How Real Estate Developers Think. Peter Hendee Brown

the people who buy or rent units or space in their finished buildings, developers can be known to overpromise and underdeliver, hyping their projects in the beginning but cheapening them in the end. To architects, contractors, and other members of the project team, developers are seen as risky clients to work for, because they are known for squeezing their team members’ fees when they are negotiating contracts at the beginning and then withholding payments for completed work, particularly when times get tough. And many members of the broader community, particularly architects, think developers either do not know or do not care about good design. Rather, they think developers always take the cheapest route by dumbing down design and reducing material quality to maximize profits. Many people conclude that cities are not as good as they could be because of the work of developers. So when community members make suggestions in neighborhood meetings like “can’t you just make it shorter, give it more articulation, use better materials, put the parking underground,” and so on, their suspicions are reinforced when the developer’s answer is more often “no” than “yes.”

      And developers seem so different from the rest of us. They appear to enjoy great wealth, dress well, drive fancy cars, own several homes, take exotic vacations, go cruising on their yachts, fly around in private planes, and live in a world that is completely different from our own. They can also be charming, charismatic, bright, knowledgeable, and fun to be around and talk to. They hobnob with local politicians and business leaders, are often viewed as local celebrities and important civic leaders, and can seem bigger than life in person. So when they come to neighborhood meetings they generate feelings of ambivalence from community members who find themselves attracted to these important and alluring people while also feeling distrustful of their motives and methods and, in some cases, jealous of their lifestyles.

      But stereotypes can be misleading: While they are often rooted in truths, these generalizations fuel the public’s distrust by painting all developers with the same brush. In the near term, distrust and misunderstanding reduce the potential for collaboration between developers and members of the community and the chances for developing the best and most creative projects for communities and cities over the long run. And stereotypes are often one-sided and do not reflect other important truths.

      For developers to remain in business they must finance and sell a product in advance, for a price that is greater than its costs. Their projects can take years to complete so inflation and unforeseeable market forces make cost control more difficult and increase uncertainty. They must walk a fine line with their buyers, attracting them with a compelling vision while managing expectations for perfection within the limits of reality. They want happy buyers but they cannot earn a profit if they capitulate to requests for things they are not contractually obligated to provide. They must also be tough negotiators with their team members because the sum of the costs of their work—design services, construction materials and labor, and other products and services—must be less than the final sale price. They often do care about good design, because good design sells, but it is good design in the eye of the average potential buyer, rather than those of the elite design professional. And often the buyer’s idea of good design can lead to projects that make for good communities in the long run. More important, the neighbors’ seemingly reasonable questions and suggestions for improving the design by reducing height and density and adding setbacks don’t reflect the increase in costs—and decrease in profits—that those changes often cause. And despite the impressions of wealth that they may project, many developers are just one bad deal away from serious financial hardship and there is no guarantee of endless riches or that the next project will be a success. Development is a very risky and complex business, which is why more people don’t do it.

      For many community members, real estate developers remain a mystery, and because we don’t really understand who they are, what they do, and why they do it, we are in a difficult position when it comes to working with them. And that’s why we need to come to a better understanding of developers, because they are going to keep on developing, and their buildings will remain with us long after the construction dust has settled. The purpose of this book is to begin building that deeper understanding.

       Understanding Developers

      This book takes the position that developers are people whose interests, motives, and actions can be easily understood and that a more complete understanding will lead to better outcomes for neighbors, communities, and cities, as well as for developers. This new understanding will help everyone from academicians who study urban development and public policy to elected officials, city planners, architects, and others who work with developers. Most important, it will help community members—like those neighbors in Evanston—when they find themselves sitting across the table from a developer who is planning to bring change to their neighborhood.

      This book is based on interviews with more than one hundred people involved in the real estate development business in Chicago; Miami; Portland, Oregon; and the Twin Cities of Minneapolis and Saint Paul, Minnesota, although the emphasis is on development in those first three cities. Together, the stories of these developers and their projects paint a vivid picture of what is common to the real estate development process. They also offer vivid contrasts that illustrate how development is a distinctly local activity that is influenced by climate and geography as well as by the unique social, political, and economic cultures of different cities. An understanding of what is common and what is different will help community members, elected officials, and others participate more productively in the development process in their own communities.

      Chicago has a very large population and dense urban development patterns that were created before the proliferation of the automobile and suburbanization. Despite being located on the open prairie, it grew up on and is bounded on the east by the edge of Lake Michigan, where density is at its greatest. Chicago is also the birthplace of the modern skyscraper, so for these and other reasons, urban living—high-density as well as high-rise—is well established. Housing in Chicago is designed for people who live and work in a city where commuting from the suburbs can take an hour or more.

      Portland’s adoption of an Urban Growth Boundary in the 1970s led to the more recent and rapid development of that city’s urban core. Development in Portland was also stimulated by significant public investment in transit and public realm infrastructure. The city is dense, efficient, and filled with buildings and places characterized by consistently high-quality architecture and urban design. And Portland’s location in the environmentally conscious Pacific Northwest has cultivated an ethic of sustainable development that has been integrated into public policy, design practice, and construction industry standards.

      Miami is the product of a major speculative real estate boom in the early twentieth century, and it has seen numerous booms and busts since. It is also a global city, the gateway to Latin America, and an economic powerhouse. Miami experienced incredible growth in the 2000s as people from around the world bought condos not for housing but as speculative investments. Many of those buyers never intended to live in their own units, so layout and function were secondary considerations. More important were striking ocean views, exotic amenities, image, hype, and the seemingly endless potential for big profits from increased appreciation that drove repeated resales and “flipping.” To attract these potential buyers, developers relied increasingly on star architects and famous interior designers not just for their design skills but also for their marketing value. This speculation led to overproduction and by 2008, after the bursting of the housing bubble, there were estimated to be more than forty thousand empty condominium units standing on the market.³

      By highlighting the projects and personal career stories of developers from these three different areas, this book illustrates differences in approach that reflect both individual backgrounds and the influence of local cultures on real estate markets. At the same time, this approach illuminates those traits and characteristics that are common to developers almost everywhere. Understanding both common traits and regional variations is the first big step toward being able to predict what developers working in other communities and cities are likely to do.

      The developers profiled here were selected by consulting media accounts; articles in real estate, design, planning, and construction trade periodicals; and industry experts as well as local elected officials, academics, journalists, community members,