WEBVTT 00:00:00.000 --> 00:00:03.220 Welcome back to the Deep Dive. Today we are tackling 00:00:03.220 --> 00:00:06.980 something that is so omnipresent, so physically 00:00:06.980 --> 00:00:09.900 massive and, you know, so fundamental to our 00:00:09.900 --> 00:00:12.919 daily existence that we have effectively become 00:00:12.919 --> 00:00:16.839 blind to it. It's the stage upon which our entire 00:00:16.839 --> 00:00:19.579 lives play out. It is the backdrop of everything. 00:00:20.000 --> 00:00:22.320 Quite literally. The walls, the roads, the roof 00:00:22.320 --> 00:00:24.699 over your head. Exactly. But I want to start 00:00:24.699 --> 00:00:26.899 by challenging a misconception that I think, 00:00:26.940 --> 00:00:29.559 I mean, 99 % of us walk around with. When you 00:00:29.559 --> 00:00:31.199 walk down the street and you see a new apartment 00:00:31.199 --> 00:00:34.439 complex going up or a shopping center or even 00:00:34.439 --> 00:00:37.179 just a shiny new suburban house, what's the first 00:00:37.179 --> 00:00:39.600 thing that pops into your head? You see the crane. 00:00:40.060 --> 00:00:42.259 You see the crane. You see the guys in hard hats. 00:00:42.399 --> 00:00:44.399 You see the cement trucks. You think, construction. 00:00:44.920 --> 00:00:46.960 Naturally. That's the visible manifestation of 00:00:46.960 --> 00:00:48.579 the work. It's the loud part. It's the dusty 00:00:48.579 --> 00:00:51.079 part. Right. But looking at our source material 00:00:51.079 --> 00:00:53.679 for today, which is a massive comprehensive breakdown 00:00:53.679 --> 00:00:56.560 of the real estate industry, it turns out that 00:00:56.560 --> 00:00:58.479 the physical building, the construction part, 00:00:58.619 --> 00:01:01.979 is basically just the final visible tip of a 00:01:01.979 --> 00:01:04.989 massive invisible iceberg. Yeah, that's a great 00:01:04.989 --> 00:01:07.090 way to put it. It's the victory lap. The actual 00:01:07.090 --> 00:01:09.730 race happened long before a shovel ever hit the 00:01:09.730 --> 00:01:12.590 dirt. That is a very apt analogy. Construction 00:01:12.590 --> 00:01:15.310 is just the execution phase. It's the assembly 00:01:15.310 --> 00:01:17.569 instructions being followed. But what we're diving 00:01:17.569 --> 00:01:20.450 into today is the creation of the instructions 00:01:20.450 --> 00:01:23.569 themselves. We're talking about real estate development 00:01:23.569 --> 00:01:26.469 or property development. And the mission for 00:01:26.469 --> 00:01:29.069 this deep dive is to look behind the curtain 00:01:29.069 --> 00:01:31.969 of how our built environment actually comes to 00:01:31.969 --> 00:01:34.609 be. We want to understand the difference between 00:01:34.609 --> 00:01:37.930 just stacking bricks to build a house and actually 00:01:37.930 --> 00:01:40.230 creating a community. Because as I learned going 00:01:40.230 --> 00:01:42.890 through this research, those are two very, very 00:01:42.890 --> 00:01:44.769 different disciplines. They are worlds apart. 00:01:45.310 --> 00:01:47.430 And to understand that difference, we have to 00:01:47.430 --> 00:01:49.590 look at the source material, which covers the 00:01:49.590 --> 00:01:52.489 entire spectrum. From the nitty gritty of land 00:01:52.489 --> 00:01:56.030 subdivision, which is surprisingly complex, to 00:01:56.030 --> 00:01:58.409 the massive lists of professionals required to 00:01:58.409 --> 00:02:00.829 just get a project to the starting line. And 00:02:00.829 --> 00:02:03.450 there was one specific distinction in the text 00:02:03.450 --> 00:02:06.290 that gave me an immediate aha moment. It said 00:02:06.290 --> 00:02:08.530 that real estate development is distinct from 00:02:08.530 --> 00:02:11.189 construction. Right. And it is also distinct 00:02:11.189 --> 00:02:14.250 from simple real estate investing. It's actually 00:02:14.250 --> 00:02:16.969 the bridge between the two. That is the perfect 00:02:16.969 --> 00:02:19.729 way to frame it. Think about it. An investor 00:02:19.729 --> 00:02:23.849 has capital money and they want a return on that 00:02:23.849 --> 00:02:27.389 money. A builder has the technical skills to 00:02:27.389 --> 00:02:30.449 erect a structure. They know how to pour concrete 00:02:30.449 --> 00:02:34.009 and wire electricity. But the developer, the 00:02:34.009 --> 00:02:36.110 developer is the catalyst. They're the ones who 00:02:36.110 --> 00:02:38.469 take the money and the skills and mash them together 00:02:38.469 --> 00:02:40.430 to create something that didn't exist before. 00:02:40.840 --> 00:02:43.199 The source uses a really cool analogy that I 00:02:43.199 --> 00:02:45.340 want to stick with today. It describes the developer 00:02:45.340 --> 00:02:48.439 as the orchestrator. Yes, the conductor. Like 00:02:48.439 --> 00:02:51.020 a conductor in an orchestra. The conductor isn't 00:02:51.020 --> 00:02:52.960 necessarily playing the violin, and they definitely 00:02:52.960 --> 00:02:54.979 aren't playing the tuba. Right. They might not 00:02:54.979 --> 00:02:56.900 even know how to play the tuba. But they're the 00:02:56.900 --> 00:02:58.819 one ensuring that everyone comes in at the right 00:02:58.819 --> 00:03:01.360 time, at the right tempo, to turn a bunch of 00:03:01.360 --> 00:03:04.729 disparate noise into a symphony. Precisely. The 00:03:04.729 --> 00:03:07.770 developer converts ideas from paper into real 00:03:07.770 --> 00:03:09.689 property. They're taking something abstract, 00:03:10.050 --> 00:03:12.849 a vision, a gap in the market, a raw piece of 00:03:12.849 --> 00:03:15.969 land, and coordinating a massive, complex machine 00:03:15.969 --> 00:03:19.069 to turn it into something tangible. And as we're 00:03:19.069 --> 00:03:21.090 going to see, that process involves a lot more 00:03:21.090 --> 00:03:23.729 than just drawing up some blueprints. It involves 00:03:23.729 --> 00:03:28.129 politics, finance, geology, sociology. It's everything. 00:03:28.389 --> 00:03:31.969 Okay, let's unpack this. Segment one, the definition 00:03:31.969 --> 00:03:34.849 of a developer. Because I think in pop culture, 00:03:34.889 --> 00:03:37.069 we have this image of the greedy developer in 00:03:37.069 --> 00:03:39.409 a suit, wringing their hands, maybe twirling 00:03:39.409 --> 00:03:41.409 a mustache. Yeah, the cartoon villain. The cartoon 00:03:41.409 --> 00:03:44.129 villain. But strictly speaking, looking at the 00:03:44.129 --> 00:03:46.469 business mechanics, what is the core function? 00:03:46.729 --> 00:03:48.870 The source defines it as a business process. 