Why Bother with this Small Developer Stuff?

Hawthorne Boulevard, Portland OR


If you have been reading this blog you know that I am always pushing for the creation of smaller development enterprises, building smaller and simpler buildings (without elevators for the most part), using off-the-shelf financing, and the delivering smaller units for the smaller households that make up a big portion today’s local markets.

I think we can do a much better job of connecting the housing unit to the list of consequential stuff people consider in their decisions to rent if we can deliver flexible unit configurations, competitive rent + transportation math, and locations close services, food and drink.  Here is a list of stuff I shot off in an email to a colleague this morning:

  • It is important to shift the approach to development projects to a smaller, more incremental scale.
  • Re-imagine the development enterprise as a smaller outfit that can compete without economies of scale, recognizing the constraints in economies of means.  If a municipality wants to revitalize a neighborhood, cultivate multiple small operators and roll out a Pink Zone.  Don’t do a big lumpy Public Private Partnership.
  • A small outfit can aggregate several small projects into a portfolio within a decent neighborhood structure.  This will provide a platform with significantly reduced downside risk and enhanced upside benefits.
  • It is time to take the Arthur C. Nelson’s work seriously.  There is a significant lack of supply of housing in walkable urbanism and half of new housing needed between now and 2030 will need to be rental housing.  (See Dr. Nelson’s Book  and  video).
  • With construction production at less than half of 2005’s peak, builders of single family homes, apartment complexes and commercial buildings are experiencing shortages of skilled trades all over the US, so small developers will need to cultivate a local base of small trade contractors to avoid the labor shortages.
  • Small developers are positioned to help local entrepreneurs create local wealth and local jobs among their trade base and their local tenants.  Small, cheap workspace needs to be provided at modest scale within the context of a neighborhood.
  • The small developer business model needs to be accessible to younger people, immigrants, and folks who already have one or two of the skill sets needed (brokerage, leasing, property management, finance, entitlement, design, construction management, communications).  We will need to develop training, tools and templates and a network of early adopters to reduce the learning curve of rookie developers.  There is a lot of interest in training and tools from the leadership of Congress for the New Urbanism and the Incremental Development Alliance.  I am active in both of these and recommend that anyone interested in this work do the same.
  • Many of the project management, construction management and property management advantages that were once only available to large outfits that could achieve economies of scale have been disrupted by technologies like BaseCamp, BlueBeam, AutoCAD360 for the iPad, QuickBooks, ClearNow.com, PayYourRent.com, YouTube, and the smartphone.
The market demand is large enough and the supply of anything remotely resembling walkable urbanism is small enough that all kinds of lousy half-baked projects are going to get built and get rented or sold in the next 15 years.  This mismatch between very low supply and very high demand provides lots of room for dumb projects, but it also presents the opportunity to re-scale the development business.

Chris Nelson Wrote a “Red Pill” Book that will not let you look at the world in the same way once you have read it.

Chris Nelson has written one of those "red pill" books.
Chris Nelson has written one of those “red pill” books.
You can read it, or you can go back to sleep....
You can read it, or you can go back to sleep….
A number of people have asked me recently why I am so focused on small developer/builders producing rental apartments , rental cottage courts, and mixed use rental buildings.  Yes, I did not enjoy the process of building for sale housing, but more important than my experience trying to manage the often unrealistic expectations of homebuyers, was reading the research of Arthur C. (Chris) Nelson.  It blew my mind.  If this guy is only half right, the world of real estate and community development is now a very different place.
The numbers on demand for rental on a national basis from Arthur C. Nelson  break down like this:
Rental apartments will be 48% of the growth of all new housing to be built between now and 2030.
Some of that demand will be delivered by the conversion of existing detached housing, which has been overbuilt.
National demand for all new housing units is about 1.3 million units a year until 2030.  Nelson puts 48% of that demand as rental.  Last year there were about 400,000 multi-family units built according to the census (combined rental and condo ownership)
48% of 1,300,000 new units in annual production is 624,000 rental units, so even if all 400,000 of the multifamily units produced last year were rental (and they were not) that is a production shortfall of a quarter million rental units units.
Nelson presents a summary of market preference from four separate surveys which say that about 1/3 of folks in the US would rather live in walkable urbanism.  If all of the nation’s the new housing production was delivered in walkable urbanism every year, we would not be able to meet the current demand (again just 1/3 of the market) until something like 2040.   If more good stuff gets built and people see it on the ground, and a greater number of  people decide that they want it, meeting that larger demand will, of course, take longer.  For example, if 1/2 the population decides that they prefer walkable urbanism and all the available production capacity goes into delivering walkable urbanism, it would take until 2060 to satisfy the market demand.
Chris Nelson’s presentation at CNU 21 in 2013 captures most of his book Reshaping Metropolitan America  here is a link to the video:  Arthur C. Nelson at CNU21
The data set from Nelson’s book is available for download as an excel file here: Reshaping Metropolitan America Data Set
It is broken down by metropolitan statistical area (MSA) so you can see what is going on in a given region vs. the national data Nelson uses to explain his findings in his book and CNU presentation.
You can find the US Census numbers on building permits here: Building Permit History
My reading of the data is that Albuquerque has demand for well over 2,000 new rental units a year between now and 2030.  Last year we produced 400.  Can you see why I think the opportunities for small developers are going to be in rental buildings?