Land Subdividers and Developers, Except Cemeteries

SIC 6552

Companies in this industry

Industry report:

This category includes establishments primarily engaged in subdividing real property into lots, except cemetery lots, and in developing it for resale on their own account.

Industry Snapshot

Real estate development is a multifaceted industry. It includes the purchase of vacant or raw land, its subdivision into small parcels, and the construction of residential single-family houses, condominiums, or apartment buildings as well as construction of retail shopping centers, industrial plants and warehouses, office buildings, schools, prisons, hospitals, and almost any type of structure. Additionally, it includes the renovation or restoration of warehouses to loft apartments or offices and the construction of parking garages. Generally land development and subdivision falls into the three categories of rural, urban, and suburban.

In an effort to stimulate a lagging economy in 2001, the Federal Reserve began cutting interest rates, which in turn stimulated the housing market. The number of houses sold and the prices of houses rose dramatically in the early 2000s. Single-family housing starts totaled an all-time high of 1.7 million in 2005. New home sales stood at 1.2 million. Many of these mortgages were packaged and sold as bundled securities to investors on Wall Street. The resulting profitability of mortgages encouraged banks to loosen lending standards and grant mortgages to even more consumers, including those with little or questionable credit, thus spawning the "subprime mortgage" boom. In addition, exporting much of the risk of mortgages to investors freed up capital for banks, and they offered very low adjustable rate mortgages (ARMs), which allowed consumers that may not be able to afford to by a home to buy one with a low mortgage payment. However, in 2006, the housing market stalled, and interest rates started to rise as the price of houses fell. Many of the ARMs granted earlier started to be reset at higher rates, resulting in large increases in many Americans' house payment. Thousands of Americans were not able to make this higher payment and defaulted on their loans. Foreclosures reached record highs, and hundreds of banks failed. By September 2009, 14 percent of all mortgages in the United States were either delinquent or in foreclosure. In the second quarter of 2010 alone, more than 895,000 foreclosure notices were filed on U.S. properties, according to the Los Angeles Times.

Although the residential real estate market was most affected by the subprime mortgage crisis of the late 2000s, the rate of defaults and foreclosures on commercial properties rose as well. Amid the environment of financial crisis and economic recession, land developers saw decreasing activity and profits. However, by late 2010, many looked for a recovery in the industry.

Organization and Structure

In the twenty-first century, land developers coordinate a battery of activities necessary to carry out the development of land into useable space. Developers typically purchase a tract of land, devise a building program, obtain government approvals and financing, and then set about to have the structures built. After the building is complete, the developer may sell all or part of the property, or keep it on account and manage the property by leasing space to tenants. There are nearly as many different scenarios as there are developers.

Successful development firms operate under a variety of paradigms, including that of niche developer, such as Francesco Galeseei of the Galesi Group. Galesi, a global corporation, developed 900 million square feet of space in the twentieth century. Galesi purchased the land from the General Service Administration (GSA) of the U.S. government and developed the acreage into strategically located distribution centers for military supply depots, some capable of holding 20 or more railroad cars. The company's net worth exceeded $250 million in 2005. Likewise, industry leader Simon Property Group led the real estate industry in North America by the end of the twentieth century through extensive investment in the shopping mall arena.

Among the leading developers' associations, the 30,000-member Urban Land Institute encourages effective urban planning and studies new area development.

Background and Development

Real estate development in the 1990s underwent a dramatic change from previous decades. Several factors spurred long-range change in the real estate development industry, including a severe economic recession in the early 1990s that affected many geographic regions of the United States. In 1991 a Census Bureau study found that 57 percent of all families were unable to afford a median-priced home in their community, a circumstance that led developers to increase construction of apartments and other multiple dwellings over single-family residences. Beginning in 1993 an overall surge in the U.S. economy and growth in housing starts enabled developers to obtain financing and accomplish this purpose. Also at issue were the overbuilding of office and commercial space in many U.S. markets and tax changes stemming from the Tax Reform Act of 1986 affecting the desirability of real estate as an investment vehicle. A crisis in the savings and loan industry, associated with a record number of bank failures, aggravated the situation. Restrictive lending policies emerged as a result of government intervention. New policies and increased government regulation affected the time and cost involved in obtaining government approvals.

