How Does the Real Estate Development Process Work?
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Real estate development is a phrase that describes the planning and research processes required to create real estate assets from start to finish.
If this sounds somewhat complicated, you're correct! Development is almost always a complex process, as there are major steps required and any of them can present unique challenges. Some may take literally years to solve.
A development project may begin with the location and purchase of unimproved land or one or more existing properties needing rehabilitation or repurposing.
In its final stages, the developers may offer the finished product to buyers or investors or arrange for leasing if it's an office complex.
While many developers prefer traditional spreadsheet management, real estate development software solutions are available. These can help increase efficiency and accuracy.
Depending on whether the planned development is for commercial or residential real estate—and we'll look at both here—the end project can be anything from a high-end shopping village to a residential neighborhood.
Defining the Commercial Development Process
The term “commercial real estate development” typically refers to the construction of investment properties that will be leased upon completion.
These include office buildings, retail centers, apartment buildings, and industrial and warehouse facilities.
Commercial and industrial development projects are usually larger and more complex than residential projects for several reasons.
The materials used during the construction phase of these projects also differ, as they're heavier-duty and more resilient. A typical residential home won't need an evacuation system, but a mid-rise office complex will.
Investors in these projects often take on more risk than usual, as they may be involved in financing properties that are producing little or no income.
In addition, these projects often take years from start to finish, and no developer can predict how the economic outlook may change during this time.
Because of these differences, commercial real estate development projects tend to require significantly more funding than residential projects and run on tighter schedules.
Defining the Residential Development Process
These focus on creating new properties, usually single-family homes. Developers concentrate on finding locations that will appeal to future residents, such as those near highly rated schools.
In addition, a residential project usually involves a small group of homeowners and/or investors.
Considering that some readers will be interested in commercial real estate (CRE) development while others will want to learn about residential real estate, we'll dive into the basic development steps for both types.
We'll begin by studying a typical commercial real estate development project, as these are considerably more complex than their residential cousins.
Commercial Real Estate Development
These projects include office buildings, retail centers, industrial parks, and mixed-use developments.
Development typically involves the following stages:
#1 – Feasibility Study
Before breaking ground, developers conduct extensive market research to identify opportunities and assess the viability of potential projects.
This involves:
- Analyzing historic demographic trends and economic indicators;
- Becoming familiar with local zoning laws and regulations;
- Evaluating competition and forecasts of market demand;
- Projecting potential returns on investment.
#2 – Site Selection and Land Acquisition
This has been described as the most important stage of development, as choosing the wrong site could result in a poorly performing result.
This stage includes:
- Evaluating locations based on accessibility, competition, and nearby amenities;
- Conducting environmental assessments;
- Researching local crime rates and similar challenges;
- Negotiating purchase terms with landowners; and
- Performing due diligence on property titles and restrictions.
Local zoning laws should be thoroughly researched at this time. Skipping this step can cause major problems later in the development process.
The environmental assessment should include the possibility of natural disasters. For example, a developer will want to remind investors that beach properties in Florida can be lucrative, but they're also at risk from hurricanes.
#3 – Conceptual Design and Planning
When a site is located, developers begin to work with architects to create plans and blueprints for the finished product.
Generally, this phase will involve:
- Developing preliminary site plans and building designs;
- Estimating project costs and timelines;
- Creating financial projections for investors and backers; and
- Obtaining approvals from local authorities.
This development phase often takes more time than initially expected, as it's generally impossible to predict how long it will take to obtain approvals from city planners and other local authorities.
#4 – Pre-Construction and Permitting
Before construction can begin, developers navigate a complex web of regulations by:
- Submitting plans for review by local planning and zoning boards;
- Obtaining building permits and other necessary approvals;
- Review any covenants, restrictions, reservations and/or easements; and
- Addressing concerns or opposition from community groups.
#5 – Construction
This much-anticipated phase takes the project from blueprints to framing.
Key aspects include:
- Hiring a general contractor and subcontractors;
- Implementing quality control measures;
- Managing the construction timeline and budget; and
- Addressing unexpected challenges or changes.
#6 – Marketing and Leasing
As construction progresses, developers begin marketing the property to potential tenants or buyers, as it's vital to generate excitement before it's completed.
This involves:
- Overseeing press releases and advertising campaigns;
- Conducting property tours with interested parties; and
- Finalizing lease agreements or sales contracts.
If the finished project contains spaces that are particularly desirable or prestigious, such as a condominium penthouse, focused marketing may be required to locate these tenants.
#7 – Property Management and Operations
Once the project is complete and occupied, the focus shifts from the developers to the investors, who will either hire management staff or take over these duties.
Now, we'll look at the similarities and differences of residential development.
Residential Real Estate Development
While these projects share some similarities with commercial projects, we'll examine some key differences between the two.
Generally, residential developments have fewer steps and smaller budgets.
#1 – Market Analysis and Target Demographics
If not working directly with future home buyers, residential developers focus on:
- Identifying housing needs in specific areas;
- Analyzing household income levels and preferences; and
- Studying school districts and local amenities.
#2 – Land Use and Zoning Considerations
Residential projects often involve:
- Working with local authorities to obtain zoning changes if necessary;
- Planning for open spaces, parks, and community amenities; and
- Researching possible concerns about population density and traffic impact.
#3 – Financing and Sales Strategy
Unique aspects of residential development include:
- Securing construction loans and long-term financing for buyers; and
- Working with real estate agents and marketing teams to attract buyers.
#4 – Community Development
Larger residential projects may involve:
- Creating homeowners' associations (HOAs);
- Developing community amenities like pools, playgrounds, or clubhouses; and
- Establishing relationships with local schools and community organizations.
Whether commercial or residential, real estate development is a complex process that requires expertise in various fields, including finance, law, architecture, and project management.
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