There’s no one-size-fits-all timeline for real estate development. The distance between a vacant lot and a finished building varies widely based on multiple factors, including the type of project, how many tenants it will require, the design, the location, the zoning rules and the permits required. Your project could take six months. It could also take six years.
Different stages of the real estate development process will also come with different levels of risk, which we’ll address when we break down the stages of the development process.
Whichever type of investment you pursue, with building ground up projects, “you should expect the unexpected” Uri Pearl, Financing Expert at Lev, told leverage.com. “Things will happen. Things will go wrong.”
This is not a warning to run screaming in the other direction. Pearl added that those investment risks can come with extensive rewards, especially for ground-up construction. Doing your research and understanding the lifecycle of the development process will help you stay flexible and prepared for the challenges along the way.
What Is a Real Estate Development Timeline?
A real estate development timeline includes all the steps required to complete your development project from start to finish, from an idea to a vacant lot to a profitable building with tenants (or ready to sell to a new owner) and the approximate amount of time all of those steps will take. There are three main stages of the development process: predevelopment, construction and operation.
For the purposes of this article, we’ll assume you’ve obtained your initial financing, and own or are close to owning the raw land you plan to build on. Nonetheless, we’ll cover a couple of situations where additional financing might be needed.
Understanding Risks Across Development Project Type and Timeline
The amount of time it will take for your real estate investment to be built, and how much risk you’ll deal with, depend on two factors: project type and development stage.
Built to Suit Projects
On the less time-intensive and less risky end of the spectrum are built to suit projects. That term means a developer or investor secured a long-term tenant, say, a national drugstore chain, and builds the property to the specifications of that tenant.
This kind of development is also less risky because the designs are fairly uniform and the tenants are already known. There may still be challenges during the predevelopment stage, including with zoning and permitting. Nonetheless, if your tenant is a large corporation with multiple locations, they’ve likely had experiences with these issues before, and will be in a stronger position to respond to regulatory challenges. In Perl’s experience, these projects can take as little as 6-12 months.
Speculative Development Projects
Speculative construction projects, by contrast, take longer and carry more risk across all stages of the process for the developer and investors, but can also come with the biggest rewards. Unlike a built-to-suit project, a spec project, a developer has no leasing commitments before they start construction, and aside from owning the land or the property, may not have decided exactly what the use will be until they get started.
Projects With Built to Suit and Speculative Aspects
In between, there are real estate projects that might have defined uses but no guaranteed tenants, whether it’s an office, build-to-suit, industrial or multifamily residential building. Like speculative projects, the design is not necessarily uniform, and it’s up to the developers to manage zoning, permitting and other regulatory issues, as well as securing tenants. Because of that burden, these projects are likely to face challenges during all stages of the development timeline, starting with predevelopment research and due diligence, and through construction and operation.
“We’ve seen a couple of projects that were started in 2016 that are still not finished or are just getting finished now,” Perl said. But “typically, [for] your standard multi-family building… it will probably take about 12 months.”
Spec projects may carry the bigger risks, but they can potentially come with the highest rewards, if the market demand is high enough.
While no two projects are exactly alike, there are some consistent milestones and processes you should be aware of as you’re getting started.
Stage 1: Predevelopment
Predevelopment activities include everything that needs to happen before construction can start. You may have recently purchased the land you plan to build on, or the building you plan to renovate, but as complex as the purchasing process was, you still have a lot more research and due diligence to complete before you can break ground.
It will also be the riskiest and potentially longest part of the process. It’s important for the developer to take a hard look at feasibility. As real estate marketer Adam Gower cautioned, “you want to plan out all your moves. Raise and address every issue you can, so you can handle it before you start constructing.”
Examples of predevelopment activities are:
Market Analysis and Feasibility Studies: Understanding what the market for your commercial development is, the demographics of the neighborhood, what the demand is for the type of development you’re planning to build, if there is demand, who the likely tenants will be, what they’re likely to pay and, based on that info, how much of a return you can expect to get on your investment. The overarching question, Simon CRE wrote, is “do the anticipated future benefits exceed the expected future costs of the proposed commercial real estate development?”
Environmental Assessments: You want to make sure the raw land is habitable, which means soil, groundwater, air and other types of testing.
Engineering Reports: Determine if the land can physically accommodate the structure you plan to build on it.
Site Preparation: Let’s say the engineering study revealed that the land you’re building on can’t sustain an office building of the size you planned on, or maybe there’s not enough groundwater. If you decide to go ahead with the project as planned, you might have to make infrastructure improvements first.