00:03:49.289 --> 00:03:51.789 And the range is huge. It encompasses everything 00:03:51.789 --> 00:03:54.370 from, say, the renovation and releasing of existing 00:03:54.370 --> 00:03:56.710 buildings all the way to the purchase of raw 00:03:56.710 --> 00:03:59.840 land and the sale of developed land. If I buy 00:03:59.840 --> 00:04:01.919 a rundown house, fix the kitchen, and sell it, 00:04:01.939 --> 00:04:04.159 flipping it, I'm technically a developer. On 00:04:04.159 --> 00:04:07.500 a micro scale, yes, you absolutely are. You saw 00:04:07.500 --> 00:04:10.659 value where others saw a mess. You applied capital 00:04:10.659 --> 00:04:12.759 and labor to improve it, and you sold it for 00:04:12.759 --> 00:04:16.480 a profit. That is development. But usually when 00:04:16.480 --> 00:04:17.980 we talk about this industry, we're talking about 00:04:17.980 --> 00:04:21.279 something much grander, buying 1 ,000 acres of 00:04:21.279 --> 00:04:23.839 desert and turning it into a functional city. 00:04:24.810 --> 00:04:27.610 The core activities listed in the source really 00:04:27.610 --> 00:04:30.050 show the breadth of this. Yeah. Let's run through 00:04:30.050 --> 00:04:32.069 that list because it's extensive. You have buying 00:04:32.069 --> 00:04:34.629 land, obviously. That's the first step. The raw 00:04:34.629 --> 00:04:37.029 material. But then there's financing the deals, 00:04:37.189 --> 00:04:39.769 which honestly sounds like a full -time job in 00:04:39.769 --> 00:04:42.589 itself. It is. I would argue a developer spends 00:04:42.589 --> 00:04:46.009 more time talking to bankers and investors than 00:04:46.009 --> 00:04:48.800 they do talking to architects. The project lives 00:04:48.800 --> 00:04:50.860 or dies on the financing. Okay, so you've got 00:04:50.860 --> 00:04:52.680 the land, you've got the money. Then building 00:04:52.680 --> 00:04:54.959 or, and this is a key distinction, having builders 00:04:54.959 --> 00:04:57.899 build. The orchestration part again. Developing 00:04:57.899 --> 00:04:59.959 in joint ventures. And this one, which I loved, 00:05:00.060 --> 00:05:03.879 creating, imagining, controlling, and orchestrating 00:05:03.879 --> 00:05:06.759 from beginning to end. That just sounds exhausting. 00:05:07.120 --> 00:05:10.420 It is immense pressure. And it brings us to the 00:05:10.420 --> 00:05:13.040 core economic dynamic that the text highlights, 00:05:13.279 --> 00:05:15.740 which is absolutely crucial for our listener 00:05:15.740 --> 00:05:18.560 to understand. Developers usually take the greatest 00:05:18.560 --> 00:05:21.220 risk in the creation of real estate. And consequently, 00:05:21.480 --> 00:05:24.639 they receive the greatest rewards. Right. High 00:05:24.639 --> 00:05:27.819 risk, high reward. It's the fundamental law of 00:05:27.819 --> 00:05:31.680 economics. But we need to ask, why is the risk 00:05:31.680 --> 00:05:34.300 so high? Why isn't it just a guaranteed paycheck 00:05:34.300 --> 00:05:36.740 like it is for the architect or the builder? 00:05:37.050 --> 00:05:39.629 Well, the text hints at this, but let me see 00:05:39.629 --> 00:05:41.889 if I have it right. The architect gets paid, 00:05:42.009 --> 00:05:44.889 you know, an hourly rate or a fixed fee to draw 00:05:44.889 --> 00:05:47.529 the plans. Whether the building sells or not, 00:05:47.750 --> 00:05:50.410 the architect gets paid. The builder gets paid 00:05:50.410 --> 00:05:52.870 to pour the concrete. If the building sits empty 00:05:52.870 --> 00:05:55.490 for five years, the builder still has their money. 00:05:55.810 --> 00:05:58.250 Exactly. They are fee -for -service providers. 00:05:58.389 --> 00:06:00.810 They do their job. They get a check. Their risk 00:06:00.810 --> 00:06:02.829 is limited to doing their job correctly. But 00:06:02.829 --> 00:06:05.050 the developer, they're the ones fronting the 00:06:05.050 --> 00:06:07.439 cash for all of it. You're front -loading capital. 00:06:07.680 --> 00:06:10.620 You are buying land, paying architects, paying 00:06:10.620 --> 00:06:13.959 lawyers, paying for permits, all before you have 00:06:13.959 --> 00:06:16.379 sold a single unit or signed a single lease. 00:06:16.660 --> 00:06:19.819 You are bleeding money for years, sometimes decades. 00:06:20.549 --> 00:06:23.370 Decades. Oh, for huge master -planned communities. 00:06:23.670 --> 00:06:26.029 Absolutely. You're bleeding money on the hope 00:06:26.029 --> 00:06:27.930 that eventually someone will pay you more than 00:06:27.930 --> 00:06:30.490 you spent. If the market turns or the city says 00:06:30.490 --> 00:06:33.129 no, or you find a rare species of frog on the 00:06:33.129 --> 00:06:35.649 land. A frog can stop the whole thing. A frog 00:06:35.649 --> 00:06:38.230 can stop a billion -dollar project dead in its 00:06:38.230 --> 00:06:40.930 tracks. And when that happens, the architect 00:06:40.930 --> 00:06:43.470 keeps their fee, the lawyer keeps their fee, 00:06:43.589 --> 00:06:47.250 but you, the developer, you are left holding 00:06:47.250 --> 00:06:49.870 the bag. A very expensive empty bag. Which is 00:06:49.870 --> 00:06:51.709 a perfect segue into our second segment because 00:06:51.709 --> 00:06:53.790 this blew my mind. I always assumed a developer 00:06:53.790 --> 00:06:56.410 was just a builder with a fancier title. A common 00:06:56.410 --> 00:06:59.709 misconception. But the source says, not all developers 00:06:59.709 --> 00:07:02.269 are builders. In fact, you can be a developer 00:07:02.269 --> 00:07:05.290 and never lay a single brick. This is a nuance 00:07:05.290 --> 00:07:07.490 that even people in the industry sometimes gloss 00:07:07.490 --> 00:07:09.829 over, but it's fascinating. It's what our source 00:07:09.829 --> 00:07:12.449 calls the process spectrum. The text describes 00:07:12.449 --> 00:07:15.689 this paper phase. Let's paint a picture here 00:07:15.689 --> 00:07:17.110 because I want to really understand the mechanics. 00:07:18.370 --> 00:07:22.290 Scenario A. I'm a developer. I find a plot of 00:07:22.290 --> 00:07:24.930 land on the edge of town. It's currently a cornfield. 00:07:25.129 --> 00:07:27.529 I buy it. Okay, you own a cornfield. You're out 00:07:27.529 --> 00:07:29.769 a few million dollars. You have no income from 00:07:29.769 --> 00:07:32.730 it. Right. Now, I don't call a single builder. 00:07:33.330 --> 00:07:36.310 Instead, I hire an architect to draw up plans 00:07:36.310 --> 00:07:39.250 for a nice suburban neighborhood. I hire engineers 00:07:39.250 --> 00:07:41.589 to figure out the drainage. The horizontal stuff. 00:07:41.930 --> 00:07:44.410 I go to the city council. I fight for the zoning 00:07:44.410 --> 00:07:47.350 change from agricultural to residential. I sit 00:07:47.350 --> 00:07:50.709 through a dozen painful six -hour meetings. Uh 00:07:50.709 --> 00:07:52.589 -huh. With angry neighbors yelling at you. I 00:07:52.589 --> 00:07:54.970 get the environmental approvals. I get the entitlements. 00:07:55.129 --> 00:07:57.250 That is the key word. Entitlements. The legal 00:07:57.250 --> 00:08:00.389 permission to build. And then I sell it. I sell 00:08:00.389 --> 00:08:02.709 the cornfield with the stack of paper, the plans 00:08:02.709 --> 00:08:05.670 and permits to a builder. And I walk away. And 00:08:05.670 --> 00:08:08.430 you walk away with a massive profit. You bought 00:08:08.430 --> 00:08:11.750 the land for, say, $1 million as a cornfield. 00:08:11.790 --> 00:08:14.490 You spent maybe another $500 ,000 on the architects 00:08:14.490 --> 00:08:17.550 and lawyers. Okay, so I'm for $1 .5 million. 00:08:18.110 --> 00:08:20.730 Right. But now that it's shovel -ready with full 00:08:20.730 --> 00:08:23.189 approvals, you sell it to a national home builder 00:08:23.189 --> 00:08:26.189 for $5 million. But why would the builder pay 00:08:26.189 --> 00:08:28.589 that? Why wouldn't the builder just do the paperwork 00:08:28.589 --> 00:08:31.050 themselves and save the $3 .5 million? Because 00:08:31.050 --> 00:08:35.129 the builder hates uncertainty. The builder operates 00:08:35.129 --> 00:08:38.049 on a production model. They have crews, they 00:08:38.049 --> 00:08:39.950 have supply chains, they have lumber arriving 00:08:39.950 --> 00:08:43.029 on specific dates. They need to build. They cannot 00:08:43.029 --> 00:08:45.929 afford to have their crews sitting idle for two 00:08:45.929 --> 00:08:48.549 years while you argue with the city council about 00:08:48.549 --> 00:08:50.730 traffic patterns. So the builder is paying for 00:08:50.730 --> 00:08:53.690 speed and certainty. Exactly. You, the developer 00:08:53.690 --> 00:08:56.110 in this scenario, have monetized the bureaucratic 00:08:56.110 --> 00:08:58.809 risk. You took the risk that the city might say 00:08:58.809 --> 00:09:01.850 no. The builder is paying you a premium to ensure 00:09:01.850 --> 00:09:04.950 the answer is already yes. They're buying a ready 00:09:04.950 --> 00:09:06.909 -made factory floor, essentially. That makes 00:09:06.909 --> 00:09:09.509 so much sense. It isolates the value of permissions. 