In a combined employed progress, how do builders improve the combine of area use? – Score: 10

5 thoughts on “In a combined employed progress, how do builders improve the combine of area use? – Score: 10”

  1. > To what extent does projected profitability per square foot for each use type factor in?

    A lot but its more a binary thing than you are thinking probably.

    The textbook answer is they will build to the highest and best use for the land which generally means the maximum profit (you can better define that as the highest NPV as there may be some variance in discount rate depending what you have going on here).

    The real world answer is all re development is complicated and takes forever. P&Z, lending, the developers experience, other partners experience etc all come into play. You hit certain limits too on stuff, you can’t just say lets do x of this y of that all the time. Different uses have different parking requirements for example, and when you max out surface parking you have to do structured which costs more, then you may have to go underground after that which costs even more. You will also have stuff like max building height either through zoning or practicality. Your excel and modeling may say you can put 1000 units in somewhere at wood frame over concrete type construction costs but you will obviously hit a point where your construction moves to steel/concrete core etc which is going to cost way way way more and make many projects unfeasible.

    You also get situations where say for example a hotel would make sense but that isn’t your core business you may want to partner with a hotel operator, they may have all kinds of different needs to make that relationship work so that will have an impact, where otherwise you wouldn’t build one at all because you frankly don’t want to be in that business.

    It also depends why you are developing? is this all spec or are you trying to locate a specific user you are building around? If you have a deal with a big grocer for example that will alter the rest of the project.

    Don’t get me wrong you do look at supply/demand and absorption and do a lot of analysis of how to max out things as much you can profit wise / sf (a lot of the costs here are in the land, legal, etc. The last sf you add is almost always the most profitable).

    Ultimately though people are just trying to get deals done that have a lot of moving pieces. You are looking at your limiting factors and figuring out how to make something work with them all.

  2. From my discussions with large developers as well as experience working in city redevelopment, mixed-use is not desirable for developers return-wise. Most would prefer, with some exceptions of course, to build all Multifamily (MF), all Office, or all Retail- not always mixed-use.

    The average project will typically become mixed-use because of city zoning. For some reason, certain city departments love mixed-use. My guess is that they believe it will help walkability and bring more ‘vibrant’ city life. However, a lot of mixed-use results in dark first-floor retail. So, for a MF/Retail MU development, a developer might input the smallest reasonable amount of retail first, and then fill the rest of the buildable area with MF.

    NumNumLobster’s answer is pretty thorough. So, I’d like to build on it. Like he said, highest and best use is always the textbook answer. And, unless you’re dealing with a very sophisticated developer who has experience developing all spaces, a developer will typically build just MF, just Office, just Retail. Now, since we are speaking of mixed-use, many developers are sophisticated since mixed use typically is only deployed near downtowns/urban areas. But their expertise does effect things too.

    Finally, and this was already said but I’ll say it again, a good developer will build for his audience. I sat down with one of the heads of one of the largest CRE developers in my state, and he spent a long time explaining that a development always starts with the target audience. For a large mixed-use MF/R development, they considered the demographic of who would be living there, what sort of things they’d demand, etc.

    MU projects can seem sexy because they’re ‘mixed’. At the end of the day it’s profit driven, though, which is essentially that textbook “highest and best use” answer.

  3. Market study dictates what is reasonable, then mix of time spent with the city on permitting to develop a master plan that checks the boxes for them. Art and science.

  4. The first two comments sum up the important points that have to be considered.

    One add I would make is consideration of material that goes into the buildings. Kind of along the lines of playing to the area, you have to think about whats going into the guts of the rooms/spaces that will eventually be up for rent. You shouldn’t have really high end appliances, fixtures, and counters in an areas where the income level isn’t sufficient to afford that monthly lease. It’s one thing for a developer to work on the property from their perspective but, it they’re not tied to a property management company that can actively market the new development, it could flop.

    Read into A, B, C developments and revenue generated from those projects over 5 year periods.

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