SIC 6552
LAND SUBDIVIDERS AND DEVELOPERS, EXCEPT CEMETERIES



This category includes establishments primarily engaged in subdividing real property into lots, except cemetery lots, and in developing it for resale on their own account.

NAICS Code(s)

233110 (Land Subdivision and Land Development)

Industry Snapshot

Real estate development is a multifaceted industry. It includes the purchase of vacant or raw land, its subdivision into small parcels, and the construction of residential single-family houses, condominiums, or apartment buildings. It includes construction of retail shopping centers, industrial plants and warehouses, office buildings, schools, prisons, hospitals, and almost any type of structure. Additionally, it includes the renovation or restoration of warehouses to loft apartments or offices and the construction of parking garages. Generally land development and subdivision falls into three categories: rural, urban, and suburban.

The value of new construction put in place in 2001 totaled $842.5 billion, of which $650 billion was used for private construction. Of that total, $388.7 billion was directed toward residential buildings, and $201.1 billion was used for nonresidential purposes, including commercial, office, and industrial buildings. Although almost all non-commercial sectors showed growth over a five-year period, expenditures on new office space more than doubled between 1995 and 2001, from $23 billion to $49.6 billion.

The beginning of the twenty-first century was marked by low interest rates that provided an historically strong housing market. New-home sales totaled nearly 950,000 in 2002, down slightly from a record of just over 975,000 in 2001. Housing starts in 2002 stood at 1.71 million, with the same expected for 2003. An unsettled political situation with Iraq in early 2003 threatened to impact the U.S. economy and investors worried about the economic impact of prolonged U.S. involvement that might lead to higher interest rates and slow the growth in the real estate market.

Organization and Structure

In the twenty-first century, land developers coordinate a battery of activities necessary to carry out the development of land into useable space. Developers typically purchase a tract of land, devise a building program, obtain government approvals and financing, and then set about to have the structures built. After the building is complete, the developer may sell all or part of the property, or keep it on account and manage the property by leasing space to tenants. There are nearly as many different scenarios as there are developers.

Successful development firms operate under a variety of paradigms, including that of niche developer, such as Francesco Galesi of the Galesi Group. Galesi, a global corporation, developed 900 million square feet of space in the twentieth century. Galesi purchased the land from the General Service Administration (GSA) of the United States government and developed the acreage into strategically located distribution centers for military supply depots, some capable of holding 20 or more railroad cars. The company's operating cash flow exceeded $12 million annually by the end of the 1990s. Likewise, industry leader Simon Property Group led the real estate industry in North America by the end of the twentieth century through extensive investment in the shopping mall arena.

Among the leading developers' associations, the 15,000-member Urban Land Institute encourages effective urban planning and studies new area development.

Background and Development

Real estate development in the 1990s underwent a dramatic change from previous decades. Several factors spurred long-range change in the real estate development industry, including a severe economic recession in the early 1990s that affected many geographic regions of the United States. In 1991 a Census Bureau study found that 57 percent of all families were unable to afford a median-priced home in their community, a circumstance that led developers to increase construction of apartments and other multiple dwellings over single-family residences. Beginning in 1993 an overall surge in the American economy and growth in housing starts enabled developers to obtain financing and accomplish this purpose. Also at issue were the overbuilding of office and commercial space in many U.S. markets and tax changes stemming from the Tax Reform Act of 1986 affecting the desirability of real estate as an investment vehicle. A crisis in the savings and loan industry, associated with a record number of bank failures, aggravated the situation. Restrictive lending policies emerged as a result of government intervention. New policies and increased government regulation affected the time and cost involved in obtaining government approvals.

Thus, land subdivision and development is a highly speculative industry involving complex processes. Subdividers and developers incur both fixed and variable costs in the process of creating single-property lots for individual sale from large parcels of acreage. It is the ability of the developer to absorb all costs within a reasonable margin that determines the success of each venture. Developers fund not only the variable development costs to prepare the individual lots for retail sale, but also the many fixed costs associated with the building of streets, sewage conduits, and other elements critical to the infrastructure of the development. Additionally there are government levies for extended infrastructure costs. These assessments, called development contributions or "impact fees," contribute further to the cost of development.

