Published September 2002

Developers face higher risks, lower returns

OK, so now we’re going to blame “greedy developers” for the West Nile Virus?

Recent editorials and wire stories point to storm retention ponds in modern-day housing developments as breeding grounds for mosquitoes, suggesting that greedy developers are somehow to blame for the virus’ spread this summer.

This line of thinking would be laughable if it weren’t for the fact that some people actually think it’s true.

The truth, of course, is that storm retention ponds, wetlands and green spaces are land-planning department mandates placed upon developers, not the result of “greedy developers squeezing even more profit by building small lots and retention ponds in housing developments” as one recent letter to the editor at The Herald suggested.

I’ll put good money down that not a single housing developer operating in the Puget Sound today would say no if they could earn a reasonable return on their investment and do so with houses built on larger lots. They want to put product out that people want. Most feel forced into condensing housing under today’s model.

The problem is, in part, land and site development costs. There’s less land available today to develop because of the state Growth Management Act, planning restrictions and other measures imposed upon developers. These are public policies that manifest through codes and zoning at the planning desks. But they have a cost.

Their effect is that they constrict supply, thereby pushing up prices for the quality developable land sites. Throw in mitigation or “impact” fees, interest-rate risk, fluctuating construction materials cost risks and the existing risk of being able to deliver any development project on budget, and the total “all-in” hard costs to bring finished housing product to the market have gone up much faster than the rate of inflation in the past 10 years.

Since homebuyers’ wages haven’t been keeping pace with these increasing costs to deliver housing, something else has to give. That has left developers with few alternatives but to condense the housing onto smaller lots to try to reduce the cost per home. The same challenge applies for apartment or condominium development.

Were it not for low interest rates in the past six to eight years, letters to the editor would be screaming about unaffordable housing because the hard costs have gone up so much. A letter to the editor publicly thanking Alan Greenspan for making more expensive housing still “affordable” to some degree is probably more appropriate today than a bash-the-developer one.

The fact is that returns on investment for housing developers have been getting skinnier, while the risks have been increasing and supply restricted. Many developers who were active in the 1980s are out of business today unless they have been able to scale up their operation so they can handle these new risks. It’s a high-stakes game today, and returns are thin at best for most developments.

Maybe it’s “Enronitis” that has folks all a-twitter over traditionally easy targets for greedy behavior. But the image of the developer converting pristine farmland into get-rich-quick condos is about as out of touch with reality today as the Rodney Dangerfield character in the ’70s golf comedy movie “Caddyshack” would be if he went to the county in his plaid pants to pull a permit today.

To those who still view developers as the greedy bad guy, it’s time to move into the 21st century or go have coffee with a real one.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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