Just Blame the Developers

 

 

That’s the cadence nowadays right? 

 

“Those damn developers must be making a killing!” 

 

“Developers must be loving this market!”

 

“These developers keep cramming in these homes tighter and tighter to make more money.”

 

“It probably cost them $300K to build it and they sell it for $1,000,000!”

 

These are the comments I hear on a pretty regular basis. Friends, family, potential clients, and regular Joe’s. I have to admit, even I thought they probably love this kind of market. That was, however, before I was educated on the intricacies of property development and really began to understand what these developers have to deal with.

 

Let’s start at square one. 

 

To build a sub-division a developer first has to acquire the land. On the Eastside, the days of developers being able to buy hundreds of acres and building a master planned community like the Issaquah Highlands, Klahanie, or Trossachs, are gone. Those days are over. Today, they are looking for deals on typically well under 100 acre lots. Some micro-developments even go up on as little as 2 or 3 acres. It’s just the reality of the lack of land.

 

“But I see huge swaths of land all over the place.”

 

True, however, there are several factors that must be considered. Often this land is greenbelt, which is protected land and will not ever be developed. Sometimes it’s owned by somebody who just has no interest in selling, or wants a price above what the market allows. Other times, it may be the quality of the land. Wetlands are not the ideal building geography, not to mention the environmental hoops one would have to jump through just to make the land build-able. 

 

The majority of the land that actually makes it to the MLS, is worthless to developers. It’s typically over-priced and when it does sell, it is to a private owner looking to either get into real estate development, or just looking to build their own home. But the dilemma with that, is when it does sell, it sets a price threshold that every land owner now thinks that they can expect. 

 

“If the land is more expensive, they just increase the prices of the homes.”

 

Yes and no. While obviously land value is going to have a correlating impact on home value, a developer has to introduce a product that is in-line with market conditions. They simply cannot build a 4,000 sq ft home on the Plateau and ask $2 million for it because the land was expensive. That home HAS to fall between $900,000 and $1.4 million depending on the variables. Otherwise it is simply not marketable. Developers are extremely constrained by the cost of the land they purchase.

 

Time. When a developer makes a land purchase, there is an immense amount of front-end work that has to be done before a single foundation is poured. Environmental impacts, feasibility studies, architectural drafting, utility easements, etc., etc. With that, lies an inherent risk in the fact that any investment won’t be ready to market for 1-2 years or more in some cases. Most will act on what makes sense in today’s market, as none of us can predict the future. But there has to be some wiggle room built into the investment to accommodate for the breathing of the market.

 

Margins. While every project is different as there are so many variables to consider, most developers are not making insanely high margins. Depending on the location and size of the development, margins may be as low as 5% to as high as 30%. They are not selling these homes for twice as much as they have into it, it just isn’t happening. 

 

The point of this article is to shed some light on the fact that most developers hate these market conditions just as much as most buyers do today. While they do have peace of mind knowing that their soon-to-be finished projects will sell, and often sell before completion, they are always looking forward and the outlook, quite frankly, is intimidating to even the most tenured local developers. They remain hopeful and optimistic, but the challenges of property development on the Eastside are serious and challenging. So next time you hear somebody blaming those “damn developers,” take a second to shed some light on the challenges that they face in providing homes for our families.

Posted on February 2, 2017 at 8:05 PM
Dan Colson | Category: Economy

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