Understanding the Risks and Milestones of Real Estate Development
Real estate development is a risky and lengthy process that spans across three main milestone stages: pre-development, construction, and operation. Development stages can take a few months or years to complete as many obstacles may appear along the way. Despite the potential setbacks that may occur, real estate development opportunities can be highly profitable investments that deliver big for your wallet. To better understand the real estate development lifecycle, let's take a look at the different project types, risks, and payoffs.
Risks Associated with Real Estate Development Properties
No matter what real estate development venture you pursue to develop, each opportunity offers its unique risks and payoffs in the hopes of achieving a highly profitable property. The types of real estate development projects that you can expect to see include:
Renovating, upgrading, or increasing an established property
Buying land or building a property on land
Converting one type of property into another
Each project type offers different levels of risk throughout the real estate development lifecycle. Typically, projects that experience relatively low risk are those with established tenants, such as retail build-to-suit. This project type offers the potential for minimal risk in the pre-development stage with regulatory hurdles. Developers benefit from these projects because they can secure a tenant for the long-term and develop a property that suits the tenant's precise needs. Build-to-suit tenants could include IKEA, Starbucks, or Walgreens.
Real estate development projects that offer high risk are those with few to no leasing commitments in place. The justification to complete this type of project, whether it's purchasing new land to build, converting one type of property into another, or upgrading an established property, exists with the forecasted demand for the property after completion. Speculative projects are high in risk for leasing, construction, and financing but can pay off big if the projected demand is satisfied with the project's completion and signs on to become a tenant.
Key Takeaways of Real Estate Development
As a real estate developer, deciding whether or not to develop certain types of properties ultimately falls on the level of risk you are willing to take. Before you dive straight in, it's essential to take the time to learn about the property, location, surrounding market, financing options, and the construction process to see if the project is right for you. Once you understand the level of risk associated with each project type, you'll be ready to develop the property, finance it, and deal with any setbacks or issues that occur throughout each main stage of the real estate development lifecycle.
Develop Your Next Project with DBe
At DBe, we are a General Contracting, Management, and Advisory firm that designs and builds state-of-the-art residential and commercial facilities and structures throughout the Tri-State area. We offer in-house development expertise in site identification, zoning, entitlements, financing, master planning, and more to achieve your project’s vision. Contact us to start your next real estate development project.