00:09:09.769 --> 00:09:12.450 That stack of paper is literally worth millions 00:09:12.450 --> 00:09:15.070 of dollars. It is. And it requires a completely 00:09:15.070 --> 00:09:17.850 different skill set. The paper developer is good 00:09:17.850 --> 00:09:20.610 at politics, law, and community relations. The 00:09:20.610 --> 00:09:23.110 builder is good at logistics, project management, 00:09:23.289 --> 00:09:26.389 and building things. And then you have scenario 00:09:26.389 --> 00:09:29.830 B or C from the source. You have builders who 00:09:29.830 --> 00:09:32.110 act as their own developers. They do it all. 00:09:32.230 --> 00:09:34.809 Right. The integrated model. They buy the cornfield 00:09:34.809 --> 00:09:36.990 and they build the houses. They capture all the 00:09:36.990 --> 00:09:39.570 profit from the land depreciation all the way 00:09:39.570 --> 00:09:42.129 to the sale of the final home. But they also 00:09:42.129 --> 00:09:44.850 take on all the risk, the political risk and 00:09:44.850 --> 00:09:47.490 the construction risk. All of it. And on the 00:09:47.490 --> 00:09:49.950 flip side, you have builders who only buy the 00:09:49.950 --> 00:09:53.110 paper. They refuse to touch raw land until it's 00:09:53.110 --> 00:09:55.269 permitted. They've made a business decision to 00:09:55.269 --> 00:09:57.350 let someone else handle that headache. It creates 00:09:57.350 --> 00:09:59.690 a spectrum of risk appetite. It allows different 00:09:59.690 --> 00:10:02.830 companies to specialize. Some specialize in politics 00:10:02.830 --> 00:10:06.110 and paperwork, the land developer. Or entitlement 00:10:06.110 --> 00:10:08.250 specialists. And some specialize in logistics 00:10:08.250 --> 00:10:11.090 and construction, the vertical developer. Exactly. 00:10:11.110 --> 00:10:13.409 Vertical meaning building up off the ground. 00:10:13.820 --> 00:10:16.019 And this ties into the scale of organization 00:10:16.019 --> 00:10:19.440 the text mentions. Development teams vary wildly. 00:10:19.600 --> 00:10:21.480 Well, massively. There's no one size fits all. 00:10:21.620 --> 00:10:23.539 It says it can range from a large company with 00:10:23.539 --> 00:10:25.899 everything in -house, architects, engineers, 00:10:26.299 --> 00:10:29.100 lawyers, the whole nine yards. Like a big national 00:10:29.100 --> 00:10:31.679 home builder, a Lennar or a D .R. Horton. They 00:10:31.679 --> 00:10:33.960 have huge divisions for every step of the process. 00:10:34.220 --> 00:10:36.840 To a single principal with a few staff members 00:10:36.840 --> 00:10:39.220 who contracts everything out. And that single 00:10:39.220 --> 00:10:42.759 principal is the pure orchestrator. They might 00:10:42.759 --> 00:10:44.919 work out of a small office, maybe even a home 00:10:44.919 --> 00:10:47.559 office, but they are directing a hundred million 00:10:47.559 --> 00:10:50.740 dollar project. They are the brain. Everyone 00:10:50.740 --> 00:10:52.960 else is a hired hand. They're connecting the 00:10:52.960 --> 00:10:55.679 capital to the land, to the experts. Speaking 00:10:55.679 --> 00:10:57.899 of those hired hands, let's talk about the cast 00:10:57.899 --> 00:11:00.919 of characters. Segment three, the ecosystem of 00:11:00.919 --> 00:11:03.750 counterparts. The source provides this massive 00:11:03.750 --> 00:11:06.190 list of professionals a developer has to work 00:11:06.190 --> 00:11:08.669 with. It felt like reading the credits of a Marvel 00:11:08.669 --> 00:11:10.929 movie, but instead of stunt doubles, it's soil 00:11:10.929 --> 00:11:14.649 engineers. It is a massive production. And every 00:11:14.649 --> 00:11:17.730 single person on that list is necessary because 00:11:17.730 --> 00:11:20.830 real estate development touches on so many different 00:11:20.830 --> 00:11:24.169 facets of physical and legal reality. Let's run 00:11:24.169 --> 00:11:25.669 through the list, but I don't want to just name 00:11:25.669 --> 00:11:28.070 drop. I want to know why they are there. Start 00:11:28.070 --> 00:11:31.139 with the design team. architects, landscape architects, 00:11:31.440 --> 00:11:34.720 civil engineers, site planners. Okay, a big group 00:11:34.720 --> 00:11:36.340 right there. We know what an architect does. 00:11:36.419 --> 00:11:38.840 They design the building. But what's the difference 00:11:38.840 --> 00:11:41.580 between an architect and a site planner? That 00:11:41.580 --> 00:11:44.440 is a crucial distinction. The architect cares 00:11:44.440 --> 00:11:46.539 about the building, the vertical structure, how 00:11:46.539 --> 00:11:48.500 it looks, the floor plan, the windows, the lobby. 00:11:48.899 --> 00:11:52.139 The site planner or the civil engineer cares 00:11:52.139 --> 00:11:54.659 about the horizontal. The ground. The ground. 00:11:54.720 --> 00:11:56.860 How does the building sit on the earth? How do 00:11:56.860 --> 00:11:59.480 cars get in and out? How does a fire truck access 00:11:59.480 --> 00:12:02.399 the building in an emergency? And crucially, 00:12:02.500 --> 00:12:05.879 where does the water go when it rains? The unsexy 00:12:05.879 --> 00:12:08.860 stuff. The essential stuff. You can have a beautiful 00:12:08.860 --> 00:12:11.200 building designed by a star architect, but if 00:12:11.200 --> 00:12:13.059 the site planner messes up the grading and the 00:12:13.059 --> 00:12:15.480 parking lot floods every time it trizzles, the 00:12:15.480 --> 00:12:18.159 development is a failure. Total failure. You 00:12:18.159 --> 00:12:20.779 will be sued. Tenants will leave. You will go 00:12:20.779 --> 00:12:24.659 bankrupt. The civil engineer is the unsung hero 00:12:24.659 --> 00:12:27.580 of every successful project. And the landscape 00:12:27.580 --> 00:12:29.679 architect. That's just trees and bushes, right? 00:12:29.879 --> 00:12:31.440 It's more than that. They design the outdoor 00:12:31.440 --> 00:12:34.720 spaces that make a place livable. Parks. plazas, 00:12:34.779 --> 00:12:37.879 pathways. They also often design the retention 00:12:37.879 --> 00:12:40.559 ponds that the civil engineer needs for stormwater. 00:12:41.000 --> 00:12:43.500 They make the necessary infrastructure beautiful. 00:12:43.779 --> 00:12:45.820 Okay, so you need the horizontal and the vertical. 00:12:46.000 --> 00:12:49.039 Then you have the money and the law, market consultants, 00:12:49.500 --> 00:12:52.419 attorneys, lots of attorneys for agreements and 00:12:52.419 --> 00:12:55.259 government approvals, and lenders. Let's start 00:12:55.259 --> 00:12:57.299 with the market consultant. Before you even hire 00:12:57.299 --> 00:12:59.360 an architect, you hire them. They tell you what 00:12:59.360 --> 00:13:01.360 to build. They don't just guess. No guessing. 