One of the things you’ll often hear people deride at cocktail parties is the trend toward smaller urban dwellings. They get called “shoeboxes” and “cubby holes in the sky.” So let’s unpack that a bit today and try and better understand the economics behind it all.
When a new building is being developed, pretty much everything gets normalized to a per square foot (or square meter) number.
This is important because saying that building X cost $50 million to build and building Y cost $100 million to build doesn’t tell you much if the buildings are completely different.
However, saying that building X cost $500 per square foot to build and building Y cost $475 per square foot to build, tells you that building Y, despite being more expensive in absolute terms, was actually cheaper and/or more efficient.
The same is true on the revenue side. And typically, developers are looking (struggling) to meet a certain per square foot number in order to make the project financially feasible.
For instance, let’s say you’re building a 100,000 sf condo building. Once you subtract the non revenue generating spaces, you might determine that you need 85,000 sf x $600 per square foot in revenue in order to make the project feasible.
But there’s a back and forth game that needs to be played here. You have to ask yourself: for the product that I’m hoping to build, does $600 psf translate into something that people can actually afford?
You might think: everyone keeps telling me at cocktail parties that condos in this city are too small. So I’m going to build a bunch of 1,800 sf, 3 bedroom condos. Based on the above, these homes would be priced at around $1.08 million (1,800 sf x $600 psf). Your on-site signage would read:
One of the things you’ll often hear people deride at cocktail parties is the trend toward smaller urban dwellings. They get called “shoeboxes” and “cubby holes in the sky.” So let’s unpack that a bit today and try and better understand the economics behind it all.
When a new building is being developed, pretty much everything gets normalized to a per square foot (or square meter) number.
This is important because saying that building X cost $50 million to build and building Y cost $100 million to build doesn’t tell you much if the buildings are completely different.
However, saying that building X cost $500 per square foot to build and building Y cost $475 per square foot to build, tells you that building Y, despite being more expensive in absolute terms, was actually cheaper and/or more efficient.
The same is true on the revenue side. And typically, developers are looking (struggling) to meet a certain per square foot number in order to make the project financially feasible.
For instance, let’s say you’re building a 100,000 sf condo building. Once you subtract the non revenue generating spaces, you might determine that you need 85,000 sf x $600 per square foot in revenue in order to make the project feasible.
But there’s a back and forth game that needs to be played here. You have to ask yourself: for the product that I’m hoping to build, does $600 psf translate into something that people can actually afford?
You might think: everyone keeps telling me at cocktail parties that condos in this city are too small. So I’m going to build a bunch of 1,800 sf, 3 bedroom condos. Based on the above, these homes would be priced at around $1.08 million (1,800 sf x $600 psf). Your on-site signage would read:
“Condos coming soon. From the low $1 millions.”
But wait a minute, how many families can afford a condo north of $1 million? Some could, but definitely not the majority. So then you determine through rigorous market analysis that $600,000 would be a better number. That is something that is within reach of more families.
But then you look at the math and realize that if you build that same 1,800 sf home, your per square foot revenue number now drops to $333 psf ($600,000 / 1,800 sf).
Given that you bought the land for $100 psf buildable (market price in the area) and that your construction costs alone are going to be $250 psf, you realize that you’re now underwater ($100 + $250 psf > $333 psf) without even adding in any soft costs (consultant fees, city fees, and so on). If you showed this to your investors on the project, they would throw you out of the room.
So instead of building that 3 bedroom condo at 1,800 sf, you say to yourself: what if I made it 1,000 sf? You’re confident that your architect could lay out a terrific condo at that size and it now magically gets your per square foot revenue number back up to $600 psf.
This solves two problems: it returns the project to positive feasibility and it keeps the total sale price within reach of more people. It promotes greater affordability. So you go ahead and do it. Boom – shrinking urban dwelling.
All of this is not to say that this is fair or unfair, good or bad. It is simply to say that this is the way it often is.
I first learned about the work of Jonathan Segal back when I was in architecture school. And he was somebody I immediately admired.
At the time, I was struggling to figure out where I wanted to position myself between architecture and real estate development, and he was somebody who had seemingly figured it all out: he simply merged the two.
For those of you who are unfamiliar with Jonathan Segal, he has made a name for himself by being a pioneer of the “Architect as Developer” business model. That is, he acts as both the architect and the developer/client.
This business model isn’t going to suit everyone, but I suspect that we’ll see more of it in the future.
Of course, it doesn’t just have to be an architect acting as a developer. It could also be an architect and a developer joining forces or some other permutation. Whatever the case may be, design and innovation are central to business today and that’s why I think this model will only become more relevant.
Below is a short 3 ½ minute video about Segal’s latest project, called Mr. Robinson. It is located in San Diego. If you can’t see the video below, click here.
[vimeo 155403927 w=500 h=211]
If you’d like to see the typical floor plans or rent one of the apartments (they start at $2,400/month), click here.
Now I’d be curious to hear your thoughts. Do you like the project?
One of the reasons I decided to start blogging was because I saw how open the tech community had become – with respect to sharing their ideas and experiences – and I thought that the same thing could and should be done in real estate, as well as in city building more broadly.
