Can a market be too hot? Should smaller developers worry if bigger developers rush in?

Florida’s real estate market has reached unprecedented heights, with major projects receiving financing from developers across the country and even abroad. But the arrival of big money does not mean that the smaller players have to give up completely; Having a comprehensive and detailed business plan can help smaller developers hold their own, even in a red-hot market.

Understanding the market landscape

Florida has long been a bellwether for national real estate trends. Cities like Miami have become microcosms of development, attracting major investors eager to capitalize on the state’s appeal, creating high-profile mixed-use developments.

Not even hurricanes have slowed the momentum, as international players have moved forward with ambitious redevelopment efforts. The downtown Miami skyline is littered with the fruits of these efforts, and luxury condos and hotels now dominate.

For smaller developers, however, this heat can be a turnoff; A market that is too hot and the smaller players may be left holding the bag if the wind suddenly changes.

But a hot market is a hot market for a reason, and smaller developers can capitalize on its potential by maintaining focus with a comprehensive business plan that uses their understanding of local market dynamics to avoid the pitfalls.

Labor is everything

A busy construction market can cause costs to vary more, especially in today’s tense labor market. It is significantly more difficult to access skilled labor, the necessary materials and the right artisans – not to mention the costs – when demand is so high in a market like Florida.

According to the Associated General Contractors of America (AGC), the construction industry is facing a shortage of approx half a million jobseven before taking into account ongoing recruitment needs. This labor gap has led to higher construction costs, which can disproportionately affect smaller developers with tighter budgets.

However, some risks have been mitigated by recent economic improvements. Federal trade policy efforts have helped alleviate some supply chain issues, providing some relief on materials availability and costs.

Smaller developers without unlimited capital must be careful and plan projects with variation in cost and time, especially when operating near large projects that can absorb available resources.

But smaller developers must also be prepared to put up a bit of defense to protect their labor as their most valuable resource. Competition for skilled workers – especially engineers, architects and specialty contractors – can be fierce in hot markets. To protect their investments in training, smaller companies may want to consider enforceable non-compete agreements with key personnel, as long as these agreements are reasonable in scope and duration.

The stronger a company’s relationship with its workforce, the better off it will be when things heat up. Especially if a smaller developer is playing in a somewhat new sphere, having strong partnerships with industry professionals early on can take a project to the next level.

Experienced architects, engineers and contractors can provide valuable guidance during the feasibility phases of a project and provide insight into costs, scheduling and construction methods. These are also the people who know what type of tenants there are and what they are looking for in a building. By working together, they can help identify and attract the right tenants, making the project successful.

Know your limits

It can be attractive for small developers to follow the money and take the risk of building more complex projects. But this is only sensible if it is in line with the business plan drawn up in line with a developer’s sector, capacity and risk.

Rather than rushing to compete for the huge, luxury projects that receive international attention, it is often better to grow incrementally and build organizational capacity step by step. More than one developer has found themselves in hot water after taking on a much larger project than they were used to.

It is not that small developers cannot grow in a hot market, but this must be done carefully. Joint ventures with other small developers can be a smart approach, allowing companies to share resources and expertise while tackling more substantial projects.

We see this collaborative approach among developers of all sizes. One of the bigger developments in Miami’s Brickell neighborhoodfor example, was developed by major players such as Swire Properties, which hired Americaribe, a joint venture of Bouygues, and John Moriarty & Associates. This model for a $1 billion project can be applied to smaller developers taking advantage of high-density infill projects in an urban area.

But growth in a hot market can also happen by looking just outside the development epicenter. Hot markets create spillover opportunities in nearby areas. As luxury apartments and hospitality projects dominate downtown Miami, demand for residential units in adjacent neighborhoods has soared. Smaller developers can find niches in infill projects, where the city’s land use plans focus on building density and revitalizing less developed areas. Such projects can pose lower financial risks and provide steady growth opportunities.

This kind of progressiveness is how something like The Villages in Central Florida was developed, taking land where there was none to build one of the state’s most successful developments. It’s an approach that allows smaller developers to avoid direct competition with large, resource-rich companies and still benefit from the region’s overall growth.

Despite the influx of big money into the Florida real estate market, smaller developers can still carve out their niche. The key lies in having a clear, responsible business plan and understanding the local market. Starting small can be the key to big growth.

Claramargaret Groover is a legal advisor at Becker Advocaten, specialized in construction law.

This column does not necessarily reflect the opinion of HousingWire’s editorial staff and its owners.

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