00:13:01.600 --> 00:13:04.120 They do studies. They look at population growth, 00:13:04.240 --> 00:13:06.460 job growth, competing projects. They'll tell 00:13:06.460 --> 00:13:08.480 you, don't build two -bedroom apartments here. 00:13:08.559 --> 00:13:10.960 The market is saturated. Build studios and one 00:13:10.960 --> 00:13:13.379 -bedrooms for young professionals. They set the 00:13:13.379 --> 00:13:15.360 entire direction of the project. So they're your 00:13:15.360 --> 00:13:17.759 first reality check. They are. Then the attorneys 00:13:17.759 --> 00:13:20.620 are your shield and your sword. You are entering 00:13:20.620 --> 00:13:23.440 into contracts with everyone. The builder, the 00:13:23.440 --> 00:13:26.679 architect, the city, the tenants. One bad clause 00:13:26.679 --> 00:13:29.200 in a contract can sink you. And the lenders, 00:13:29.200 --> 00:13:31.179 of course. No money, no project. They're your 00:13:31.179 --> 00:13:32.879 most important partner. And they have their own 00:13:32.879 --> 00:13:35.399 lawyers and consultants who scrutinize every 00:13:35.399 --> 00:13:37.720 single detail before they write you a check. 00:13:37.879 --> 00:13:40.179 Then the technical earth stuff. Environmental 00:13:40.179 --> 00:13:43.580 consultants. Soils engineers. Let's talk about 00:13:43.580 --> 00:13:44.940 the soils engineer for a second. This sounds 00:13:44.940 --> 00:13:47.340 boring, right? It sounds like dirt. Literally. 00:13:47.460 --> 00:13:49.759 It is the stuff of nightmares for developers. 00:13:50.580 --> 00:13:53.299 Imagine you buy that cornfield. You are ready 00:13:53.299 --> 00:13:56.379 to build. The soils engineer drills a few test 00:13:56.379 --> 00:14:00.019 borers and finds. expanding clay, or a sinkhole, 00:14:00.080 --> 00:14:02.879 or a high water table. What does that mean for 00:14:02.879 --> 00:14:04.580 the project? I don't know what expanding clay 00:14:04.580 --> 00:14:07.600 is. It means the soil literally swells up when 00:14:07.600 --> 00:14:10.179 it gets wet and shrinks when it dries. It will 00:14:10.179 --> 00:14:12.440 crack your foundation to pieces. It means your 00:14:12.440 --> 00:14:15.179 budget just exploded. Now you have to dig out 00:14:15.179 --> 00:14:17.460 10 feet of dirt and replace it with imported 00:14:17.460 --> 00:14:20.919 gravel. Which costs? Millions. Or you have to 00:14:20.919 --> 00:14:23.899 drive piles, which are like giant concrete skilts, 00:14:23.899 --> 00:14:26.730 down into the bedrock. That can add millions 00:14:26.730 --> 00:14:29.830 to the cost. If you didn't budget for that risk, 00:14:29.990 --> 00:14:32.330 your profit margin is gone before you start. 00:14:32.610 --> 00:14:34.889 So the soils engineer is basically telling you 00:14:34.889 --> 00:14:36.450 if the ground will actually hold your building 00:14:36.450 --> 00:14:38.570 up? Yes. And then you have the environmental 00:14:38.570 --> 00:14:41.149 consultants. This is even scarier. Say you're 00:14:41.149 --> 00:14:43.549 buying an old parking lot in the city to build 00:14:43.549 --> 00:14:46.350 apartments. Brownfield development. Which we'll 00:14:46.350 --> 00:14:48.929 get to later, but that means potentially contaminated, 00:14:49.149 --> 00:14:51.169 right? Suppose there was a gas station on that 00:14:51.169 --> 00:14:55.350 corner in 1960. Or... a dry cleaner in 1950. 00:14:55.730 --> 00:14:59.409 Okay. Both used nasty chemicals, leaky underground 00:14:59.409 --> 00:15:02.490 storage tanks, perchloroethylene. Those chemicals 00:15:02.490 --> 00:15:05.309 leaked into the soil. If you buy that land, you 00:15:05.309 --> 00:15:07.230 own the cleanup. The government will make you 00:15:07.230 --> 00:15:08.909 clean it. Even if I didn't dump the chemicals. 00:15:09.070 --> 00:15:10.230 You bought the land, you bought the problem. 00:15:10.850 --> 00:15:12.929 The environmental consultant does what's called 00:15:12.929 --> 00:15:15.610 a phase one environmental site assessment. They 00:15:15.610 --> 00:15:17.889 are the detective who tells you, hey, don't buy 00:15:17.889 --> 00:15:20.450 this unless you have $2 million set aside to 00:15:20.450 --> 00:15:23.149 scrub the soil. Wow. Okay. Moving down the list. 00:15:23.590 --> 00:15:26.129 Surveyors, title companies. These are the legal 00:15:26.129 --> 00:15:28.490 map chores, right? Surveyors tell you exactly 00:15:28.490 --> 00:15:30.549 where your property lines are, down to the millimeter. 00:15:31.009 --> 00:15:33.169 The title company makes sure the person selling 00:15:33.169 --> 00:15:35.309 you the land actually owns it and that there 00:15:35.309 --> 00:15:38.409 are no hidden claims on it from a long lost era 00:15:38.409 --> 00:15:41.049 from 1890. Which I assume happens. It happens. 00:15:41.529 --> 00:15:44.429 Then finally, you get to the execution team, 00:15:44.549 --> 00:15:47.789 general contractors, subcontractors. And after 00:15:47.789 --> 00:15:50.710 it's built, Leasing agents, property managers, 00:15:50.929 --> 00:15:53.470 city inspectors, right? The team just keeps growing. 00:15:53.909 --> 00:15:56.990 The source makes a critical point here. Success 00:15:56.990 --> 00:15:59.710 in development depends on the ability to coordinate 00:15:59.710 --> 00:16:02.250 and lead these interrelated activities efficiently 00:16:02.250 --> 00:16:04.970 and at the appropriate time. At the appropriate 00:16:04.970 --> 00:16:07.509 time seems key. It's a sequence. It's a cascade, 00:16:07.769 --> 00:16:10.269 a waterfall. You cannot hire the leasing agent 00:16:10.269 --> 00:16:12.269 before you have the permits, or you can, but 00:16:12.269 --> 00:16:14.740 you're wasting money. You cannot pour the foundation 00:16:14.740 --> 00:16:18.000 before the soils engineer signs off. If one person 00:16:18.000 --> 00:16:20.340 drops the ball, say, the architect is late with 00:16:20.340 --> 00:16:22.320 the drawings. Then the whole parade stops. The 00:16:22.320 --> 00:16:24.620 contractor can't start. The contractor's contract 00:16:24.620 --> 00:16:26.559 probably says you have to pay them a penalty 00:16:26.559 --> 00:16:29.139 for the delay. The bank is still charging you 00:16:29.139 --> 00:16:31.559 interest on the loan for that extra month. It's 00:16:31.559 --> 00:16:34.120 a domino effect. It's a pressure cooker. It really 00:16:34.120 --> 00:16:36.940 is. And the text points out that this whole team 00:16:36.940 --> 00:16:39.620 isn't just building a building. They're addressing 00:16:39.620 --> 00:16:43.759 a specific set of intertwined issues. Environmental, 00:16:44.100 --> 00:16:47.860 economic, private, physical, and political. The 00:16:47.860 --> 00:16:49.919 political aspect is often the one that blindsides 00:16:49.919 --> 00:16:51.720 new developers, I'd imagine. It's the one they 00:16:51.720 --> 00:16:54.480 can't control. You can solve a soil problem with 00:16:54.480 --> 00:16:56.620 money. You can solve a design problem with a 00:16:56.620 --> 00:16:58.879 better architect. But you can't always solve 00:16:58.879 --> 00:17:01.240 a political problem. You're altering a community. 00:17:01.820 --> 00:17:03.779 That requires political buy -in. You have to 00:17:03.779 --> 00:17:05.980 convince the neighbors, the council, the mayor. 00:17:06.180 --> 00:17:08.640 Which leads us directly into the most transformative 00:17:08.640 --> 00:17:12.279 part of this whole process. Segment four, land 00:17:12.279 --> 00:17:14.880 development and subdivision. The source calls 00:17:14.880 --> 00:17:17.319 subdivision the principal mechanism by which 00:17:17.319 --> 00:17:19.640 communities are developed. That sounds like dry 00:17:19.640 --> 00:17:22.039 textbook language, but stop and think about the 00:17:22.039 --> 00:17:24.279 weight of that statement. The principal mechanism. 