Real Estate Development

By Matthew Mohr

Our region has had continual growth and the amount of new construction seems to be never ending. Property in our area, which was being sold a few decades ago for pennies per foot, has skyrocketed to many dollars per foot. This continual push for more buildings and the upward price spiral has created an environment that has seemed to make some big winners with few losers.

Whenever a market gets to this point, where anything and everything seems to be successful, something and some people will eventually get hurt.

True professional developers use sophisticated modeling when evaluating a project returns and risks. Solid financial analysis, including calculating the owners cost of capital, return on investment benchmarks, and a net present value based on various rents, business conditions and many factors will be performed.

Recently, I visited a very sophisticated manufacturing plant in Ohio with some colleagues. The building has some incredible engineering. Piping and control mechanisms with electronic monitoring systems were in place to ensure the product being produced was done right every time. The building engineering had to account for specialized containers to hold 5,000 gallons of liquid with area for expansion in the future. Pouring a concrete floor and putting production in place simply would have not worked. This facility took foresight, excellent technology and expert engineers to build. The risk to the owners amounts to many millions of dollars and the owners know their business well, so they did everything possible to make sure they would achieve a positive return on their investment. There are many individuals and whole organizations in our market claiming to be real estate development professionals. With demand for property along with excess money available from investors, buildings have been built all over the region and many are able to provide some returns, but long-term continuous and positive cash flow is far from guaranteed. Some of these organizations and investments will fail.

When market demand is as strong as we have experienced in our region, it is easy to have inexperienced contractors and unsophisticated realtors achieve what appears to be success. Over the longer term, eventually those lacking experience, especially those who “cut corners” or “shoot from the hip” will fail.

Two of the most notable real estate management-development businesses in our area are Goldmark and the Kilbourne Group. Both follow somewhat different paths yet both have grown and prospered along with managing their respective business for the long term. “Goldmark, now primarily engaged as a real investment trust named Sterling Multi-Family REIT and Sterling Office and Industrial REIT, started with small properties, then when they gained positive after continued on page 34