Outside the Big Box

One category of development that's frequently debated is big box retail. You know, the Costco's, Best Buys, and Home Depots of the world.

From a retail perspective, this is a profitable niche. Build a large (ok, huge!) store, pack it in with as much product as you can, limit service, and cut prices as much as possible. The store makes up in sales volume what it lacks in profit margin.

It's profitable for developers, as well. Profitable store, built for the long term, easy and cheap to build (they're usually pretty "bare boned"). For a developer, that's good business.

Here's where the debate comes in, though. Big box is not friendly to smart urban development. The stores themselves can often be an acre or more inside. With that much space, walkability is not really an option. Even in an urban environment, the perimiter is so large, you can walk a city block and still be outside the same store. Enough of these and you end up recreating the need for a car, which clogs the urban downtown, sending more people to suburbia, and so on...

Develop one of these in suburbia, though, and that 1-2 acre store turns into a several-acre site. Parking usually takes up at least double the space of the store. Then, there's loading dock access for multiple trucks, required landscaping, access roads, you get the picture. By definition, it's the complete opposite of smart development.

Lately, one more drawback has cropped up. The economic downturn hammered the retail sector, and there have been some bankruptcies and closures of big box retailers - Circuit City is one big example. With each store closure, one more big box is left vacant. That means acres of retail wasteland. No one else wants the stores right now, and until retail takes off again, the space will remain unused. Smaller stores have a much broader base of potential tenants, making them much easier to lease again. This also makes smaller retail stores a much smarter way to develop and grow an urban area.

Economic Justification for Development

In my last post, I commented about a few "mega developments", and how they all related to some aspect of "play", such as Las Vegas-style gambling or a mega amusement park for the ultra-rich. Apparently, these activities throw off a lot of cash for the owner, justifying the initial investment in the projects.

So, are there less luxurious justifications for significant developments?

Just so we're straight, every development is significant in some way, but I'm referring to landmark, sweeping, game-changing development.

All along, I've advocated some types of development that aren't your typical suburban development - projects that exist to satisfy some societal need, be it community, culture, health, environmental responsibility. (As a reminder, you can read more about that here.) However, to the investment community, these are not adequate justifications for developing real estate. Needless to say, the project will only be successful with the investment.

As I, or any other developer, work through the vision of a development, the financials are often forefront of the planning process. Unless I can answer the question of how an investor in a project can receive their money back with interest, the project will never get off the ground. In a circular way, this should explain why a Vegas-style casino may get funded, while a community-sensitive, well-planned mixed-use project may not.

Rest assured, projects that promote Community, Culture, AND Commerce can be funded and built. It simply means I, and my other fellow developers, just need to be more diligent.

Mega Developments

One trend showing up in real estate development in "developing" countries is the "mega development". Some entity with a lot of money decides to build a massive series of buildings and infrastructure. Keep in mind that describing these developments as "recent" is a bit of a misnomer, since these projects take years to decades to complete...

Dubai - This small section of United Arab Emirates was the first out of the gates near as I can tell. Their solution to having nearly filled up all their coastline and beach land is to create coast. Palm Jumeirah, Palm Deira, The World, and other projects are being built on man-made islands. The process creates a significant amount of both buildable land and coastline. Some of this is being done with walk-ability and mass transit in mind, while other parts are more similar to the suburban-style islands off the coast of Miami. Check out Nakheel Development for more. Funds for this project are directly from the Dubai government.

Abu Dhabi - This larger portion of UAE holds nearly 10% of the world's oil reserve. This means they have access to a lot of funds. About $500 billion (with a "B") is being put into development in their coastal capital city, also called Abu Dhabi. (Start Spreading the News! Abu Dhabi, Abu Dhabi!) Ironically, the area being targeted is also about the size of Manhattan. The architecture looks to be superb, while the overall effect appears to me to have the feel of Orlando mixed with Beverly Hills (read: playground of the ultra-mega-rich). It even includes a Ferrari-themed amusement park. This project is also solely government-funded, and developed by Aldar Properties.

Macao - This is actually two islands off the coast of China, and the project is the development of reclaimed land known as the Cotai Strip. Besides being geographically distant from the other two areas, the "project" is a departure from the Middle East projects above in other ways as well. First, the feel of the project is much more Las Vegas than LA or Manhattan. Second, the project is being funded by private development funds from the Las Vegas Sands corporation and MGM Mirage, among others. Sheldon Adelson, of Las Vegas Sands fame, is leading this development effort which is ultimately supposed to produce as much revenue annually as the entire state of Nevada.

Some commonalities exist between these projects. First, two of the three depend largely on reclaimed land. Second, the complexities that exist are quite different from typical developments, and are related to scale and speed of development, as opposed to gaining public buy-in and raising funds.

From a developer's standpoint, these projects represent a dream come true. Put the pedal to the metal and get the job done. They also represent the ability to put forth a particular philosophy or methodology without a whole lot of opposition. Mind you, in these cases, it mostly has to do with play, but the freedom is there. When you think about it, maybe the idea of play contributes to the ease of funding. When "play" sells, the investor can justify the investment economically.

So, the challenge to the developer comes in finding ways to economically justify their development...