00:17:24.420 --> 00:17:27.400 Let's really break it down. What exactly is subdivision? 00:17:27.779 --> 00:17:30.059 Technically, it is exactly what it sounds like. 00:17:30.380 --> 00:17:33.220 You take a large tract of land, a big rectangle 00:17:33.220 --> 00:17:36.400 on a map, and you slice it up into smaller shapes. 00:17:36.720 --> 00:17:39.900 You take a 100 -acre farm and turn it into 400 00:17:39.900 --> 00:17:43.160 quarter -acre lots. Okay, drawing lines on a 00:17:43.160 --> 00:17:46.359 map. But by drawing those lines, you are creating 00:17:46.359 --> 00:17:50.099 the DNA of a future community. The source says 00:17:50.099 --> 00:17:52.400 this process determines the community's appearance. 00:17:53.099 --> 00:17:55.779 the mix of land uses and its infrastructure. 00:17:56.079 --> 00:17:59.500 Right. Roads, drainage, water, sewerage, public 00:17:59.500 --> 00:18:02.000 utilities. Think about the street you live on 00:18:02.000 --> 00:18:04.220 right now. Walk out your front door in your mind. 00:18:04.420 --> 00:18:07.160 Is the street wide or narrow? Is it straight 00:18:07.160 --> 00:18:09.480 or does it curve? It curves. Is there a sidewalk? 00:18:09.640 --> 00:18:11.319 Is there a strip of grass between the sidewalk 00:18:11.319 --> 00:18:13.619 and the road? Are the power lines overhead or 00:18:13.619 --> 00:18:16.259 buried? All of those things were decided by a 00:18:16.259 --> 00:18:18.400 developer during the subdivision process, probably 00:18:18.400 --> 00:18:21.000 decades before you moved in. And once those lines 00:18:21.000 --> 00:18:23.500 are drawn and the concrete is poured, they're 00:18:23.500 --> 00:18:25.559 effectively permanent. You can't just change 00:18:25.559 --> 00:18:28.859 it. You can remodel a house. You cannot easily 00:18:28.859 --> 00:18:31.700 move a road. You are living with the consequences 00:18:31.700 --> 00:18:34.819 of those decisions for a century or more. So 00:18:34.819 --> 00:18:37.140 the developer is essentially designing the lifestyle 00:18:37.140 --> 00:18:38.759 of the people who will live there for the next 00:18:38.759 --> 00:18:41.619 hundred years. Exactly. The layout of the streets 00:18:41.619 --> 00:18:45.099 dictates how you move. If they design a subdivision 00:18:45.099 --> 00:18:47.480 with lots of cul -de -sacs and no connecting 00:18:47.480 --> 00:18:50.359 paths, everyone will drive everywhere. There's 00:18:50.359 --> 00:18:53.059 no other option. It's engineered for cars. Right. 00:18:53.160 --> 00:18:55.960 If they design a grid with alleys and sidewalks, 00:18:55.960 --> 00:18:58.819 people might walk to a corner store. The developer, 00:18:58.980 --> 00:19:01.619 through subdivision, dictates the flow of humanity. 00:19:02.319 --> 00:19:04.400 They decide if neighbors will ever meet each 00:19:04.400 --> 00:19:06.640 other on a sidewalk or only wave from inside 00:19:06.640 --> 00:19:09.640 their cars. That's a lot of power. And the text 00:19:09.640 --> 00:19:12.380 refers to purchasing unused land for this purpose 00:19:12.380 --> 00:19:15.240 as speculative development. Speculative. It's 00:19:15.240 --> 00:19:17.220 a polite word for gambling. But sophisticated 00:19:17.220 --> 00:19:20.500 gambling. High -stakes poker. The text explains 00:19:20.500 --> 00:19:23.299 why land development, this subdivision process, 00:19:23.720 --> 00:19:26.000 poses the most risk of any type of real estate. 00:19:26.539 --> 00:19:29.059 First, it is dependent on the public sector for 00:19:29.059 --> 00:19:31.109 approvals and infrastructure. What does that 00:19:31.109 --> 00:19:33.650 mean, dependent for infrastructure? You are building 00:19:33.650 --> 00:19:37.210 100 new houses. Those houses need to flush their 00:19:37.210 --> 00:19:40.049 toilets somewhere. You are betting that the city 00:19:40.049 --> 00:19:42.710 will let you hook up to their sewer plant? If 00:19:42.710 --> 00:19:45.150 the city comes back and says, sorry, our plant 00:19:45.150 --> 00:19:48.549 is at capacity, come back in five years, you 00:19:48.549 --> 00:19:51.529 are dead. Your project is worthless. It involves 00:19:51.529 --> 00:19:54.390 a long investment period with no positive cash 00:19:54.390 --> 00:19:56.700 flow. I want to focus on this because I think 00:19:56.700 --> 00:19:59.200 this is where the financials really come into 00:19:59.200 --> 00:20:01.920 play. We see the big numbers. Developer sells 00:20:01.920 --> 00:20:05.079 lots for $10 million, but we don't see the bleed. 00:20:05.619 --> 00:20:08.660 Economists call this the J curve. Imagine a graph. 00:20:09.019 --> 00:20:11.759 The vertical axis is money in your pocket. The 00:20:11.759 --> 00:20:14.579 horizontal axis is time. When you start a land 00:20:14.579 --> 00:20:16.779 development project, the line on that graph goes 00:20:16.779 --> 00:20:18.779 straight down into the negative. You buy the 00:20:18.779 --> 00:20:21.680 land, minus $2 million. You pay the engineers. 00:20:22.359 --> 00:20:25.519 Minus $500 ,000. You pay the city fees. Minus 00:20:25.519 --> 00:20:27.980 $200 ,000. You have to build the roads and the 00:20:27.980 --> 00:20:30.099 sewer lines yourself before you can sell a single 00:20:30.099 --> 00:20:33.140 lot. Minus $3 million. And during all this time. 00:20:33.279 --> 00:20:36.839 Years maybe. You have zero income. The land pays 00:20:36.839 --> 00:20:40.359 you nothing. It only eats money. And all the 00:20:40.359 --> 00:20:42.700 while, you are paying interest on the loans you 00:20:42.700 --> 00:20:45.819 took out to do all this. You are deep, deep in 00:20:45.819 --> 00:20:48.460 what developers call the valley of death. And 00:20:48.460 --> 00:20:51.750 then. When does it turn around? Then you finish 00:20:51.750 --> 00:20:53.849 the subdivision. You get the final stamp from 00:20:53.849 --> 00:20:56.069 the city. You sell the first lot to a home builder. 00:20:56.210 --> 00:20:59.630 Ping. Income. You sell the next lot. Ping. The 00:20:59.630 --> 00:21:02.029 line on the graph shoots up. If you did your 00:21:02.029 --> 00:21:04.029 math right, you eventually cross back above zero 00:21:04.029 --> 00:21:06.470 and make a profit. But you have to survive the 00:21:06.470 --> 00:21:08.930 valley first. And if the economy crashes while 00:21:08.930 --> 00:21:11.130 you're in the valley, if a recession hits and 00:21:11.130 --> 00:21:13.470 home builders stop buying lots? You go bankrupt. 00:21:13.890 --> 00:21:16.849 The bank takes the land. This happens in every 00:21:16.849 --> 00:21:18.730 single recession. You can drive around the country 00:21:18.730 --> 00:21:21.190 and see them. Half -finished subdivisions with 00:21:21.190 --> 00:21:23.849 roads that lead to nowhere, fire hydrants standing 00:21:23.849 --> 00:21:27.630 in empty fields, ghost towns. Wow. Those are 00:21:27.630 --> 00:21:29.569 the projects where the developer ran out of cash 00:21:29.569 --> 00:21:31.730 before they could sell the lots. They died in 00:21:31.730 --> 00:21:35.059 the valley. It's terrifying. The text also mentions 00:21:35.059 --> 00:21:37.720 a ladybird deed in the citations, which is a 00:21:37.720 --> 00:21:40.299 bit of a specific legal instrument. Right. But 00:21:40.299 --> 00:21:42.940 it just highlights how complex the transfer of 00:21:42.940 --> 00:21:45.279 these rights can be. It's not a simple transaction. 00:21:45.599 --> 00:21:47.920 No, it's a reminder that land isn't just a business 00:21:47.920 --> 00:21:50.599 asset. It's property. It's tied to inheritance, 00:21:50.839 --> 00:21:54.259 family and centuries of common law. Every transaction 00:21:54.259 --> 00:21:56.660 is layered with history and legal complexity. 