As a result, land subdivision and development is a highly speculative industry involving complex processes. Subdividers and developers incur both fixed and variable costs in the process of creating single-property lots for individual sale from large parcels of acreage. It is the ability of the developer to absorb all costs within a reasonable margin that determines the success of each venture. Developers fund not only the variable development costs to prepare the individual lots for retail sale, but also the many fixed costs associated with the building of streets, sewage conduits, and other elements critical to the infrastructure of the development. Additionally there are government levies for extended infrastructure costs. These assessments, called development contributions or "impact fees," contribute further to the cost of development.

For assistance with crucial cost determinations, subdividers turn to professional appraisers, yet the element of risk cannot be underestimated. Through careful analysis of the total costs of development in comparison to the potential retail value per lot, development firms speculate on an amount of land to purchase based on salability and develop accordingly, in order to maximize profit. Market survey results often provide indicators of the potential retail sale price of each. Surveys and investigations provide additional data regarding the existence of competing projects in the immediate geographical area, along with the potential impact of such projects. Overall, the timeliness of a proposed construction project figures keenly into the risk assessment, as does the creativity of the developer in designing a salable residential or business community. After comprehensive appraisal of risk and cost factors, the subdevelopment process moves into the hands of lenders. With appropriate financing, the subdivision project becomes a matter of civic and legal issues, and the process of obtaining approvals and licensing ensues before construction begins.

Construction and Sale as a Function of Property Development.
The actual construction of the subdivided lots is crucial to the development process. Subdividers and land developers commonly include home and office construction within the scope of their respective business operations. Similarly, many developers support sales, leasing, and property management services for convenience and to expedite the development process. In a report in Appraisal Journal, Robert Owens of Southeast Missouri State University in Springfield intimated that the developer's ability to pre-sell lots and to build a significant proportion of the developed lots might be a crucial factor contributing to the success of a development. Marketing is a key aspect of the development process. Most states do not require developers to hold real estate licenses, but marketing of the property, particularly to out-of-state buyers, must conform to state guidelines. According to Owens, convenient access to a sales force frequently enhances the developer's potential for success on a venture.

Syndication.
Some development arrangements, called syndication, involve groups of individual investors who pool their money. Investors sometimes contribute to a development venture in exchange for part ownership of the developed property, while others act strictly as lenders. A real estate specialist, called a syndicator, sponsors or manages the syndicate and maintains an active role in overseeing the development of the project. The function of syndication commonly overlaps with the role of the developer.

Causes for Concern.
In the late 1990s, ongoing expansion by developers into rural areas raised concerns about the rapid conversion of rich farmland into "tar and cement," especially in the American Northeast where the American Farmland Trust, an activist group, attracted media attention to the proposed development. Also of concern was the alleged destruction of historic Iroquois villages in order to claim land for residential subdivisions in New York and Canada. In defense of developers, the Ohio Home builders Association refuted such claims, noting that the amount of land taxed at agricultural rates actually increased for four years during the 1990s. A mounting crisis condition, called urban sprawl, nonetheless plagued communities and developers alike. Such growth was typified at Sioux Falls, South Dakota, which experienced rapid growth during the late twentieth century. The population increased from 72,000 in 1970 to 116,000 in 1996. During the same period the total urban area increased from 27 square miles to 50 square miles, and the community was expected to grow to support a population of 156,000 by the year 2015.

The implementation of urban growth boundaries (UGB) that confined developers to operate within strict geographical boundaries was increasingly commonplace as a means to combat the rapid encroachment of urbanization on farmland. The UGB system, originally supported by the National Association of Home Builders (NAHB), lost favor over time, as the practice led to tight housing markets, with skyrocketing costs for new homes. As land prices tripled in some urban areas, UGB restrictions remained firm, and buyers moved to outlying areas, exacerbating rather than alleviating the condition of sprawl and generating long-range traffic congestion in the process. The development community responded to the crisis with smaller lot sizes, increased pressure to expedite boundary expansion, and increased cooperation toward devising new solutions. Also active in the ongoing efforts to find new solutions are the California Building Industry Association (CBIA) and American Planning Association (APA). Areas of particular concern to NAHB in the late 1990s as a result of UGB restrictions included Portland, Oregon; Washington, D.C.; and Boulder, Colorado. Similarly, in California, builders reported that only 130,000 homes could be built each year in a market capable of supporting 250,000.

