Brad Bonkowski and Andie Wilson: The steps to development
Have you ever asked “Why don’t THEY build a hotel here?”, “Why don’t THEY open a Nordstrom here?”, “Why don’t THEY open another restaurant here?” While it remains a mystery who “THEY” are, there are some general answers to these questions you may find interesting.
They seem to apply to property owners, real estate developers and city planners collectively. In reality, these are all separate entities, making decisions based on their own needs and investment requirements, not as a cohesive group.
Let’s take a sample project with a developer looking for a site for a fast food restaurant. Let’s assume the developer represents McBurger Fries, who needs a drive-thru site, and the franchise floor plan and site layouts dictate at least a 1/2-acre of land will be required. Obviously a fast food site will require a high traffic site, on a main thoroughfare. So the developer will start looking at prime retail sites meeting the franchise development standards, and chances are that none of the available sites will be exactly 1/2-acre. Most may be 1 to 2 acres which means the developer must convince the seller to subdivide the parcel (if possible) or purchase the larger site and face the challenges of disposing of the excess land once the project is built.
Let’s assume the current market value of prime retail land on Highway 50 East, near the 580 bypass, is $10/SF, or $435,600 per acre. Let’s assume the developer finds a 1-acre parcel and has to purchase the entire acre at market value. The structure to be built is only 1,500 square feet, but the costs of building a restaurant to the franchise’s specifications mean the cost of construction will be approximately $250/SF. That’s $375,000 just to build the building, and fixturize it. Additional mandatory costs might include:
Site work: $50,000
Permits & fees: $25,000
The total costs to build this fast food store are now at $1,020,600, including the cost of land.
Let’s assume the fast food operator will lease this 1,500 SF location from the developer for top dollar in today’s market: $2.25/SF/NNN, for a total monthly rent of $3,375, or an annual amount of $40,500.
If the developer paid all his costs of construction and development of $1,020,600 in cash, his annual return on the investment would be 3.9 percent. If, more realistically, the developer financed some of this work, that return would be lower due to the interest on the debt. If the developer is able to sell off the surplus ½-acre, he might recoup $217,800, and this would definitely improve the return on investment. But frankly, the rate of return is too low and the risks involved are too high for him to spend the time and effort on such a project. Chances are good he wouldn’t be able to sell the property once it’s completed for what he has into it.
This is just one specific example, but is a good case study in why new projects, even simple ones with one tenant, are difficult to get to the finish line. Most “Why don’t they….” questions have a similar answer. “Why don’t they build a Nordstrom here?… build an office building here?…build a retail center here?” These questions can usually be answered by analyzing the site demographics and company sales projections. Most retailers have specific population and income requirements for a site before they will even consider opening a store in the area. We have spent many hours trying to convince franchises to consider Carson City for a new yogurt store, or burger joint, but if our population and demographic figures don’t meet their parameters, there’s no convincing them otherwise.
Some retailers have specific traffic count requirements for the location of a new store site, or they may have minimum average income requirements for the surrounding population. Often retailers have even more specific guidelines, such as “must be on the going home side of the street.”
Knowing the site parameters developers have before forging ahead may help you understand why a certain project may, or may not, ever get off the ground. The larger the project, the longer the due diligence period will be. The Capitol Mall project downtown is a perfect example of this. Any wise developer will be sure she has answered all applicable questions: How much office space can I expect to fill? At what lease rate? How long will it take to fill the space? How much retail space will I need to satisfy the new employees working in these buildings, without building so much that I’m left with long-term vacancy? The Capitol Mall project has even more moving parts to consider: parking to accommodate the new spaces as well as existing, surrounding businesses, during and after construction, land leases, infrastructure (are there adequate services available?), just to name a few of the dozens of considerations that must be taken into account.
Every development involves many moving parts, and typically takes anywhere from six months to several years to fully formulate, before a shovel is ever put in the ground. Many concepts or ideas will be discussed before a final plan ever will take shape. This is why you don’t usually hear about developments until it’s time for the dirt work to begin — it’s irrelevant to release details until the developer is certain the plans are ready to go, as they are guaranteed to change many times over during the design and planning phase. This is also why smart city planners and officials are tight-lipped about projects in the works. There’s no point in making information public until final plans are either done or fairly close to completion.
To sum up, development is a multilayered process that requires much analysis before a site is selected, constant change to the design to get to the point, most likely after several years of work, of submitting final plans to the city for release to the general public. In our experience maybe 50 percent or less of projects that enter a due diligence period get built, and not all of those succeed in the end. It’s a high risk business with potentially great reward that’s not for the faint of heart. When you do see a project come out of the ground you can be reasonably assured it has been years in the making and that the developer has done extensive research into the surrounding area to ensure the demographics support the project.
Brad Bonkowski and Andie Wilson are broker/owners of NAI Alliance Carson City, a commercial real estate brokerage. They may be reached at (775) 721-2980.