But in many ways, the real estate industry is the antithesis of the tech industry. We are slow moving and secretive of our ideas. Now, some of this is driven by fundamental differences in terms of how these two sectors operate. It’s a lot easier to test and iterate on your ideas in tech than it is with actual bricks-and-mortar. But I still think about ways in which we, in real estate, could be pushing the envelope.
As one example of what I’m talking about, take Union Square Ventures in New York. They call themselves a “thesis-driven venture capital firm”, which means they come up with a framework and core set of ideas, and then use those to drive their investment decisions.
You would think that these frameworks and ideas would be pretty sensitive. I mean, they are the core drivers of their business. But their entire website is actually set up around sharing and collaborating – with the public – on these ideas. Here’s a screenshot:
“Condos coming soon. From the low $1 millions.”
But wait a minute, how many families can afford a condo north of $1 million? Some could, but definitely not the majority. So then you determine through rigorous market analysis that $600,000 would be a better number. That is something that is within reach of more families.
But then you look at the math and realize that if you build that same 1,800 sf home, your per square foot revenue number now drops to $333 psf ($600,000 / 1,800 sf).
Given that you bought the land for $100 psf buildable (market price in the area) and that your construction costs alone are going to be $250 psf, you realize that you’re now underwater ($100 + $250 psf > $333 psf) without even adding in any soft costs (consultant fees, city fees, and so on). If you showed this to your investors on the project, they would throw you out of the room.
So instead of building that 3 bedroom condo at 1,800 sf, you say to yourself: what if I made it 1,000 sf? You’re confident that your architect could lay out a terrific condo at that size and it now magically gets your per square foot revenue number back up to $600 psf.
This solves two problems: it returns the project to positive feasibility and it keeps the total sale price within reach of more people. It promotes greater affordability. So you go ahead and do it. Boom – shrinking urban dwelling.
All of this is not to say that this is fair or unfair, good or bad. It is simply to say that this is the way it often is.
I first learned about the work of Jonathan Segal back when I was in architecture school. And he was somebody I immediately admired.
At the time, I was struggling to figure out where I wanted to position myself between architecture and real estate development, and he was somebody who had seemingly figured it all out: he simply merged the two.
For those of you who are unfamiliar with Jonathan Segal, he has made a name for himself by being a pioneer of the “Architect as Developer” business model. That is, he acts as both the architect and the developer/client.
This business model isn’t going to suit everyone, but I suspect that we’ll see more of it in the future.
Of course, it doesn’t just have to be an architect acting as a developer. It could also be an architect and a developer joining forces or some other permutation. Whatever the case may be, design and innovation are central to business today and that’s why I think this model will only become more relevant.
Below is a short 3 ½ minute video about Segal’s latest project, called Mr. Robinson. It is located in San Diego. If you can’t see the video below, click here.
[vimeo 155403927 w=500 h=211]
If you’d like to see the typical floor plans or rent one of the apartments (they start at $2,400/month), click here.
Now I’d be curious to hear your thoughts. Do you like the project?
One of the reasons I decided to start blogging was because I saw how open the tech community had become – with respect to sharing their ideas and experiences – and I thought that the same thing could and should be done in real estate, as well as in city building more broadly.
But in many ways, the real estate industry is the antithesis of the tech industry. We are slow moving and secretive of our ideas. Now, some of this is driven by fundamental differences in terms of how these two sectors operate. It’s a lot easier to test and iterate on your ideas in tech than it is with actual bricks-and-mortar. But I still think about ways in which we, in real estate, could be pushing the envelope.
As one example of what I’m talking about, take Union Square Ventures in New York. They call themselves a “thesis-driven venture capital firm”, which means they come up with a framework and core set of ideas, and then use those to drive their investment decisions.
You would think that these frameworks and ideas would be pretty sensitive. I mean, they are the core drivers of their business. But their entire website is actually set up around sharing and collaborating – with the public – on these ideas. Here’s a screenshot:
Each topic is something they are “thinking about” and something they want to make an investment in (or already have). Fascinating.
Many of you, I’m sure, would argue that there are risks to doing this. But there are also benefits, some of which are driven by collective intelligence. By sharing their ideas and hypotheses with the public, it helps to evolve their thinking. After all, their investment thesis is not a static thing. It grows over time.
But in addition to this, it also makes it abundantly clear to their customers (entrepreneurs) what they believe in and what they look for. And I am sure this helps them with deal flow. More and more customers aren’t just “buying” a product, they are also “buying” a philosophical underpinning and belief system.
Can you imagine a real estate firm doing something like this? I can. But it’s not happening yet, as far as I know.
Each topic is something they are “thinking about” and something they want to make an investment in (or already have). Fascinating.
Many of you, I’m sure, would argue that there are risks to doing this. But there are also benefits, some of which are driven by collective intelligence. By sharing their ideas and hypotheses with the public, it helps to evolve their thinking. After all, their investment thesis is not a static thing. It grows over time.
But in addition to this, it also makes it abundantly clear to their customers (entrepreneurs) what they believe in and what they look for. And I am sure this helps them with deal flow. More and more customers aren’t just “buying” a product, they are also “buying” a philosophical underpinning and belief system.
Can you imagine a real estate firm doing something like this? I can. But it’s not happening yet, as far as I know.
