Did We Just Kill the Golden Goose?

MIAMI--Marc Coleman, president of development for One Real Estate Investments, still remembers the last boom and bust. And he's learned some lessons that are serving him well in his new role. Coleman recently shifted his savvy from Newgard Development Group to One Real Estate as the condo market begins to reach equillibrium.

GlobeSt.com caught up with Coleman to discuss the biggest challenges in the market today and how his firm is tacklign them in the final installment of this interview series. You can still read parts one and two:

GlobeSt.com: What are the biggest challenges in the market today, as you see them?

Coleman: Besides some overheating in some sectors, one of the biggest challenges is construction costs. In the last boom, construction costs rose so quickly that they ended up killing a lot of projects–good ones and bad ones.

The problem with construction costs is that, in most condo deals, you don't know what they are until you have sold most of your building. This can lead to some very nasty surprises. In addition, they tend to be very elastic on the way up and “sticky” on the way down. In other words, they go up very quickly as the market gets busy, but tend to not come back down nearly as fast when things slow down-until it's much too late.

Toward the end of the last boom, to protect themselves, contractors, subs and the whole industry were so busy bidding projects that they just threw big numbers against the wall hoping some of them would stick. When very few of them did, you had a lot of the industry staring at itself wondering ... “What happened? Did we just kill the golden goose?” Well maybe not, but it sure added fuel to the fire.

GlobeSt.com: How is One Real Estate navigating those challenges?

Coleman: We are choosing our locations and projects very carefully. That's why we like Wynwood. Because of its past industrial zoning restrictions, very little housing has been built there in the last couple of decades. This is in the process of changing with the adoption of a new zoning district that will modestly increase height while allowing more residential units to be built, all while keeping the funky industrial uses and esthetics that have made it what it is.

We think this will create an opportunity to do something cool and unique, something that is very arts-oriented and pedestrian friendly from a streetscape point of view, but still large enough to get economies of scale for construction and operational purposes.

To combat rising construction costs, we like to keep things simple. Our site on North Miami Avenue is large enough that we don't have to do things like build underground parking or include a lot of structural or mechanical offsets to get our required density. It's also only 12 stories tall. This opens up the bidding field to a lot more contractors and subs that don't build high-rises but are still big enough to do quite large projects like ours.

We are also working on rental projects. Because of our develop and hold strategy and financial strength, we are fortunate in that we don't have to do condos. This means we don't have to rely on buyer deposits to finance our projects. This lowers our risk and creates a bit more certitude in the development process.

GlobeSt.com: What do savvy residential developers have in common right now?

Coleman: The smart ones might be hedging their bets right now ... not overpaying for dirt, being conservative, perhaps staying away from condos in certain areas and keeping things simple. And if they can, they should be taking a long-term hold strategy. If you need a lot of leverage or have to make a lot of rosy assumptions to make your proforma work, maybe it is better not to build. Sometimes your best projects are the ones you don't do.