When you get down to the nitty-gritty, project construction can produce a number of unanticipated expenses, which can lead to dreaded cost overruns. In fact, according to a study by KPMG, only 31% of all respondents’ projects came within 10% of their budget in the past 3 years.
From up-front capital to overall construction costs, managing in-house development means opening yourself up to higher costs and greater financial risk. Every change order, delay, and misstep is going to cost money.
If cost overruns are a major concern (which, when are they not?), working with a preferred developer can help alleviate some of those concerns. You, as a tenant, agree to rent and you know your expenses. A developer is responsible for those added risks.
What’s the return on investment you’re looking for?
If you’re a business with a ton of excess cash and want to keep it in the business, you might be willing to accept a 6 to 8% return on investment by developing your own stores.
But if you’re a business opening a lot of stores and getting a 20 to 40% return by leasing it may make more sense to use a preferred developer. This may help you set up your business to grow and take advantage of the market.
Owning and developing your own real estate can be advantageous at times, but can also come with a greater financial burden and smaller returns for companies whose primary focus is not real estate.
Ultimately, it boils down to what your business plan is, what your main priority is, and what the most cost-effective approach is.
How much flexibility are you looking for?
When it comes to developing and owning versus leasing real estate, flexibility is a key factor to consider.
Many single tenant net lease retailers lease because of the flexibility it provides. Leasing gives retailers more liquidity, offers significant tax benefits, and provides a more streamlined development process with less internal overhead.
As we touched on previously, it frees up businesses to invest less in real estate and more in their growth and expansion efforts.
When buying and developing property, your capital is tied up for a long period of time, creating potential opportunity costs. For example, the down payment needed to buy the property could be allocated elsewhere in the business, possibly generating a higher return.
When it’s all said and done, the decision to develop and own versus working with a developer should be based on your specific business plans and what you value most. Every situation is unique and both options offer significant pros as well as significant cons.
Take the time to figure out what factors are most important to you and how you can set your business up for success.