Also of concern was significant overdevelopment of property, both commercial and residential, throughout the 1990s. Of greatest concern were specific situations in Texas, Georgia, and Illinois. In Dallas, Texas, developers continued with new expansion, despite rising office vacancies that approached 20 percent in mid-1999 along the Dallas North Tollway, up from 9 percent in the prior year. In Illinois, one Chicago suburb reported new construction vacancy rates as high as 15 percent. Analysts expressed similar apprehension regarding specific locations in Atlanta, Georgia, and Houston, Texas. Concerns in Atlanta focused on a reported 17 percent office vacancy rate along a major highway corridor near the northern suburb of Buckhead. Additionally, the Houston, Texas, district known as the "energy corridor" suffered from waning demand for office space through the end of the 1990s, as an ongoing reaction to the earlier oil bust in the 1980s.

Optimistic Prognosis.
Ongoing issues notwithstanding, building conditions in the 1990s and at the turn of the twenty-first century were improved over conditions in the 1980s. Based on U.S. Census Bureau statistics on housing starts, 1.7 million starts made January 2000 the third highest month since the monthly average for the 1978 was 2.2 million. The Housing Market Index (HMI), which reflects the confidence of the home-building profession in the long-term market, increased steadily from 38 in January of 1995, to 71 in January of 2000, with only minor slowdowns along the way.

Low interest rates during the early 2000s allowed many Americans to become homeowners, driving the real estate market. This, in turn, caused a slowdown in multifamily housing occupancy such as apartments. The decline in interest rates especially affected high-end rental units as more renters became owners. Yet investors, unable to resist the low interest rates themselves, continued to build apartment complexes even though existing complexes were well below capacity, hoping to fill units with the young adults who were traditionally the highest demographic of apartment dwellers. Vacancy rates as high as 8 to 10 percent (compared to just 3.8 percent during 2000) were not out of range. However, multifamily dwellings were still in high demand in some areas of the country.

During the first nine months of 2002, Atlanta had the most new apartments with 13,095 new units. Dallas/Fort Worth was second in the nation with 9,045 new units. Moreover, areas hit by the downfall of the technology and telecom industries in the late 1990s and early 2000s, including Atlanta, also suffered from the highest rates of occupancy decline.

A new trend in industry and warehouse building was to move outside the nation's five distribution hub of Los Angeles, Chicago, New Jersey, Dallas and Atlanta to take advantage of lower land and labor costs and attractive economic incentive packages offered by outlying communities. Land developers were attracted to these high-quality properties in less populated markets to avoid the flood of investors competing in the major markets over limited land, which was highly valued as a more secure investment during a period of market instability.

The industry became more attractive to investors during the period of uncertainty and apprehension in the U.S. economy following the September 11, 2001 terrorist attacks and in the midst of the war on terrorism in Iraq. As a result, real estate was considered a relatively stable investment compared to the stock market. This assumption was turned on its head, however, during the subprime mortgage crisis that took place later in the decade.

The value of new construction put in place in 2004 totaled $582.9 billion, a 10 percent gain over 2003 and the largest annual jump since 1999. Of that total, $328.5 billion was directed to residential buildings, a substantial 16 percent increase from 2003. Nonresidential purposes, including commercial, office, and industrial buildings, accounted for $160 billion, which represented a 3 percent increase from 2003. Nonbuilding construction, including highways, bridges, and utilities, increased by 2 percent to $94.3 billion.

The new housing market remained red hot during the first half of the 2000s, spurred by low interest rates and new financing options, including the growing popularity of adjustable rate mortgages. New housing starts totaled $1.96 billion in 2004 and, according to the National Association of Realtors (NAR).

Although the residential housing market remained robust despite a recession in the early 2000s, commercial construction did not fare as well. Nonresidential building fell by 11 percent during 2001 and 2002 and was flat during 2003. Office construction was particularly hard hit, falling 43 percent between 2001 and 2003. However, the nonresidential sector began to track upward during 2004. The entire sector grew 3 percent, but significant growth was seen in the office segment, which increased 15 percent.

During 2004 office construction in New York City jumped 276 percent, driven by several new major projects including the Freedom Tower, One Bryant Park, and The New York Times headquarters. "The level of office construction remains substantially below what took place in the late 1990s, but this structure type's sharp correction is now over, and the modest improvement in market fundamentals should enable construction to strengthen some more during 2005," Robert A. Murray of McGraw-Hill Construction noted in a press release in January 2005.