For assistance with crucial cost determinations, subdividers turn to professional appraisers, yet the element of risk cannot be underestimated. Through careful analysis of the total costs of development in comparison to the potential retail value per lot, development firms speculate on an amount of land to purchase—based on salability—and develop accordingly, in order to maximize profit. Market survey results often provide indicators of the potential retail sale price of each. Surveys and investigations provide additional data regarding the existence of competing projects in the immediate geographical area, along with the potential impact of such projects. Overall, the timeliness of a proposed construction project figures keenly into the risk assessment, as does the creativity of the developer in designing a salable residential or business community. After comprehensive appraisal of risk and cost factors, the subdevelopment process moves into the hands of lenders. With appropriate financing, the subdivision project becomes a matter of civic and legal issues, and the process of obtaining approvals and licensing ensues before construction begins.

Construction and Sale as a Function of Property Development. The actual construction of the subdivided lots is crucial to the development process. Subdividers and land developers commonly include home and office construction within the scope of their respective business operations. Likewise many developers support sales, leasing, and property management services for convenience and to expedite the development process. In a report in Appraisal Journal, Robert Owens of Southeast Missouri State University in Springfield intimated that the developer's ability to pre-sell lots and to build a significant proportion of the developed lots might be a crucial factor contributing to the success of a development. Marketing is a key aspect of the development process. Most states do not require developers to hold real estate licenses, but marketing of the property, particularly to out-of-state buyers, must conform to state guidelines. According to Owens, convenient access to a sales force frequently enhances the developer's potential for success on a venture.

Syndication. Some development arrangements, called syndication, involve groups of individual investors who pool their money. Investors sometimes contribute to a development venture in exchange for part ownership of the developed property, while others act strictly as lenders. A real estate specialist, called a syndicator, sponsors or manages the syndicate and maintains an active role in overseeing the development of the project. The function of syndication commonly overlaps with the role of the developer.

Causes for Concern. In the late 1990s, ongoing expansion by developers into rural areas raised concerns about the rapid conversion of rich farmland into "tar and cement," especially in the American Northeast where American Farmland Trust, an activist group, attracted media attention to the circumstance. Also of concern was the alleged destruction of historic Iroquois villages in order to claim land for residential subdivisions in New York and Canada. In defense of developers, the Ohio Home builders Association refuted such claims, noting that the amount of land taxed at agricultural rates actually increased for four years during the 1990s. A mounting crisis condition, called urban sprawl, nonetheless plagued communities and developers alike. Such growth was typified at Sioux Falls, South Dakota, which experienced rapid growth during the late twentieth century. The population increased from 72,000 in 1970 to 116,000 in 1996. During the same period the total urban area increased from 27 square miles to 50 square miles, and by the year 2015 projections held that the community would grow to support a population of 156,000.

Increasingly commonplace as a means to combat the rapid encroachment of urbanization on farmland was the implementation of urban growth boundaries (UGB) that confined developers to operate within strict geographical boundaries. The UGB system, originally supported by the National Association of Home Builders (NAHB), lost favor in time, as the practice led to tight housing markets, with skyrocketing costs for new homes. As land prices tripled in some urban areas, while UGB restrictions remained firm, buyers moved into outlying areas, exacerbating rather than alleviating the condition of sprawl, and generating long-range traffic congestion in the process. The development community responded to the crisis with smaller lot sizes, increased pressure to expedite boundary expansion, and increased cooperation toward devising new solutions. Also active in the ongoing efforts to find new solutions are the California Building Industry Association (CBIA) and American Planning Association (APA). Areas of particular concern to NAHB in the late 1990s as a result of UGB restrictions included Portland, Oregon; Washington, D.C.; and Boulder, Colorado. Likewise, in California, builders reported that only 130,000 homes could be built each year in a market capable of supporting 250,000.

