It’s impossible to assure success for a real estate development project. Even the most experienced developers and best-laid plans face inevitable hiccups throughout the real estate development process.
When building a new facility, business owners face challenges that threaten to derail projects and often have significant implications for the business's health and future growth. Those challenges are compounded because owners typically lack the development expertise to navigate a project's complexities.
Traditionally, small business owners make real estate decisions by default. They happen throughout their daily operations – many businesses move from space to space without much thought for properly aligning their business and real estate strategies.
Real estate consulting is the practice of marrying those two concepts – aligning real estate, business strategy, and all the second and third-level considerations that arise from a project: tax and balance sheet implications, financing, wealth, and investments strategy.
If you don't want to read the whole article, here's an overview of 9 Reasons Business Owners Should Hire a Real Estate Development Consultant for Their Next Project:
- Risk management
- Cost savings
- Flexibility
- Resource availability
- The ability to scale
- Experience
- Facility optimization
- Time to focus on the business
- Quality control
What is a real estate development consultant?
The real estate development industry isn’t built to serve small business owners. There has never existed a one-stop shop for owners who aren't well-versed in the process to help them navigate the complexities of a project.
Instead, engineers, architects, contractors, attorneys, etc., work in their silos. And there isn't anyone left to help connect the dots on complex real estate development projects – business owners are themselves left fumbling through the process. And as a business owner who is already overworked and wearing too many hats, trying to manage a construction project means the work they need to do goes undone.
A real estate development consultant fills this much-needed gap for business owners. Development is an iterative process – everything from site selection and land entitlement through construction compounds on itself. And real estate consulting offers the medium to coach owners through the development process and often manage the entire project.
All this may sound pretty abstract. So, we’ve broken it down into 9 simple reasons why business owners should hire a real estate development consultant for their next project.
1. Risk Management
Managing risk during real estate development is one of the most essential steps to setting a project up for success.
There are a few critical different kinds of risks to consider:
- Site selection risk: Finding the right site is critical to future growth and business success for many businesses. The right site may also be an essential tool in attracting and retaining talent. Business owners often underestimate how challenging the site selection process is and how much they'll need to pay for a quality piece of land when they find one. But the business may feel the downside of finding the wrong property for years.
- Land entitlement risk: Land entitlement is the process of obtaining all the necessary permits and approvals before you can begin a construction project. It can be a time-consuming and expensive process, especially if your development requires a property rezoning. However, risk during the land entitlement process can be managed by assembling the right land development team and understanding what local planning and government officials have envisioned for a site.
- Construction risk: Construction is a dangerous business, and risks come in many shapes and forms. Projects are always outlined in a contractual agreement between the contractor and project owner, which inherently presents a risk. But other common hazards include budget overruns, timeline delays, material and labor shortages, theft, and design errors.
- Financing risk: Financing risk is two-fold. Project owners always carry financing risks related to interest rates and the macroeconomy. The viability of a project may be contingent on achieving a debt service coverage ratio that can only be realized by obtaining certain financing parameters. But banks carry financing risk as well. A project managed by a real estate development project manager presents much less risk than one run by the business owner - they’re more likely to be completed on time and within budget.
Some of these development risks are avoidable – a real estate development consultant can help you foresee and alleviate these challenges before they become an issue. But some of them are inherently part of the construction process. Therefore, it's essential to be aware of what risk exists so you can develop an adequate risk management plan to help mitigate the potential downside.
2. Cost savings
Building a quality development team of honest, responsive, and reasonably priced service providers takes years. Business owners that don't manage development projects daily often have no idea what services should cost.
A real estate development consultant can assist with contract review and negotiation to ensure the project owner gets the right service at a realistic cost. Otherwise, business owners are often left overpaying for services that fail to deliver the desired result.
Additionally, by outsourcing the real estate development project management, a business owner doesn't need to maintain an in-house team. Since they're likely only building one or two buildings throughout their business career, they can instead flex those resources more efficiently to other parts of the business.
3. Flexibility
When a business’s space needs change, most owners have the decision between ground-up development vs. acquisition of an existing facility. And while each strategy has its pros and cons, development often offers businesses more flexibility than the alternative.
Markets change quickly, and businesses' real estate needs and operations evolve as a result. A real estate development consultant can help with timing a project to align with a business's requirements. Predicting when the right existing building will hit the market is impossible. But when developing a building from the ground-up, you can adapt a project in real-time to changing market conditions and business needs.
As a business owner, having someone on your team who understands the local market dynamics and macroeconomic landscape is critical to best position your project for success.
4. Resource availability
I already mentioned that finding quality service providers is challenging. But finding quality service providers that answer their phone is even harder. If you don't have a development team in-house, finding the right engineering, architectural, and construction partners to help with your project is often a significant friction point.
A real estate development project manager already has relationships with these services - contacts they do business with regularly that will provide quality service at an affordable price. On the other hand, a business owner managing their "one-off" owner-occupied development project wouldn't have the relationship nor the scale of work to make it worth many of these trades’ time.
It's crucial to leverage the resources of a real estate consultant to build the right development team with the right experience for your desired outcome.
