Real Estate Development Risks
According to the Federal Reserve, real estate is the biggest asset class in the United States, worth around $40 trillion. This figure gives one a good idea of the billions and billions of dollars that change hands every day, from tenants to landlords, developers to contractors, lenders to home buyers, and so on. As the real estate industry is so vast and so deeply tied to the economy, it absolutely cannot operate without affecting other industries with their own variables of volatility to account for. This is one of the reasons why real estate developments are fraught with risks.
At every turn, developers are literally and figuratively exposing themselves to risk. In the first phase of appraising land and buying it—developers incur risk when they pay upfront all of their capital or round up investors who would want to see a return on their investments. Developers must know their way around numbers, lest the project stalls due to funding issues. Finding property to develop isn’t as easy as it sounds as well, as the neighborhood and surrounding area should ideally be well-developed in terms of infrastructure and transportation.
Next, the construction phase or the undertaking of improvements on the property often requires superior management and negotiation skills. This is why some developers have architect backgrounds or were once general contractors. These types of developers are able to significantly cut down costs, putting their experience to valuable use. On the other hand, players who have to hire professionals to do the construction or improvements should be aware of their financial liabilities. Developers must pay them for their services as any lawsuit can potentially throw a monkey wrench into their plans for the property.
Finally, when the project is completed, developers must always prepare for the worst in case they are unable to lease or sell space. As mentioned, even when developers have planned everything down to the last detail, their real estate is still subject to market forces which can impact their profits for better or for worse.