The average commercial real estate development timeline requires extensive planning and coordination. From the initial planning stages to actual construction, the development process is intricate, with many moving parts, often taking more than a year to complete.
After all, when building a structure from the ground up, developers effectively create an enduring piece of real estate to support the local economy and generate value for property owners and investors over time.
What Is Ground-Up Commercial Real Estate Development?
Ground-up commercial real estate development involves developing a piece of raw land into a usable commercial space. This typically involves purchasing a vacant parcel of land, obtaining the necessary permits and approvals, and constructing a commercial building on the site.
After construction completion, the property can be leased or sold to tenants or buyers. From office towers to retail centers, developers may work on a wide variety of different types of commercial properties. In addition, the development team may consist of architects, engineers, and contractors who design and construct the property.
It is common for a real estate project manager to serve as the main point of contact for a development project, overseeing every aspect of predevelopment and construction, from site selection and due diligence to building and leasing. Ultimately, they assist the team with adhering to the development timeline and inform stakeholders of significant updates throughout the process.
What Are the Main Phases of the Development Process?
Often divided into four primary phases, the real estate development process encompasses site selection, site development, construction, and leasing. The team may set key project milestones within each stage, such as securing financing and completing conceptual designs.
Site selection includes finding a piece of land or development site that meets the project’s specific needs. This may involve working with a real estate agent or broker to identify suitable properties. The land must be zoned for commercial use and able to accommodate enough square footage for the proposed development.
During this stage, the development team may do due diligence to assess the property’s potential, which includes environmental reviews and market analysis. In addition, a feasibility study could help determine if the project is physically possible and financially viable.
After locating a land parcel and obtaining financing to purchase it, the development team may need to acquire the appropriate permits and approvals from local authorities before starting construction. The approval process can take several months based on the project’s size and scope.
After site selection, the land enters the development phase. This involves preparing the ground for construction, such as land grading; installation of utilities like water, sewer, and electricity; and road construction.
The time needed to complete site development depends on the project’s complexity. For example, a small office building might only take a few months to develop, while a large shopping center could take over a year.
Additionally, environmental issues can cause construction delays. If a piece of land is contaminated, for instance, it must be cleaned up before construction can begin.
Once construction is underway, the development team must approve any changes, which can cause delays and added costs. Construction involves physically developing and building the structures on the site, which usually begins with pouring the foundation.
Next comes framing, where builders erect the walls and roof of the building. Then the developers can apply exterior finishes like stone, brick, and glass. Lastly, there is construction on the interiors, including installing interior fixtures and fittings and any mechanical and electrical systems.
The leasing stage is when the developer begins to lease out the space in the commercial development through a broker or by working with potential tenants directly. Once a tenant is interested in leasing the property, they can negotiate a lease agreement with the developer or property owner.
How To Secure Financing for a Ground-Up Development Project
Real estate investors and developers can choose from several options when financing a ground-up development project. From government grants to conventional loans from a bank, here are a few of the most common forms of financing.
Traditional Bank Loans
At the outset of a development project, the developer or real estate investor typically approaches a bank or a similar financial institution to discuss financing options. The borrower may present the bank with a pro forma, which is a detailed financial projection of the expected revenues and expenses for the project.
Based on this pro forma, the bank decides whether or not to provide financing for the project. If the bank does provide funding, the borrower then works with the bank to negotiate the terms of the loan, including the interest rate and repayment schedule.
After approval, the bank usually disburses the loan in stages throughout the development process, and the borrower begins making payments on the loan. This type of financing is ideal for larger development projects that can be broken down into phases.
The Small Business Administration (SBA) can guarantee a portion of the loan, making it easier to get approved for financing with lower interest rates. Find a lender participating in the SBA program to obtain an SBA loan, then apply for financing. Remember that getting an SBA loan can take several weeks, so factor this into the development timeline.
Private lenders or equity investors may be willing to provide funding for a project in exchange for an ownership stake in the project. They often comprise individuals or companies investing their money in real estate projects.
With more flexible underwriting criteria than banks, these lenders often provide shorter loan terms but higher interest rates than mainstream financial institutions. The upside to the increased interest rates is that a project can get off the ground sooner with this type of financing, especially since bank financing can take months to obtain.
Crowdfunding has become a popular way to finance commercial real estate projects in recent years. Crowdfunding can provide the capital needed to finance a ground-up development project by pooling funds from many investors.
When pitching a crowdfunding project, it’s important to know the expected return on investment and what type of equity stake investors will receive.
Online Lending Platforms
Thanks to the rise of online lending platforms, it is now easier than ever for real estate investors and developers to access the capital they need to fund their projects. These platforms provide an alternative to traditional bank loans and offer many advantages, including lower interest rates, shorter repayment terms, and flexible eligibility criteria.
For example, the industry-leading platform LoanBase has processed more than $750 million in loans. LoanBase also offers financing options for specific real estate asset classes, including vacant land and retail loans. By streamlining the borrower experience with automated underwriting and loan servicing, LoanBase is redefining the real estate development industry.
What Is the Typical Length of a Development Timeline?
The average development timeline for a ground-up commercial property can vary based on the scope and size of the project. For example, a sprawling office park would likely take longer to build than a single retail store situated on a plot of graded land.
However, it is worth noting that many proposed timelines usually include project milestones with estimated dates for each development phase. In general, site selection can take anywhere from six months to two years, based on the market and the availability of properties that meet the development team’s project criteria.
The process of obtaining local building permits and approvals also varies widely. For instance, the waiting period for a restaurant building project’s permits to be approved could extend from a handful of weeks to months.
And depending on the complexity of the ground-up development project, construction can take several months to years.