6 Reasons Small Developers Will Love CRE in 2017
As it stands today, capital has been exceedingly tight for small commercial real estate developers. The largest investment banks are backing large-scale projects made up of several large developers. Yet new data released in the 2017 Emerging Trends in Real Estate report from the Urban Land Institute is giving small developers reasons to smile.
According to the annual report, there are several trends that are favoring small developers in the real estate market. We look at 6 of the reasons that we believe small commercial real estate developers will love CRE in 2017.
#1: Small Developers Represent 86% of the Market and Growing
The first bit of good news for small developers is the fact that they represent the largest sector of the commercial building industry. In fact, small developers that employ 20 people or less represent over 86% of the market. What that means is that while the projects may be smaller, the field is wider for small developers than ever before and the numbers are growing.
#2: Small Firm Agility is Prioritized
Even though big banks are backing larger real estate deals, buyers are prioritizing agility. No one knows small and agile better than small developers. As the workplace and consumer buying habits continue to evolve in new and innovative ways, the demand for multifunctional real estate remains high.
Small developers can take advantage of neighborhood and community revitalization programs. New construction that fits a smaller market where buyers seek affordable yet multi-use real estate is made much cheaper because the projects are smaller and thus the costs are reduced.
#3: More Opportunities for Mixed-Use Projects
Mixed-use projects have transformed metropolitan locations throughout the U.S. over the last several years. Small developers are seizing on this movement to slash construction costs by seeking out properties that take advantage of contextual zoning.
#4: Regional and Local Lenders are Backing Small Developer Projects
For some areas, attracting big developers to help combat blight through investment is difficult. Banks as well look to mitigate their risks by backing bigger projects. However recent trends show regional and local lenders are willing to back more small developer projects than ever before.
Because credit is still tight for many small developers, regional banks are filling the gap by backing projects that are smart locally and risk less capital. While small and mid-sized developers have historically relied on backing from regional banks, the increase is notable largely due to the tightening of credit.
#5: Renters are Looking for Multi-Family Rentals
Pricing again is the root of good news for small developers in CRE for 2017. Rent prices as well as home prices have gone up nationally, dramatically in some places. Those unable to buy housing but who are looking to avoid new rent hikes are turning to multi-family rentals.
In the real estate market, small firms by far represent the majority of multi-family real estate deals, accounting for more than 90% of them. Small developers have the opportunity to make a handsome profit as this trend is expected to continue over the next few years. The Meridian at Fondren is a perfect example of how three local developers teamed up to create this high rise, $33 million, 240-unit luxury apartment building that was constructed on Lakeland Drive across from University of Mississippi Medical Center, which opened to residents in 2016.
#6: Small Developers are Innovating
Innovation starts at the small developer level. With the above five trends, there are growing opportunities for small developers in innovation. From creating new work/life office spaces to developing multi-family units from old offices, small developers remain at the forefront of real estate development innovation. The District at Eastover is a project that is being completed by local developers, The District Land Development Company, LLC and is a great example of the how local real estate developers are using innovation to reimagine the site of the old Mississippi School for the Deaf and Blind to create Jackson’s first truly mixed-use development.
So for Jackson, and Mississippi as a whole, we see that the majority of development projects will be done by small local commercial developers, who will continue to thrive for the next several years, as our economy continues to grow as we enter the expansion phase, post the 2008 recession. We are optimistic for 2017 and if you are a developer or user looking for that perfect site, contact NAI UCR Properties and we can assist you in evaluating your next project or location.
By Micah McCullough, CCIM
Vice President | NAI UCR Properties