00:21:56.799 --> 00:21:59.869 So given that the risk is huge. You're bleeding 00:21:59.869 --> 00:22:02.230 cash. You're waiting on the government. You're 00:22:02.230 --> 00:22:05.309 praying for a good economy. How do developers 00:22:05.309 --> 00:22:07.789 mitigate this? How do they not just have ulcers 00:22:07.789 --> 00:22:11.930 all the time? Segment five, mitigating risk with 00:22:11.930 --> 00:22:15.250 information. They mitigate it with data. In the 00:22:15.250 --> 00:22:17.450 old days, a developer might have used their gut 00:22:17.450 --> 00:22:19.829 instinct. This town feels like it's growing. 00:22:19.930 --> 00:22:23.240 I'll buy that farm. Today. That is suicide. So 00:22:23.240 --> 00:22:25.200 what do they use now? The source specifically 00:22:25.200 --> 00:22:28.099 mentions spatial intelligence tools. Spatial 00:22:28.099 --> 00:22:30.619 intelligence? That sounds like spycraft. What 00:22:30.619 --> 00:22:32.339 are we actually talking about? We are talking 00:22:32.339 --> 00:22:35.119 about geographic information systems, or GIS, 00:22:35.400 --> 00:22:38.259 on steroids. We're talking about modeling population 00:22:38.259 --> 00:22:41.259 trends, demographics, and even psychographics. 00:22:41.480 --> 00:22:44.380 Psychographics? What's that? Not just who lives 00:22:44.380 --> 00:22:47.160 there, but how they think and what they buy. 00:22:47.839 --> 00:22:50.440 Developers can buy data sets that tell them. 00:22:50.680 --> 00:22:54.599 People in this zip code tend to drive SUVs, buy 00:22:54.599 --> 00:22:58.740 organic food, have 1 .5 kids, and go to the gym 00:22:58.740 --> 00:23:01.420 twice a week. That is slightly creepy. Where 00:23:01.420 --> 00:23:03.319 did they get that data? It's aggregated from 00:23:03.319 --> 00:23:06.339 all sorts of places. Credit card companies, mobile 00:23:06.339 --> 00:23:09.819 phone location data, social media, public records. 00:23:10.039 --> 00:23:12.420 It's the reality of the modern economy. And the 00:23:12.420 --> 00:23:15.380 goal, as the text states. The goal is to identify 00:23:15.380 --> 00:23:17.920 the sort of customers a home builder or retailer 00:23:17.920 --> 00:23:20.490 would like to have surrounding their... new development. 00:23:20.630 --> 00:23:22.670 So if I'm a developer and I've subdivided this 00:23:22.670 --> 00:23:25.150 land and I want to sell a commercial pad to a 00:23:25.150 --> 00:23:27.210 grocery store chain, I don't just say, hey, it's 00:23:27.210 --> 00:23:29.569 a nice spot. No, that pitch doesn't work anymore. 00:23:29.730 --> 00:23:31.690 You walk into the meeting with Whole Foods or 00:23:31.690 --> 00:23:34.450 Kroger or whoever and you say, look at this map. 00:23:35.150 --> 00:23:37.490 Based on cell phone tracking data and credit 00:23:37.490 --> 00:23:40.190 card spending patterns, there are 5 ,000 households 00:23:40.190 --> 00:23:42.309 within a 10 -minute drive who fit your exact 00:23:42.309 --> 00:23:45.609 customer profile. And, you continue, they are 00:23:45.609 --> 00:23:47.710 currently driving 20 minutes to your competitor. 00:23:48.250 --> 00:23:50.730 If you build here, you capture them. Here's our 00:23:50.730 --> 00:23:53.329 projection for your first year sales. You're 00:23:53.329 --> 00:23:55.809 using data to prove the future. You're using 00:23:55.809 --> 00:23:58.829 data to reduce the uncertainty. If you can prove 00:23:58.829 --> 00:24:01.670 the demand is there, the risk goes down. The 00:24:01.670 --> 00:24:04.349 bank is more likely to lend to you. The tenant 00:24:04.349 --> 00:24:07.369 is more likely to sign. You're replacing a gut 00:24:07.369 --> 00:24:10.009 feeling with a spreadsheet. It effectively weaponizes 00:24:10.009 --> 00:24:12.769 information to fight risk. Exactly. It's an arms 00:24:12.769 --> 00:24:15.029 race of data. Now, when we talk about development, 00:24:15.089 --> 00:24:18.049 I think we usually default to houses or shops. 00:24:18.170 --> 00:24:21.049 But segment six, the universe of development 00:24:21.049 --> 00:24:24.849 types, the see also and external links sections 00:24:24.849 --> 00:24:27.390 of this source material were a goldmine. Oh, 00:24:27.410 --> 00:24:29.099 yeah. I don't want to just list them. I want 00:24:29.099 --> 00:24:31.079 to talk about what they represent. It demonstrates 00:24:31.079 --> 00:24:33.660 that the built environment is incredibly specialized. 00:24:34.339 --> 00:24:37.299 You don't just develop. You develop a very specific 00:24:37.299 --> 00:24:40.160 product for a very specific market. Let's start 00:24:40.160 --> 00:24:42.000 with residential. We have the standard stuff, 00:24:42.099 --> 00:24:44.680 but then we have agri -hoods. What on earth is 00:24:44.680 --> 00:24:47.500 an agri -hood? It is a fascinating response to 00:24:47.500 --> 00:24:50.180 modern alienation. Instead of building a golf 00:24:50.180 --> 00:24:52.019 course community where houses surround a golf 00:24:52.019 --> 00:24:54.839 course, developers are building communities around 00:24:54.839 --> 00:24:57.400 a working farm. So you look out your window and 00:24:57.400 --> 00:25:00.839 see kale. You see a community garden, an orchard, 00:25:00.839 --> 00:25:03.619 maybe some chickens. You get a box of fresh produce 00:25:03.619 --> 00:25:05.880 delivered to your door every week as part of 00:25:05.880 --> 00:25:09.859 your HOA dues. It's selling a lifestyle of getting 00:25:09.859 --> 00:25:13.670 back to nature. but in a carefully curated, developer 00:25:13.670 --> 00:25:15.789 -controlled environment. That's amazing. Then 00:25:15.789 --> 00:25:18.910 you have micro -apartments and SROs or single 00:25:18.910 --> 00:25:21.269 -room occupancy. This is the opposite end of 00:25:21.269 --> 00:25:23.789 the spectrum. This is a direct response to the 00:25:23.789 --> 00:25:26.369 affordability crisis in big, expensive cities. 00:25:26.569 --> 00:25:28.869 If land is too expensive, you can't make the 00:25:28.869 --> 00:25:30.970 land cheaper, so you make the units smaller. 00:25:31.230 --> 00:25:34.210 How small are we talking? 300 square feet. 200 00:25:34.210 --> 00:25:37.029 square feet. Sometimes even less. It's reviving 00:25:37.029 --> 00:25:39.250 the old boarding house concept, but branding 00:25:39.250 --> 00:25:42.769 it as minimalist living or co -living. It's marketing 00:25:42.769 --> 00:25:46.730 spin on small. It is, but it serves a vital economic 00:25:46.730 --> 00:25:49.869 function. If you don't build that, where does 00:25:49.869 --> 00:25:52.170 the entry -level worker, the student, the artist 00:25:52.170 --> 00:25:54.890 live in a city like New York or San Francisco? 00:25:55.230 --> 00:25:58.349 True. Okay, let's move to industrial. We see 00:25:58.349 --> 00:26:01.970 business parks, science parks. Think about a 00:26:01.970 --> 00:26:04.410 science park or a research park. This isn't just 00:26:04.410 --> 00:26:07.190 a generic warehouse. This is a developer creating 00:26:07.190 --> 00:26:10.259 an ecosystem for innovation. They're often located 00:26:10.259 --> 00:26:13.119 near a major university. Ah, to get the talent. 