As the demand for housing outpaced the supply, developers began buying apartment complexes to convert them into condominiums, and condos and co-op construction was on a record pace during the first half of 2005. Also, hotel investments were strong as travel finally recovered following a steep decline following the terrorist attacks of September 11, 2001.

The commercial and multifamily sectors saw record levels of capital committed during 2004. According to the Federal Reserve, commercial mortgage debt increased 10.6 percent during 2004 to reach a record $2.29 trillion. According to the Real Estate Research Corporation, offices accounted for 37 percent of all commercial real estate transaction revenues; apartments, 32 percent; retail, 24 percent; hotels, 5 percent; and industrial, 2 percent. By 2010 this figure had reached $2.4 trillion, and the level of commercial and multifamily mortgage debt outstanding stood at $3.2 trillion.

The U.S. government made several attempts to stop the downward spiral occurring in the economy in the mid- and late 2000s. One example was the Emergency Economic Stabilization Act of 2008, which the Insurance Information Institute called "a $700 billion rescue plan for the U.S. financial services industry." Another piece of legislation, the American Recovery and Reinvestment Act of 2009, dedicated approximately $132 billion to infrastructure. In 2010 Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act, which comprised a massive overhaul of financial services regulation and sought to protect homebuyers from the type of problems created during the subprime mortgage crisis

Current Conditions

The industry continued to struggle into the early 2010s. According to Sustainable Land Development Today in 2010, "The obstacles that must be overcome today in land development are quite simply larger and more complex than ever before." These included the housing and financial crises, which restricted funding for quality development projects; opposition from environmental groups; and more restrictive regulations. An example of the types of challenge land developers faced was the situation in New York in late 2010, where legislators were considering restrictions on development of land that contained or was near habitats of endangered or threatened species. In addition, sustainability, which was identified as the number one idea for the next hundred years by Time magazine, was one of the most important topics for the land development industry as it entered the second decade of the twenty-first century.

Industry Leaders

With 5,200 employees, Simon Property Group of Indianapolis, Indiana, was the largest mall owner in the United States as well as one of the nation's largest publicly traded real estate companies in 2010. Simon managed more than 320 commercial properties, equaling some 250 million square feet. In 2009 the company posted revenues of $3.7 billion. The majority of Simon Property holdings were shopping malls, including Premium Outlet malls.

In 1996 Simon Property Group purchased the DeBartolo Corporation. This firm, started in 1948 by Edward DeBartolo in Youngstown, Ohio, was a leading builder and operator of enclosed shopping malls across the nation. DeBartolo's 76 million square feet of mall space made up nearly 10 percent of all mall space in the country and was visited by 40 million customers each week. In addition, the company developed and operated office buildings, hotels, and office parks. Other DeBartolo holdings include the San Francisco 49ers football team and Louisiana Downs, a race track in Bossier City, Louisiana.

DeBartolo had a keen foresight with regard to real estate trends. He foresaw the exodus to the suburbs in the 1950s and capitalized on it by developing suburban shopping centers. In the 1960s he anticipated the real estate boom in Florida and purchased large tracts of land there. When the boom hit, the company had one-third of its holdings in Florida. DeBartolo pursued a strategy of developing one mall every year, diversified further into entertainment ventures, and went public with a real estate investment trust (REIT) in 1994, transferring all of its real estate interest to the newly formed DeBartolo Realty Corporation. Upon his death in December of 1995, founder Edward J. DeBartolo, Sr., left a diversified corporation of malls, racetracks, riverboat casinos, and sports teams. In 1996 DeBartolo Realty merged with Simon Property Group.

In 2010 Simon Property Group attempted but failed to buy out General Growth Properties, the second-largest mall owner in the country. General Growth, which had debts of about $25 billion, filed for Chapter 11 bankruptcy in 2009 and emerged in 2010. The company employed 3,200 workers in 2010.

In 2009 PulteGroup Inc. of Bloomfield Hills, Michigan, became the largest home builder in the United States when it merged with former rival Centex. Revenues for PulteGroup in 2009 were $4.0 billion with 5,700 employees. D.R. Horton, based in Fort Worth, Texas, was another major home builder in 2010. The company sold about 16,700 homes in 2009, a drop of 37 percent from the previous year. D.R. Horton employed almost 3,000 people in 30 states and reported revenues of $4.4 billion in 2009. Another major home builder was Lennar Corporation of Miami, Florida, with sales of $3.1 billion and employed about 3,800 people.

