By: Austin VanScoyk
Today’s real estate market has come a long way from the glory days of 2019-2022 when low cap rates and aggressive rent growth could make even ambitious projects pencil out as positive projects. Times have gone from shooting fish in a barrel by making cosmetic improvements, hiking up the rent, and refinancing/exiting at profitable cap rates to sky-high interest rates, stagnant rent trends, and proformas that simply don’t perform.
As Arizona developer and founder of Brightedge Ventures Austin VanScoyk notes, there’s hope for savvy real estate developers: ”These recent shifts in the market simply means that it’s become more critical to ensure the aim before taking a shot. We can no longer rely on growth and rates that weren’t sustainable to begin with; instead, we must take a strategic and opportunistic view of the macroeconomic landscape.”
1. Capitalize on the Need for Infill Development
There’s a saying, “Never let a good crisis go to waste.” The housing crisis is no different. With land at a premium in urban areas and a shortage of housing options, many municipalities are rewriting (or have already rewritten) code to allow for more progressive housing options.
Infill supports walkable environments, prevents further sprawl, diversifies housing options, and drives rental rates that are hard to achieve in these economic conditions with traditional single-family housing.
Infill development is the missing ingredient and an opportunity that real estate developers shouldn’t overlook.
2. Focus on Operating Companies and Build to Suit
Build-to-suite (BTS) development is familiar, but the current economic landscape says this strategy deserves another look.
Operating companies are battening down the hatches, preparing for a recession, and where they can save money, they will. Their real estate strategies are part of that evaluation, which is where a savvy developer can realize an opportunity to save the day.
A build-to-suit saves a company from coming out of pocket with necessary upfront capital. As long as an operating company can cover the required rent, it can avoid being at the mercy of fluctuating interest rates, and a calculating real estate developer has a worthy investment to hold.
3. Bite Off the Land Entitlement Piece
Land entitlement is not for the faint of heart, but it can be highly profitable. The process of entitling land can be lengthy, costly, and convoluted. Every municipality is different, but once a landowner entitles the land (has gained all the necessary approvals for a real estate development plan), that landowner can effectuate the land to an appropriate and lucrative use.
Land entitlement doesn’t commit an investor like a full-cycle development project, but it relies on an excellent due diligence process and skill. Full legal development approval can include site plan approvals, rezoning, conditional use permits, utility permits, road approvals, landscape approvals, land subdivision, recombination, and more.
So if you’ve got that process down and the expertise to prove it, there’s a lot of capital to be had for deals that are structured to use outside money, entitle the project, and then sell the project for a return. Of course, this strategy necessitates that you’re well connected with backend buyers so that you aren’t left holding a property no one wants to buy.
Looking Forward
While the real estate market reads dubious through 2024, there are still opportunities for development if you know where to look, especially in areas like Arizona, where VanScoyk has been working for decades. There are old problems that a creative real estate developer can solve in new ways. These strategies listed take heed of the macroeconomic factors at play so as not to be caught flat-footed in today’s uncertain market. Infill development, build-to-suit, and mastering land entitlement pack the potential to beat the insecurities of recent market conditions.
Published by: Martin De Juan
