Real Estate Developers and Housing

Real Estate Developers Defined

Real estate developers are entrepreneurs who are the central drivers of any real estate enterprise. Generalists by nature and by necessity, real estate developers assemble and lead teams of specialists who are responsible for taking a real estate developer's idea and realizing the vision of that idea by performing specific functions orchestrated by the real estate developer throughout the development process until the development project is completed and stabilized as either rental or for-sale housing. Unless the real estate developer is a large development firm with in-house staff capacity, team members will generally be third-party professionals with specialty expertise in architecture, engineering, real estate and contract law, market analysis and valuation, finance, project management, general contracting and construction, and marketing and asset management. Residential real estate development ventures are value-added propositions that lead to tangible results that provide housing, build communities, and improve the economy. To be successful in such ventures, real estate developers must manage a variety of risks that have the potential of throwing a project off-track either while a development is being planned, in progress and under construction, or completed and ready to be sold or operated. Some of these risks include critical shifts in financial markets with the potential downside of increasing capital costs, while decreasing the availability of equity sources; inflationary factors affecting the costs of construction labor and materials; regulatory requirements that may extend a project's development time line and increase risk exposure to higher costs and reduced profits; and negative changes in the real estate market that may reduce consumer demand for new housing.

Managing risk is a precarious endeavor for real estate developers and one that is not easily accomplished. During boom periods when the housing and capital markets are robust and the demand for [Page 580]new housing is high, real estate developers with the capacity to assemble a professional team and marshal capital resources are better able to manage risk and enter the development process with some level of confidence. To the extent that urban economic conditions are elastic during such boom periods, real estate developers will respond favorably. Risk aversion, in many ways, can produce impulsive behavior on the part of real estate developers that may limit their rational responses to market conditions.

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