The Opus Corporation, of Minnetonka, Minnesota, was a leading commercial development firm with more than 30 million square feet under development in 2009. The company had annual revenues of more than $1.0 billion in the early 2000s. Opus was founded in 1953 and in 2010 remained privately owned by the founding family.

Trammell Crow Company (TCC), based in Dallas, Texas, was another large commercial real estate developer. By 2010 TCC had developed about 500 million square feet valued at approximately $50 billion. Crow began his illustrious real estate career in Dallas shortly after World War II. An accountant who earned his degree in night school, he became successful when he joined with the Stemmons brothers, and together they built more than 50 warehouses in Dallas in the 1940s.

Crow had a knack for anticipating the needs of the market and adding building amenities that appealed to his tenants. He formed partnerships with other developers and shared incentives and rewards generously with his partners. In fact, Crow built a reputation both as a skilled developer and as an incubator for smaller developers. Nonetheless, in the early 1990s the depressed real estate market affected even TCC. Problems in the Southwest forced the company to refinance 150 properties in 1990, and new construction totaled only $500 million in 1991, down from $2.2 billion in 1985. By 1999 the company rebounded, maintaining 158 offices worldwide, including Canada, Europe, Asia, and South America. With 6,300 employees in 2004, TCC posted revenues totaling $778.4 million.

Trammell Crow Residential, also in Dallas, which specialized in upscale apartment buildings, had developed more than 225,000 units by 2010. Although it split from TCC in 1977, the privately owned company maintained connections to the Trammell Crow family. Trammell Crow Residential's revenues in 2003 were estimated at $1.6 billion.

Catellus Development Corporation, headquartered in San Francisco, had been the largest private landholder in California until it was bought out by real estate investment trust ProLogis of Denver for cash and stock worth $3.6 billion in 2004. ProLogis, which had 475 million square feet to its name by 2010, had sales of $1.2 billion in 2009 with 1,135 employees.

Workforce

According to the U.S. Department of Labor, Bureau of Labor Statistics, land subdivision and development industry 8,400 firms employed about 66,000 people in the early 2000s. Land subdivision and development requires complex entrepreneurial skills and a solid knowledge base in many disciplines. Developers work with experts in many fields, including architects, builders, planners, financiers, attorneys, urban government and inspection personnel, community representatives, and investment partners.

Developers must additionally acquire a thorough knowledge of every local community associated with a development venture, including the local political machinery, local economy, and local real estate markets. Local policy shifts and economic swings have the potential to affect any development project to a dramatic degree. Successful developers respond with flexibility, shifting strategies abruptly in order to insure the ultimate viability of any project. Successful developers must be skilled at problem solving, which is the essence of development. They must have a clear vision and a penchant for minute details since mistakes such as the omission of appropriate soil tests or the wrong clause in a title insurance policy can devastate an undertaking. As master planners, developers absorb ultimate responsibility for any mistakes associated with a development project.

America and the World

Foreign real estate investment in the United States was partly to blame for the overbuilding of commercial office space. The situation was further aggravated by the increasing number of U.S. companies that shifted manufacturing operations overseas, further reducing demand for domestic facilities.

Elsewhere in the world, global real estate development occurred rapidly. Currency, regulatory, and logistics, as opposed to market demand, comprised the most significant obstacles for developers, as market risk virtually vanished. Sites in North Africa and Asia were among the more lucrative markets for land development at the beginning of the twenty-first century, with the Asian nations among the most accommodating to foreign investment. In Hong Kong, residential prices rose 25 percent in the late 1990s, causing the government to seek promises from developers to concentrate on residential development rather than commercial sites. In the Philippines, a rapidly expanding economy resulted in a proliferation of U.S.-style residences in a nearly risk-free market. Capital infusions from the International Monetary Fund (IMF) to alleviate financial crises on the Asian continent further contributed to a growing interest in the Far Eastern economies on the part of astute developers. Continued restrictions meanwhile prevailed in Arab countries in the form of strict licensing controls on the construction and engineering trades, a condition that served to enhance the appeal of the less restrictive Asian sector.

In the 2000s China, with a population of 1.3 billion, was an emerging market with considerable potential as it underwent rapid industrialization and urbanization. In 2004 China passed legislation that opened the door to the establishment of real estate trusts.

Globally, $202 billion was invested in commercial real estate in the first three quarters of 2010, as compared to $139 billion transacted over the same period of 2009.

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