Legal Fees: Lawyers can arrange the deal to buy the land, to help you with environmental and engineering studies, or to secure the necessary zoning and construction permits.
Hiring a Team of Architects, Civil Engineers and Construction Project Managers: Basically everyone involved in getting this project off the ground.
Site Plans, Development Plans and Building Plans: The building designs, the construction plans, the scope of work, and any other documentation the construction teams need to begin their work.
Zoning, Zoning Permits and Construction Permits: Almost all land is zoned for a specific purpose. Before you start building, you’ll need to check whether the land you’re planning to build on is zoned for the purposes of your investment. You’ll also need to get permits from the municipal government that allows construction to proceed.
Securing Predevelopment Loans: Even if you’ve arranged most of the financing you need for construction, that capital may not be eligible for the activities listed above. If you or your partners are unable to contribute equity at this stage, a predevelopment loan can help.
“Investing at this stage,” Crowdstreet advised, “carries the greatest and most varied risks because there are many unknowns,” but all of these steps are necessary to alleviate even more unexpected challenges further along in the process.
Stage 2: Construction
You’ve finally completed all of the research and due diligence, and you’re ready to break ground. This stage carries less risk than predevelopment. But, as Adam Gower explained, “If you didn’t do your pre-development work thoroughly, you’re likely to run into more problems during construction.”
Here’s what you can expect during construction.
Vertical Construction: Laying the foundation, and building upward to completion of the development. This process is everything from the building envelope, framing, floors, walls, roof, then drywall, interior finishes, fixtures, appliances, common areas, electrical wiring, plumbing, everything that makes the space ready for use.
Again, these steps will be a lot more straightforward for a single-tenant net lease retail project like a Walgreens, than, say, a large shopping center, or a mixed-use development that includes apartments and retail space.
Inspections: Just as you’ll need permits that allow construction to proceed, the Department of Buildings or similar agencies might check up on the construction in progress to ensure safety and other regulatory guidelines are being met. The roof, plumbing, electrical, HVAC, foundation, and building envelope are just a few of the elements that might get inspected, both during construction and after completion, but before the certificate of occupancy is granted.
Drawing on Construction Financing: You’ll likely be getting capital from multiple sources for your development. Different parts of that debt and equity are accessed and spent in “draws.” You may also need to take out an additional construction loan to cover unforeseen expenses. Crowdstreet warned that the investments and loans accessed and given during the construction phase have lower returns than pre-development loans, but higher than those for renovation or development of existing buildings.
Marketing: Even before the building is finished, you’ll want to build interest among potential tenants. That way, when lease-up starts, there’s a pool of potential renters or buyers to draw on.
Certificate of Occupancy: Once the project goes through all of the final inspections, codes, ordinances, and anything else lenders and local jurisdictions require to complete construction, local governments will issue a Certificate of Occupancy that signals the building is habitable.
Stage 3: Operation
At this point you’ve made it through the major hurdles or construction, which means you need tenants or, if you’re planning to sell the development, a buyer. This is the least risky phase of the development process, especially if you’ve leased part of it during the construction stage.
But again, there is still work to do. Among the activities in this stage include:
Marketing and Lease-Up: Whether you’re looking for tenants to sign leases, or looking for a buyer to take over the property, you’ll need an effective marketing strategy to reach either audience.
Obtaining a Buyer: If you don’t plan to invest in the property long-term, you’ll want to find a buyer who will.
Finding a Property Manager: A property manager can handle maintenance, rent collection, heat and other utilities, billing, and everything else it takes to keep your building running day to day.
Obtaining a Bridge Loan or Other Additional Financing: Just as you might have drawn on a predevelopment loan or a construction loan in other phases of the project, you might also obtain additional capital as your investment is getting off the ground. Before your project reaches 90% occupancy, and for a lender-determined period of time, you might apply for a a short-term bridge loan, which can help close the gap between construction and permanent financing or a stable pool of tenants to stabilize cash flow.
Be Clear About Your Priorities to Balance Risk and Reward
Identifying your priorities before beginning a ground up project is key for success throughout the real estate development timeline for projects built from the ground-up. Ask yourself: Are you in a better position to take advantage of the stability of a built to suit project, or are you willing to bet on projects where the risks throughout the lifecycle are higher, but the rewards bigger if the project goes well?
“It’s all a trade off of risk and reward,” Perl said of ground up construction. “These are high risk projects. But the reward is, if you do complete it, it has pretty much the highest returns you can get for a real estate investment.”