Real Estate Development 101

November 10, 2020
Isaac Waitman


The real estate industry is massive – MSCI estimated that the size of the professionally managed global market was more than $9.6 trillion at the end of 2019 (that’s not counting the millions of homes built and sold to homeowners). To put those astronomical numbers into context, that’s enough money to:

Real Estate, to say the least, is one of the most important slices in the global economic pie. Furthermore, it’s necessary for human existence, requires less management than most businesses, and is limited – real estate will never go out of style.

Individual properties, on the other hand, do go out of style. They wear down and need to be replaced. They stop supporting local needs (like a grain mill in a growing city, or a mobile home park in an urbanizing area). And even if the current use is not a terrible fit for the community, spaces might need to change to accommodate rapid population growth.

All of these “changes in space” are what real estate development refers to. In this post we’ll answer four questions:

  1. What Is Real Estate Development?
  2. What Do Real Estate Developers Do?
  3. What Is the Real Estate Development Process?
  4. What Are the Results of Real Estate Development?

What Is Real Estate Development?

The Urban Land Institute defines Real Estate Development as “the continual reconfiguration of the built environment to meet society’s needs” (Miles, Mike E., et al, Real Estate Development: Principles and Process, Urban Land Institute, 2015).

Let’s break that down:

  • Continual Reconfiguration: Real estate needs are always changing because of each property’s limited life. This is why creativity is so important for developers – it’s not just about building the biggest buildings you can on the cheapest piece of open land. Many of the most successful development projects involve unique changes to current properties that no longer serve the needs of the community.
  • The Built Environment: There are a lot of ways to invest in real estate that are not considered development. Plus, there’s a blurry line with strategies that seek to add value to existing properties through renovations. Changes on an existing property may be considered development if you’re making significant changes to the structure or use (known as repositioning an asset). In general, if you’re talking about building a space, you’re talking about development.
  • Meeting Society’s Needs: While the aspect of “Continual Reconfiguration” provides job security for developers, it also presents a challenge. Public and private entities have to work together to find ways to improve spaces that benefit the community. This means that real estate development must operate in the context of the local community. Development is one of the only industries where consumers have control over the products you create.

This definition is broad because real estate development can take many forms. This takes us to our next question...

What Do Real Estate Developers Do?

Richard Pieser & David Hamilton answer this question in their book, Professional Real Estate Development:

“Few job descriptions are as varied as that of real estate developer. Development is a multifaceted business that encompasses activities ranging from the acquisition, renovation, and re-lease of existing buildings to the purchase of raw land and the sale of improved parcels to others. Developers initiate and coordinate those activities, convert ideas on paper into real property, and transform real property into urban fabric. They create, imagine, finance, and orchestrate the process of development from beginning to end. Developers often take the greatest risks in the creation or renovation of real estate – and they can receive the greatest rewards” (Peiser, Richard B., and David Hamilton, Third Edition, Urban Land Institute, Professional Real Estate Development: The ULI Guide to the Business 2012).

In other words, the job of a real estate developer is too fluid to fit into a concise description. You must be both creative and analytical; act quickly and pay attention to details; make plans and deal with uncertainty; be persistent and know when to compromise. You are always dealing with more tasks and issues than you think you can handle.

Even with this fluctuation, though, there a few key responsibilities that are common for real estate developers:

  1. Building and Managing a Team

You can’t be a great developer if you’re a one-man-show. You need both skilled employees and consultants/contractors to pull off projects on time and with excellent communication (you don’t want your architects, attorneys, and accountants to be out of sync). The larger and more complicated the project, the larger and more specialized the team will need to be.

  1. Managing Risks

One of the most important jobs for developers is risk-management. This includes market analysis, property research, due diligence, financial underwriting, and all of the other ways you try not to lose money. And sometimes risk management means you decide to take a small, defined loss on a project to avoid a much larger loss down the road. While not the most fun part of the job, this is crucial for long-term success.

  1. Fundraising

Real estate development is a capital-intensive business. Developers usually fund their projects through a mix of debt and equity, but one thing remains the same – it will always require a lot of money. This means hours spent with potential investors (on the equity side) and banks or loan brokers (on the debt side) to secure the funds you need.

  1. Negotiation

While negotiation is more of an attribute than a responsibility, it’s such an important skill that it deserves to be on the list. What do securing a property, sourcing construction bids, gaining city approvals, closing on a loan, and selling the project to lock in your profits all have in common? Negotiation. To paraphrase the great Chris Voss, negotiation is any conversation with a desired outcome. And developers always have a desired outcome.

While developers who specialize in different product types will have different day-to-day schedules, these four responsibilities are key to success in every aspect of the industry.

What Is the Real Estate Development Process?

This question deserves a much longer answer, and is one of the more confusing aspects of the job to newcomers. For a high-level understanding, Miles, Netherton, and Schmitz give a helpful outline in their textbook on Real Estate Development from the ULI:

  1. Idea Inception: decide from market research and background knowledge what type of development would fit in the area.
  2. Idea Refinement: after identifying a specific site for the project, settle on a tentative design and negotiate an agreement to control the land.
  3. Feasibility: run a formal due diligence process and either validate your assumptions or disqualify the project before moving forward.
  4. Contract Negotiation: make final decisions on design, financing, construction, and any other necessary pieces and obtain all necessary approvals and permits from regulatory entities.
  5. Formal Commitment: sign all contracts (which are often contingent on each other).
  6. Construction: manage the builder/contractors to keep the project under budget and on schedule.
  7. Completion and Formal Opening: bring in full-time operating staff, advertise to future tenants, obtain occupancy certificates, and if necessary, close on permanent financing and pay off the construction loan.
  8. Property, Asset, and Portfolio Management: oversee operations and any necessary reconfiguring/remodeling to extend economic life and optimize the performance of the asset.

While a project never goes according to plan, most will follow a similar schedule to this. It’s important for developers to always keep the big-picture vision in mind to avoid getting lost in the day-to-day tasks. Given that many projects take 2-10 years to go from stage one to ten, this is much easier said than done.

What Are the Results of Real Estate Development?

Whether you’re developing properties, working with a developer, or investing in a development, the hard work and uncertainty pay off.

Most people think first of the financial reward, and that’s fair – as an investment, your ROI on a development project is a priority. Few real estate ventures match the returns of a well-underwritten development. While this is due to the higher level of risk – and regardless of how you’re involved in a development, that risk is something you need to be comfortable with – smart risks can create non-linear outcomes (as Nassim Taleb likes to point out) that lead to a higher reward-to-risk ratio than other asset classes can offer.

Money, however, is not the only value of real estate development (many would even say it’s a secondary result). In a development project, you have an opportunity to impact lives, communities, and regions in a positive way. And this isn’t just a cheesy, instagram-ready commonplace that you can slap on a picture of a coastal sunset – developers build tangible spaces that people live, meet, and communicate in. A beautiful building has the potential to increase the natural beauty around it, attract people to it, and thus play a critical part in helping people interact with their communities. Developers often carry bad reputations as greedy moguls, waiting for the next poor widow to take advantage of. But done correctly, real estate development can balance wealth-building investments with the fulfilling experience of creating spaces that people love.