In large urban areas across the United States, the real estate development trend is densifying the area over expansion into more rural areas.
John McNellis, a governor with the Urban Land Institute, said up-zoning and staying in urban areas gives developers options like using existing infrastructure rather than the expense of placing new water/sewer lines, roads and other essential pieces of development into a rural area.
“Environmentally, you are best in making use of existing infrastructure than trying to sprawl out into the countryside,” McNellis said. “The most inefficiently constructed building in the heart of downtown is going to be far more environmentally friendly than a development on the edge of town.”
McNellis spoke to the regional Urban Land Institute on March 30 in Greenville about working in real estate, specifically about making the change from one profession to real estate development. McNellis, a former real estate attorney, became a real estate developer in Northern California over 30 years ago.
He said two words of success in real estate development are supply constraint. He said if the supply outweighs the demand, developers have greater risk. While infinite land availability is visually appealing, developing it doesn’t ensure people will come.
“If I build it in the middle of the Mojave Desert, they won’t come,” McNellis said. “But, if you build it in Silicon Valley or even the Golden Triangle, they it would fill up, but you have to know that supply doesn’t make demand.”
That means developers have to do their homework and study market trends. What’s up? What’s down? And, more importantly he said, where are people going?
While some of that may include some guesswork, McNellis said developers have to be educated about things like a market’s absorption.
“You go to the planner and you ask questions about how many projects are going on and who has enquired about particular zip codes and you can see what the absorption is and whether there is a need in an area,” McNellis said.
Another trend for developers to watch is job growth. He said the Upstate was a prime example of where job growth has allowed for a boom in real estate development. The region has experienced a drop in vacancy coupled with increases in construction of new development and average rents for office and industrial property over the last 18 months.
That has created a perfect storm of sorts for real estate developers in the area.
“What you really want is an area that has strong job growth coupled with supply constraints and the best supply constraints are geographical where there is nowhere really to go,” McNellis said. “Think Las Vegas in terms of what might be bad supply constraints.”
But, development does come with its fair share of hurdles. One of those big hurdles is rezoning.
While it might be a national issue, Michael Dey, executive vice president and CEO of the Home Builders Association of Greenville, said Greenville County specifically struggles with getting things like homes and housing developments through the political process of approval.
The data suggests the permit trend was on the rise from 2012 to 2015 with increases of 7.5% to 12% each year. Even though Greenville County has issued more permits by number than its neighbor, the gains in permitting year-over-year have been stronger in Spartanburg County. According to Market Edge data, Spartanburg County has seen a 28% increase in permits issued over each of the last two years. Greenville County, on the other hand, increased 6.3% in 2014 and 9.4% in 2015.
“They (Spartanburg County) are able to get the production moving in that market,” Dey said. “And, after two to three years of sufficient investment, that development is moving to Spartanburg.”
But, he said a lot of the growth in Spartanburg is attributable to the fact that recent job creation has come along highways 101 and 291 in or close to Spartanburg County because “rooftops follow jobs and commercial follows rooftops.”
In the end, when it comes to real estate development, McNellis said all the research doesn’t produce an exact science in predicting the best places to develop.
“A lot of development is lifestyle,” McNellis said. “If you are married with two or three kids and you want to have lots of land, then suburban fields is where you want to be. People look at what they can get for $500,000 and it can be a nice condo downtown or two acres in the country.”
There are numerous success stories in real estate development, but he said there are even more tragedies.
“Real estate is a very easy business to lose lots and lots of money,” McNellis said. “There are just too many variables that can whack you in the side.”