To understand what developers are going through these days, think of Edward K. Warren, corsets, and buggy whips.
In 1883, Warren made a fortune by introducing cheaper, lighter turkey quills for ladies’ corsets in place of expensive, heavy whalebone. Two years later, he expanded by putting quills in buggy whips. The early 1900s saw products from the Warren Featherbone Co. in tiny Three Oaks, Mich., selling as far away as Australia.
Then came two disasters: The automobile eliminated demand for buggy whips. And even worse (for Warren), women stopped wearing corsets.
You could argue that developers are undergoing similar existential threats today. Developers operate today in an era that has their potential customers questioning traditional notions of what constitutes a home and how they should expect to live in it. As a result, the people behind the multifamily and commercial projects being built across the country are reexamining what it is they do, how they build, and where they make money. Just like Warren at the turn of the last century, these developers are experiencing an age of disruption.
From Past to Present
Ask experts and academics about how development has evolved and you get consistent answers. Developers used to put up single-purpose apartment buildings, office towers, or shopping areas; now multi-use structures are what brings in renters and income. Zoning regulations were elementary; now some companies’ claim to fame stems in part from how well they can exploit incentives and loopholes. Community involvement used to be no big deal; now developers must be smooth-tongued diplomats as well as hard-headed dealmakers.
Given these complexities, making a project pencil out requires a lot more pencils. Developers who fail to keep up with the times are crashing out of the business.
“Developers can’t be as formulaic as they used to be,” says Mark Stapp, a professor at Arizona State University who has been teaching, planning, investing in, developing, and consulting on real estate for more than three decades. “The job requires more critical strategic thinking and planning than ever. Those skills have emerged as being important in not just how you find and underwrite, but also in how you manage the project.”
Twenty-five years ago, developers could execute pretty much exactly what they envisioned, notes Jonathan Watts, a partner at the Los Angeles-based architecture firm KFA. But over the past decade, such certainty “has gradually been eroded by this need for other voices in the entitlement development process,” Watts says. “… This lack of certainty causes difficulties in getting equity on board, and it’s increasing the length of time on a project.”
Varying Customer Demands
Developers always have catered to customer wants; New York City’s Classic 7 apartment configuration in upscale prewar buildings typically included a maid’s room, for instance. But rarely have today’s customer demands been so complicated. A 2017 survey by the National Multifamily Housing Council (NMHC) found consumers calling for spaces that are more flexible, better able to adapt to lifestyle changes, and more convertible when different needs arise. All those demands might logically lead them to make spaces as generic and open as possible. But the same NMHC poll found an even higher percentage of potential apartment dwellers saying they want to personalize their space. That’s can be tough to deliver given growing demand for nontraditional housing, such as dorm-style apartments in which each renter gets a room and shares the kitchen and living/dining areas. And personalization goals for a millennial or the coming generation Z renter may differ from what’s desired by multi-member immigrant families or the growing senior population.
How the apartment relates to its neighborhood is another challenge. One study of millennials found that half of all meals bought by them at restaurants are eaten at home. At the same time, there’s less desire to own a car and more demand for online shopping. As a result, building designs that used to feature apartments from top to bottom now devote lower floors to sit-down and take-out restaurants, drug stores, and package delivery lockers, plus easy access for Uber Eats-style deliveries. Parking is limited, if it exists at all.
(Meanwhile, developers frequently have to deal with complaints about competition for parking when they seek to put multi-unit housing in what had been largely a single-family neighborhood.)
What goes into constructing the building also is undergoing change. New codes and products are making wood an attractive alternative to some projects that in the past would have been erected with concrete and steel. Cross-laminated timber is one of the most popular of these alternative products, but it’s certainly not the only one. In addition, modular construction is getting attention. The fact that Europe has been putting up mass timber structures for years is helping smooth the way for its use in North America.
Fasten Your Seat Belts
Joshua Harris, academic director at New York University’s Schack Institute of Real Estate, sees 10 big trends for developers in the next decade: Concepts like space as a service, the rise of co-working, and urban-style developments in even small cities, but also misalignment between coming trends and existing regulations and labor forces.
“The constant theme in most of these trends is the accelerating adoption of technology facing off against functionally obsolescent business models, regulations, and even historical norms about how the world is supposed to work,” he writes. “Real estate investors should embrace and seek to understand these trends; on net, they provide more profit potential than loss if heeded correctly.”
And what happened to E.K. Warren when he faced his own era’s disruptions?
He adapted, creating millinery items like ribbon, elastic, braid, and, later, baby clothes. Warren was worth today’s equivalent of $100 million when he died in 1919, and the company’s descendants kept making clothing until 2005. They evolved.