonies, Pixar’s Up, even the comedy Caddyshack features an obnoxious developer that wants to turn the golf course into condos.
Golf jokes aside, “Developer” has become a bad word because the big ones have a monopoly on our communities and we all know it.
Development Doesn’t Benefit Locals
For most developments, the wealth gets exported and is not retained in the community. Even when the wealth stays, the community has to contend with the mass production of units, which inevitably leads to a mass decline.
Neighborhood Opposition
Because development doesn’t benefit locals, there tends to be neighborhood opposition. This, unfortunately, stalls out small developers as well.
Big developers have the political capital to get around local opposition (in most cases). They’re experienced and they’ve been in similar situations before. Small developers have to answer and respond to the community. They can’t afford to spend the political capital to get through.
Fees And Regulations
Since development usually doesn’t benefit the locals, neighborhoods attempting to stop developments usually ask their local government for help. Communities look for local governments to pressure developers to stop. Then the community asks for the local government to take action to make sure that it never happens again.
This leads to fees, regulations, and bureaucracy that slows down developments of all sizes.
To negotiate the new bureaucracy and understand the rules, specialization is required. When specialization is required, expert consultant industries are created to negotiate the complicated rules. This adds additional costs to any development project and doesn’t create value for the community.
Barriers To Entry
Rules and regulations are the moats that protect big development.
Hollywood is a great place to look for popular examples of how development is complicated and difficult to get into. Idris Elba’s character, Stringer Bell, tries to get into development and has difficulty in, “The Wire”. Fictional character Carmella Soprano had a hard time with her spec house in “The Sopranos.”
In the business world, you look for moats to protect your business. Leaders look to build obstacles that new businesses need to figure out in order to compete.
In an unfortunate turn of events, the rules and regulations meant to protect the community from placeless, wealth exporting developers actually reinforces the monopoly big developers have.
High Capital Requirements
In order to negotiate everything we’ve talked about, you’ve got to have deep pockets and be ready for a long time horizon.
Big development knows that a project will take years to go from zero to done. The best way for developers to make money and attract the money of others is to make the project bigger.
Why go through all the trouble of neighborhood opposition, rules, and regulations to make 6% on a $1m project. That’s only $60k. But if it’s a $10m project, it’s basically the same amount of effort (just bigger numbers on a spreadsheet) and now the developer is making $600k.
Final Thoughts
Real Estate developer dogma is that you’ve got to get big. When you get big, you’ve “made it.” You’ve got political capital, you’ve got deep pockets to attract and retain specialists, and the appetite and experience to negotiate the regulations.
Profits are the rocket fuel of business. Unfortunately, the big ones get the best margins and access to the cheapest capital. This reinforces the cycle that developers are the bad guys.