00:26:13.279 --> 00:26:15.319 To get the talent. They build specialized labs 00:26:15.319 --> 00:26:17.339 with specific ventilation. They build collaborative 00:26:17.339 --> 00:26:19.940 spaces. They put in a coffee shop. They are trying 00:26:19.940 --> 00:26:22.579 to create the next Silicon Valley by designing 00:26:22.579 --> 00:26:25.059 the physical space to encourage people to bump 00:26:25.059 --> 00:26:27.500 into each other and share ideas. So the developer 00:26:27.500 --> 00:26:30.200 is trying to engineer serendipity. Yes. They're 00:26:30.200 --> 00:26:32.099 building the hardware for the software of the 00:26:32.099 --> 00:26:34.339 economy to run on. And speaking of hardware, 00:26:34.559 --> 00:26:37.309 data centers. aren't explicitly listed, but they 00:26:37.309 --> 00:26:39.809 fall under this industrial umbrella. That's a 00:26:39.809 --> 00:26:41.809 massive sector right now. That is the hottest 00:26:41.809 --> 00:26:44.750 sector in real estate, period. Big windowless 00:26:44.750 --> 00:26:46.789 concrete boxes that hold the Internet. They're 00:26:46.789 --> 00:26:48.789 basically just buildings full of servers. And 00:26:48.789 --> 00:26:50.930 developing them is different from a shopping 00:26:50.930 --> 00:26:53.230 mall. Completely different game. You don't care 00:26:53.230 --> 00:26:55.170 about visibility from the highway. You care about 00:26:55.170 --> 00:26:58.329 two things. Access to massive amounts of electricity 00:26:58.329 --> 00:27:01.829 and access to fiber optic cables. Power and data. 00:27:02.009 --> 00:27:04.329 That's it. The whole site selection process is 00:27:04.329 --> 00:27:07.289 about finding a spot on the power grid, not on 00:27:07.289 --> 00:27:10.609 the road network. And the retail nuances. Shopping 00:27:10.609 --> 00:27:12.890 malls versus power centers versus retail parks. 00:27:13.230 --> 00:27:15.970 To the average person, a strip mall is a strip 00:27:15.970 --> 00:27:19.059 mall. But to a developer, the economics are totally 00:27:19.059 --> 00:27:21.759 different. A power center, those big open -air 00:27:21.759 --> 00:27:24.200 centers with a Best Buy, a Target, a Home Depot, 00:27:24.359 --> 00:27:27.240 is designed for efficiency. Low maintenance, 00:27:27.519 --> 00:27:30.599 huge parking ratios. A traditional enclosed shopping 00:27:30.599 --> 00:27:33.279 mall is incredibly expensive to run. You have 00:27:33.279 --> 00:27:35.539 to heat and cool all that common area, pay for 00:27:35.539 --> 00:27:37.859 security, clean the fountains. That's why so 00:27:37.859 --> 00:27:39.980 many malls are dying and power centers are surviving. 00:27:40.240 --> 00:27:42.880 The operating costs kill them all. And then we 00:27:42.880 --> 00:27:44.440 get into the really wild stuff in the source. 00:27:45.450 --> 00:27:48.089 Arcology. Listed under municipal. This is sci 00:27:48.089 --> 00:27:50.970 -fi stuff, right? A single massive building that 00:27:50.970 --> 00:27:53.809 contains a whole city. It is theoretical, mostly. 00:27:54.049 --> 00:27:57.329 Paolo Soleri's concept. But you see elements 00:27:57.329 --> 00:28:00.549 of it in real -world projects, like the line 00:28:00.549 --> 00:28:03.549 being built in Saudi Arabia. The ambition to 00:28:03.549 --> 00:28:05.750 create a self -contained, perfect environment. 00:28:06.130 --> 00:28:08.930 It seems like the ultimate developer ego trip. 00:28:09.069 --> 00:28:11.740 It is. I can build a better world inside this 00:28:11.740 --> 00:28:14.660 glass bubble. Extraterrestrial real estate. I 00:28:14.660 --> 00:28:17.759 mean, it sounds like a joke. But if we ever colonize 00:28:17.759 --> 00:28:20.619 Mars... We will need developers. We will need 00:28:20.619 --> 00:28:23.160 zoning. We will need infrastructure. We will 00:28:23.160 --> 00:28:25.460 need to decide who owns the best crater view. 00:28:25.680 --> 00:28:28.720 Oh, my gosh. The principles of the business process 00:28:28.720 --> 00:28:31.700 we defined at the start, risk -reward coordination, 00:28:32.079 --> 00:28:34.440 will apply on Mars just as they do in Manhattan. 00:28:34.779 --> 00:28:37.319 Universal laws of development. Literally universal. 00:28:37.680 --> 00:28:39.559 Okay, bringing it back down to Earth for segment 00:28:39.559 --> 00:28:42.480 seven, the regulatory and economic web. We touched 00:28:42.480 --> 00:28:44.240 on this, but I want to get granular on the rules 00:28:44.240 --> 00:28:46.519 of engagement. The regulatory environment is 00:28:46.519 --> 00:28:48.950 the box the developer has to play inside. And 00:28:48.950 --> 00:28:51.369 it's a very complicated box. Zoning. This is 00:28:51.369 --> 00:28:54.009 the big one. Zoning is the law that says you 00:28:54.009 --> 00:28:55.670 can build a house here, but you cannot build 00:28:55.670 --> 00:28:58.589 a factory. Or you can build a two -story building 00:28:58.589 --> 00:29:01.410 here, but not a 10 -story one. It's the city's 00:29:01.410 --> 00:29:04.369 master plan for what goes where. And this leads 00:29:04.369 --> 00:29:08.609 to the NBY versus YMBY war mentioned in the text. 00:29:08.849 --> 00:29:10.890 This is the defining political battle of our 00:29:10.890 --> 00:29:13.269 time in real estate, especially in growing cities. 00:29:13.470 --> 00:29:16.700 So break it down. N -M -B -Y. N -M -B -Y. Not 00:29:16.700 --> 00:29:19.140 in my backyard. These are existing residents, 00:29:19.420 --> 00:29:22.160 usually homeowners, who say, I like my neighborhood 00:29:22.160 --> 00:29:24.240 the way it is. Don't build that apartment building. 00:29:24.420 --> 00:29:26.279 It will bring traffic. It will block my son. 00:29:26.539 --> 00:29:30.319 It will crowd the schools. And YMB. Yes, in my 00:29:30.319 --> 00:29:33.200 backyard. These are usually younger people, renters 00:29:33.200 --> 00:29:35.740 or advocates, who say, we have a massive housing 00:29:35.740 --> 00:29:37.559 shortage. Rents are too high. We need to build 00:29:37.559 --> 00:29:39.920 more supply, more density. If you don't build 00:29:39.920 --> 00:29:42.440 it here, where will people live? And the developer 00:29:42.440 --> 00:29:44.599 is caught in the middle. The developer is the 00:29:44.599 --> 00:29:47.109 lightning rod. They want to build, which aligns 00:29:47.109 --> 00:29:49.450 with the YMBYs, but they have to get approval 00:29:49.450 --> 00:29:51.390 from a city council that is often controlled 00:29:51.390 --> 00:29:54.450 by the voters who live there, who are often NMBYs. 00:29:54.730 --> 00:29:57.269 It's a vicious political fight on every single 00:29:57.269 --> 00:29:59.789 project. And then there's the financial rules. 00:30:00.450 --> 00:30:02.750 We skipped over some terms earlier that I want 00:30:02.750 --> 00:30:05.170 to define now because they are the scoreboard 00:30:05.170 --> 00:30:07.609 for this game. Right. Cap rate and leverage. 00:30:08.349 --> 00:30:11.609 Let's do leverage first because it explains the 00:30:11.609 --> 00:30:16.930 extreme risk and reward. almost always bought 00:30:16.930 --> 00:30:20.069 with debt. Other people's money. So I don't pay 00:30:20.069 --> 00:30:23.410 $10 million cash for the building. No. You put 00:30:23.410 --> 00:30:25.849 down $2 million of your own money, your equity, 00:30:26.029 --> 00:30:28.869 and you borrow $8 million from the bank. That's 00:30:28.869 --> 00:30:31.369 your debt. You're leveraged 4 to 1. Why do that? 00:30:31.450 --> 00:30:33.150 Why not just buy a smaller building with the 00:30:33.150 --> 00:30:35.930 $2 million? Positive leverage. Yeah. Say the 00:30:35.930 --> 00:30:38.410 building goes up in value by 10%. It's now worth 00:30:38.410 --> 00:30:41.450 $11 million. You made $1 million profit. But 00:30:41.450 --> 00:30:43.069 you only put in $2 million of your own money. 00:30:43.250 --> 00:30:46.230 So your return on equity is 50%. That's magic. 