5. The ability to scale
Scalability is an important aspect of any business - scaling top-line revenue through fewer costs of goods sold, scaling income with fewer man-hours, and scaling productivity without fewer resources. Trying to become more profitable while reducing variable expenses is a constant battle.
Real estate is often a limiting factor to a business's ability to scale. Either it's too small, not adequately laid out, or doesn’t meet the needs of the evolving business.
What if you could find a location allowing you to scale on-site? By developing a comprehensive real estate strategy before you build, you can begin anticipating 5, 10, & 20-year growth projections to make more informed decisions.
Most existing real estate sites have been maxed out from a horizontal development perspective, which means the only way you can scale or add density is by going vertical. But many businesses can’t go vertical – the only feasible way to expand is outward. And if your site doesn’t allow for it, you’re out of luck.
What if, instead of you could plan your project around possible future expansions? That adds a lot of flexibility for your ability to scale on-site but doesn’t come without a cost. The law of economies of scale says that construction costs usually rise less than proportionally to building size and the extent of land development.
But if budget or time requires you to build out a project in phase, future expansion decisions typically need to be accounted for and accommodated early in the plan. The building and site must be programmed and designed around that possible expansion. And future costs should be considered against what it would cost to develop the entire project upfront. A real estate consultant can help you weigh those decisions and consider how they will impact your business over the long term.
6. Experience
Real estate development consultants offer the expertise that bridges traditional industry silos – providing knowledge on the balance sheet and tax implications of a project, highest and best use, real estate strategy, development best practices, commercial real estate development mistakes to avoid, in addition to the technical facets of a project like properly sequencing your critical due diligence tasks and land entitlement.
That experience is invaluable to a business owner's team. Projects can be derailed very quickly without the specialized skill set and expertise to manage a development. A real estate development project manager brings the experience to ensure projects are built according to the owner's vision.
But it's easy to tout experience. Experience is only important because of the results it yields. So, ensure your development team's results align with the kind of project you're trying to achieve.
7. Facility optimization
A ground-up development allows business owners to craft their vision and optimize their space while simultaneously building personal wealth. Facility optimization aligns your real estate with your business's operations, organizational culture, and workplace strategy.
As businesses evolve and their operations change, so do their space requirements. And the usual solution linear thinking real estate professionals offer is to "buy a bigger space!" But that often doesn't solve space challenges – it doesn't account for changes in operations and doesn't begin to accommodate real estate's impact on culture.
A real estate consultant can help a business owner account for these intricacies to design a space that enhances the business. Properly planned real estate development delivers unique results for small businesses – facility optimization is the union of forward-thinking real estate and business strategy, improving productivity, enriching culture, and fostering growth.
8. Time to focus on the business
Managing a real estate development project is time-consuming. You couple that with the learning curve required to wrap your head around the development process and learn the ins and outs of a municipality's development ordinances, and it quickly becomes a full-time job.
And business owners are already stretched too thin, which means that to self-manage a development, they'd be forced to begin dropping balls. With a real estate development project manager, business owners could instead focus more on their core business and avoid reprioritizing their already too-busy schedules.
Keep in mind that owners who are forced to split their focus between managing development and their business often see top-line revenues drop between 10-15% during the project's life. Not only does that negatively affect the business's health, but it can also impact the ability to finance the project.
Real estate consulting allows owners to outsource the day-to-day management of a project and participate only when critical design decisions need to be made.
9. Quality control
Part of the nature of the development business is that often, project consultants will take the path of least resistance. Instead of thinking creatively to circumvent challenges better, engineers, designers, architects, etc., typically take the easy answer because it requires less brainpower.
Project consultants are busy, and it’s often not malicious, but their goal is to get deliverables out the door as quickly as possible to move on to the next project. Unfortunately, this often leads to the business owner being railroaded by their consultants because they don't have the experience to push back on bad advice.
As an owner's representative, a real estate development consultant's experience puts them in a unique position to be able to spot-check project deliverables - that could be on ways to try to add density to a civil engineer's site plan, creative solutions to value engineer the site and building by making it more affordable and efficient, or on ways to design the space more functionally for the owner's operations.
Regulatory compliance is another critical aspect of quality control. Unfortunately, most business owners aren't familiar with development regulations and don't have a trusted advisor to help them avoid pitfalls.
The regulatory burdens are cumbersome and can quickly derail projects or increase costs. Therefore, it's essential to be well-versed in the legal and regulatory requirements with development to avoid expensive mistakes.
Delivering owner-occupied development projects more efficiently
For most businesses, the key to a successful owner-occupied development project is achieving a space that meets their operational intent, is within budget, and is on time.
At the user level, construction costs are largely out of our control. But finding creative ways to cut costs, and designing a space that meets a business’s operational needs as inexpensively as possible, is attainable.
Enlisting the services of a real estate development consultant with a proven track record, can help you ensure that your projects are being delivered more efficiently
Marsh & Partners has helped companies from veterinary hospitals to manufacturers to trade businesses achieve the right kind of building, in the right place, at the right time. You can check out our small business development consulting solutions resources page here to learn more.
You can also book some time on our calendar to learn more about how we might be able to help with your next project.
