For companies looking to do business with commercial properties, understanding the property development process might offer insights into discovering business opportunities. How does a commercial property go from an undeveloped piece of land to an occupant-ready structure?
We’re going to walk through the CRE development process to understand how these construction projects go from concept to actual property that can be sold, leased, or opened for business. That way, when you search for properties that meet your criteria, you can not only “speak the lingo,” but you can also understand who’s who in commercial real estate.
What Is a CRE Developer?
CRE developers specialize in commercial properties. Oftentimes this refers to projects that start with nothing more than raw land, but not always. Sometimes CRE developers deal with existing property that needs work in order to become viable.
Regardless of the type of project, CRE developers are involved in every aspect of the development process. This stretches from site selection and financing to zoning and property management after construction is complete. To be successful, CRE developers must have a deep understanding of real estate, strong financial and project management skills as well as an understanding of zoning and regulatory requirements.
CRE developers also rely on professionals from many other disciplines to bring a project to completion. For example, they must work closely with architects, contractors, attorneys, and financial teams. They even have to work with marketing and PR professionals, community organizers, and local politicians.
Phases of Commercial Development and Construction
Just like there are different types of commercial real estate, there are different types of CRE developers. Some might focus on commercial office property while others put their effort into building hotels or developing life sciences buildings. Some developers sell their creations while others lease space in the property while maintaining ownership.
While these various types of projects have their own unique challenges, many of the phases within the real estate development process are the same or quite similar. Let’s look at the general process behind commercial real estate development.
Market research and site selection
Determining if a project is viable and where it should be located are the earliest steps in the CRE development process. The importance of these steps cannot be overstated because they lay the foundation for the success or failure of the project. And while market research and site selection are different steps, they go hand in hand.
Think of it this way: There could be strong indicators that a family entertainment park would be economically viable. No matter what the positive market data says, the project could be doomed if the selected site is plagued by problems like zoning restrictions, insufficient infrastructure support or even drainage issues that are expensive to fix.
Many variables go into market research and site selection, but the following types of questions are generally included in the process:
Can the market support the type of business or activity the new development is intended for? This illustrates demand and includes population data, income data, local economic data, and market trends for the type of business being proposed.
Are there competitors in the area and how are they performing? If there are competitors in the area, are they underperforming, and can a new development turn this threat into an opportunity?
Is the land physically suited for the type of construction project required? This is a complicated question, which requires professionals such as site planners, civil engineers, landscape architects, architects, and potentially environmental consultants.
Is the land zoned for the type of development or will a variance or rezoning be needed? What is the process for this and are there additional requirements from local authorities to consider?
Is there traffic and utility infrastructure in place to support the project or would those need to be factored into the development costs?
Even after a piece of land has gotten the initial green light, there is still a lot of work to determine the feasibility of the project. For instance, the site has to be investigated more deeply to ensure it fits the physical requirements for construction. Environmental and soil studies must often be completed to determine that the land is safe for development. These studies will be required by lenders and city officials that need to sign off on the project.
The level of detail that goes into market research and site selection is necessary to help ward off unpleasant surprises that can delay or stop the project from moving forward. It also helps to show that there is demand for the final product and supports the developer as they seek financing for the project.
Preliminary budget and purchase contract
In this phase of CRE development, the developer aims to weigh the income potential of the final project against the projected cost to complete it. A developer will share the details of their market research and site study with their network of consultants and contractors. In turn, they help to determine the estimated cost to develop the land, make required improvements, and non-construction-related costs such as consultant fees, permits, marketing, sales and leasing.
The goal of the preliminary budget is to show the general cost of the project along with the revenue potential once it is completed. In showing both the cost and potential revenue, it helps to illustrate the soundness of the plan. The preliminary budget is also used to help secure capital and is necessary for the purchase contract, which needs to be signed before the project moves forward.
Bringing in consultants
Consultants from multiple disciplines, including civil engineers, structural engineers, architects, landscape architects, and geo-tech consultants are called into the process. Additionally, environmental consultants and marketing and PR professionals are also commonly involved. Together, these professionals support the CRE developer in performing due diligence across various disciplines and in anticipating and solving obstacles that may impede the project.
Working with the community
Commercial real estate projects have an impact on the communities they are in or near, so it is important to include those communities in the process. Residents and area businesses will want to know what is being developed, what type of impact it might have on them and the area, as well as how the project will benefit the community.
While not every commercial real estate development requires a public hearing, many do. By having a strong plan to communicate and cooperate with the community, developers can limit problems and negative interactions. This is important to the overall success of the project, both in construction and when it is in use.
Securing approvals and entitlements from local government
There are many approvals that have to be signed off on before construction can begin. This includes approval from regulatory agencies and local government authorities for the site plan, zoning, and design. Each of these must be thoroughly reviewed, and all questions or concerns resolved before authorities sign off on the project.
Although much of the work leading up to this point is designed to ensure that the project easily moves through the review and approval process, that’s not always the case. The process can be lengthy and involve multiple rounds of approvals and revisions that delay the start of construction.
Construction bid requests
CRE developers will call for bids from the construction community. General contractors will use the project’s scope of work to create a bid that reflects projected costs and a timeline for completing the project. The developer uses these bids to find the right general contractor, but they also use them to help create a final budget and project schedule.
Submission of building plans and acquiring permits
Approval from the city and regulatory agencies is separate from building plan approval and the securing of permits. Even after the project has been signed off, the building department and agencies overseeing permits need to review the plans in great detail.
The goal of this step is to ensure that the building plans are sound and that all codes are followed. Once everything has been reviewed and approved, permits can be granted. Permits authorize the developer to begin the construction portion of the project.
A great deal of work must take place before construction can start, but that doesn’t take away from the amount of work involved in the construction process itself. There are many groups working together to bring the project across the finish line. This requires coordination and communication between the CRE developer and their network of consultants, general contractors, subcontractors, suppliers, and other interested parties.
The construction process includes pre-construction work to get the site ready, building the structure, interior work within the structure, and exterior on-site work such as landscaping. Inspections take place throughout the process to ensure that the project is up to code. Delays in construction are common and can happen because of weather, inspection issues, and supply-chain problems.
Once the project is complete and the local government has issued occupancy certificates, the CRE developer may sell it or lease it to tenants. The work to facilitate the transition from the developer to new owner or tenants starts long before the project is complete. Marketing, sales teams, and other professionals are brought into the project early on to generate interest.
CRE Developers vs Builders
The terms “developer” and “builder” are sometimes used interchangeably, but they are not the same. Some commercial real estate developers may be builders, and they might even complete some of the construction work required for a project. Many developers, however, are not builders but act as project managers that coordinate and organize the project.
There are different types of commercial real estate developments and variations on the development process. The type of development, scope of work and goals of the developer all play into how a project is brought to life. No matter what the project is, it’s easy to understand why commercial projects can take a lot of time and money to complete.
It’s easy to forget the complicated work that goes on behind the scenes to build the structures where we live, work, and visit. From malls and movie theaters to office buildings and stadiums, these pieces of commercial real estate (CRE) all started the same way — with an idea. Bringing that idea from concept into reality takes imagination, capital, and the hard work of skilled professionals from many disciplines.
Read more about the different types of commercial real estate developments in this guide.