00:30:46.690 --> 00:30:48.490 That's how developers get rich. Right. But it 00:30:48.490 --> 00:30:50.710 works in reverse. If the building value drops 00:30:50.710 --> 00:30:54.180 10%, it's now worth $9 million. You still owe 00:30:54.180 --> 00:30:56.779 the bank $8 million. Your $2 million in equity 00:30:56.779 --> 00:30:59.980 is now only worth $1 million. You've lost 50 00:30:59.980 --> 00:31:03.019 % of your money. If it drops 20%, it's worth 00:31:03.019 --> 00:31:05.640 $8 million. You owe the bank $8 million. You 00:31:05.640 --> 00:31:08.559 are wiped out completely. You have lost everything. 00:31:08.920 --> 00:31:11.460 That is the leverage effect the text mentions. 00:31:11.519 --> 00:31:14.660 It amplifies the wins and the losses. Precisely. 00:31:14.660 --> 00:31:18.119 And cap rate or capitalization rate is how they 00:31:18.119 --> 00:31:20.859 measure the value of a property's income. It's 00:31:20.859 --> 00:31:23.940 basically the yield. If a building costs $1 million 00:31:23.940 --> 00:31:26.880 and generates $50 ,000 a year in net profit, 00:31:27.119 --> 00:31:30.619 it's a 5 % cap rate. So it's like the interest 00:31:30.619 --> 00:31:32.779 rate on a savings account, but the building is 00:31:32.779 --> 00:31:35.400 the account. Correct. And here's the secret. 00:31:35.779 --> 00:31:39.240 Cap rates measure risk. A brand new building 00:31:39.240 --> 00:31:42.680 with a solid tenant in a safe, booming city might 00:31:42.680 --> 00:31:46.039 have a 4 % cap rate. An old building in a shrinking 00:31:46.039 --> 00:31:48.980 crime -ridden city might have a 10 % cap rate. 00:31:49.079 --> 00:31:51.079 You get paid more yield for taking more risk. 00:31:51.180 --> 00:31:53.200 You got it. And when a developer looks at a deal, 00:31:53.359 --> 00:31:55.380 they aren't just looking at the pretty architecture. 00:31:55.579 --> 00:31:57.720 They're looking at the spread between the cap 00:31:57.720 --> 00:31:59.799 rate, which is what the building earns, and the 00:31:59.799 --> 00:32:01.599 interest rate, which is what the bank charges 00:32:01.599 --> 00:32:03.640 them for the loan. That spread is the whole game. 00:32:03.880 --> 00:32:07.279 The spread is life. If the cap rate is higher 00:32:07.279 --> 00:32:10.579 than the interest rate, you make money. If interest 00:32:10.579 --> 00:32:13.720 rates rise like they have recently and go higher 00:32:13.720 --> 00:32:16.619 than the cap rate, the developer is underwater. 00:32:16.900 --> 00:32:19.579 The machine stops. That explains why the entire 00:32:19.579 --> 00:32:21.480 industry is so sensitive to what the Federal 00:32:21.480 --> 00:32:23.579 Reserve does. They are addicted to cheap debt. 00:32:23.700 --> 00:32:26.119 When debt gets expensive, development stops. 00:32:26.420 --> 00:32:28.859 We also have brownfield versus greenfield in 00:32:28.859 --> 00:32:31.420 the regulatory section. Greenfield is easy. Raw 00:32:31.420 --> 00:32:34.359 land, cornfields, forests on the edge of town. 00:32:34.460 --> 00:32:36.700 It's easy to build on, but it contributes to 00:32:36.700 --> 00:32:39.359 suburban sprawl. And Brownfield. Brownfield is 00:32:39.359 --> 00:32:42.799 hard. It's the abandoned factories, old gas stations, 00:32:42.960 --> 00:32:46.359 contaminated industrial sites in the city. It's 00:32:46.359 --> 00:32:48.640 hard to build on, expensive to clean up, but 00:32:48.640 --> 00:32:50.599 it's good for the city because it recycles land 00:32:50.599 --> 00:32:53.180 instead of paving over more countryside. And 00:32:53.180 --> 00:32:55.279 the government often gives incentives for Brownfield, 00:32:55.359 --> 00:32:58.380 right? Tax breaks. Yes, exactly. Tax breaks and 00:32:58.380 --> 00:33:00.900 grants to encourage developers to take that extra 00:33:00.900 --> 00:33:03.240 risk and cost. Otherwise, those sites would just 00:33:03.240 --> 00:33:05.740 sit there rotting forever. So what does this 00:33:05.740 --> 00:33:08.279 all mean? Let's wrap this up. If we look at the 00:33:08.279 --> 00:33:10.539 big picture, what we've seen is that real estate 00:33:10.539 --> 00:33:12.920 development is the engine of the built world. 00:33:13.200 --> 00:33:16.519 It is this high risk, high reward orchestration 00:33:16.519 --> 00:33:20.339 of lawyers, engineers, politicians and financiers. 00:33:20.460 --> 00:33:22.599 It's not just bricks and mortar. It's a process. 00:33:23.119 --> 00:33:26.059 It's a business model that creates the stage 00:33:26.059 --> 00:33:28.819 we live our lives on. Every single street you 00:33:28.819 --> 00:33:31.460 walk down, every shop you enter, every office 00:33:31.460 --> 00:33:34.420 you work in. It started as an idea on a piece 00:33:34.420 --> 00:33:37.220 of paper. A developer had to fight for that idea. 00:33:37.619 --> 00:33:40.140 They had to push it through political barriers 00:33:40.140 --> 00:33:43.599 like the NMBYs, physical barriers like bad soil, 00:33:43.799 --> 00:33:46.319 and economic barriers like rising interest rates. 00:33:46.519 --> 00:33:49.019 And they had to orchestrate that team of hundreds 00:33:49.019 --> 00:33:51.619 of people to make it happen. Precisely. They 00:33:51.619 --> 00:33:53.420 are the person with the vision in the stomach 00:33:53.420 --> 00:33:56.000 for the risk to see it through. I want to leave 00:33:56.000 --> 00:33:57.660 the listener with a final thought going back 00:33:57.660 --> 00:33:59.359 to that subdivision concept we talked about. 00:33:59.740 --> 00:34:02.000 The source said subdivision determines the appearance 00:34:02.000 --> 00:34:04.680 and mix of our communities. Yes. And we talked 00:34:04.680 --> 00:34:07.460 about how those lines on the map are basically 00:34:07.460 --> 00:34:09.940 permanent. They are the fossilized remains of 00:34:09.940 --> 00:34:11.820 a business deal. That's a great way to put it. 00:34:11.900 --> 00:34:15.139 So if developers determine the layout of our 00:34:15.139 --> 00:34:18.059 world, to what extent is our daily lifestyle? 00:34:18.679 --> 00:34:21.639 How much we drive, who we interact with, whether 00:34:21.639 --> 00:34:24.940 we walk to a park or drive to a mall, dictated 00:34:24.940 --> 00:34:26.840 by the business models and risk calculations 00:34:26.840 --> 00:34:29.500 of a developer from 30 or 40 years ago. We are 00:34:29.500 --> 00:34:31.760 living in the legacy of their spreadsheets. We 00:34:31.760 --> 00:34:34.219 navigate the world they financed. The width of 00:34:34.219 --> 00:34:36.340 your street was probably determined by a municipal 00:34:36.340 --> 00:34:39.860 code that a developer argued about in 1975 to 00:34:39.860 --> 00:34:42.599 save money on asphalt. That is a thought to chew 00:34:42.599 --> 00:34:44.159 on the next time you drive through your neighborhood. 00:34:44.710 --> 00:34:47.050 Look at the curve of the road. Look at the cul 00:34:47.050 --> 00:34:49.670 -de -sac. Someone drew that line to maximize 00:34:49.670 --> 00:34:51.550 the number of lots they could sell to pay back 00:34:51.550 --> 00:34:55.269 a bank loan in 1985, and you are living on it 00:34:55.269 --> 00:34:58.449 today. Indeed. It forces you to see the city 00:34:58.449 --> 00:35:01.130 not as a static thing, but as a historical record 00:35:01.130 --> 00:35:03.449 of capital flowing into concrete. Thanks for 00:35:03.449 --> 00:35:05.369 diving deep with us. Hopefully you'll never look 00:35:05.369 --> 00:35:07.429 at a for -lease sign the same way again. Until 00:35:07.429 --> 00:35:07.969 next time.