Also of concern was significant over development of property, both commercial and residential, throughout the 1990s. Of greatest concern were specific situations in Texas, Georgia, and Illinois. In Dallas, Texas, developers continued with new expansion, despite rising office vacancies that approached 20 percent in mid-1999 along the Dallas North Tollway, up from 9 percent in the prior year. Also, in Illinois, one Chicago suburb reported new construction vacancy rates as high as 15 percent. Analysts expressed similar apprehension regarding specific locations in Atlanta, Georgia, and Houston, Texas. Concerns in Atlanta focused on a reported 17 percent office vacancy rate along a major highway corridor near the northern suburb of Buckhead. Additionally, the Houston, Texas, district known as the "energy corridor" suffered from waning demand for office space through the end of the 1990s, as an ongoing reaction to the earlier oil bust in the 1980s.

Optimistic Prognosis. Ongoing issues notwithstanding, building conditions in the 1990s and at the turn of the twenty-first century were improved over conditions in the 1980s. Based on U.S. Bureau of the Census statistics on housing starts, January of 2000—with 1,775,000 starts—was the third highest month in over 20 years, when the monthly average for the year was 2,020,000 in 1978. The Housing Market Index (HMI), which reflects the confidence of the home-building profession in the long-term market, increased steadily from 38 in January of 1995, to 71 in January of 2000, with only minor slowdowns along the way.

Current Conditions

Low interest rates during the first years of the twenty-first century allowed many Americans to become homeowners, driving the real estate market. This, in turn, caused a slow down in multifamily housing occupancy, such as apartments. The decline in interest rates has particularly affected the high-end rental units as more renters became owners. Yet, investors, unable to resist the low interest rates themselves, continued to build apartment complexes even though existing complexes were well below capacity, hoping to fill units with young adults, traditionally the highest demographic of apartment dwellers. Vacancy rates as high as 8 to 10 percent (compared to just 3.8 percent during 2000) are not out of range before the economic slowdown in the United States is reversed. Yet multifamily dwellings are still in high demand in some areas of the country as the overall long-term economic outlook remains strong.

During the first nine months of 2002, Atlanta had the most new apartments with 13,095 new units. Dallas/Fort Worth was second in the nation with 9,045 new units. Yet, areas hit by the downfall of the technology and telecom industries in the late 1990s and early 2000s—including Atlanta—also suffered from the highest rates of occupancy decline.

A new trend in industry and warehouse building was to move outside the nation's five distribution hub of Los Angeles, Chicago, New Jersey, Dallas and Atlanta to take advantage of lower land and labor costs and attractive economic incentive packages offered by outlying communities. Land developers have been attracted to these high-quality properties in less populated markets to avoid the flood of investors competing in the major markets over limited land, which has been come highly valued as a more secure investment during a period of market instability.

Because real estate is valued as a relatively stable investment, compared to the stock market, the industry has become more attractive to investors during the period of uncertainty and apprehension in the U.S. economy, post-September 11, 2001 terrorist attacks and in the midst of military conflict with Iraq.

Industry Leaders

Simon Property Group of Indianapolis, Indiana, the largest mall owner in the United States as well as one of the nation's largest publicly traded real estate companies, manages over 240 properties, equaling some 18 million square feet, in 36 states. Assets total more than $14.9 billion. In 2002 the company posted a net profit of $561.6 million on revenues of $2.4 billion. The majority of Simon Property holdings are shopping malls, including the largest mall in the United States, Minnesota's Mall of America. Simon purchased Corporate Property Investors in 1998 for 33.5 percent growth and that year reported revenues of $1.4 billion.

Another major force in real estate development, with 11 percent ownership of Simon Property Group, is the Edward J. DeBartolo Corporation. This firm, started in 1948 by Edward DeBartolo in Youngstown, Ohio, is a leading builder and operator of enclosed shopping malls across the nation. DeBartolo's 76 million square feet of mall space makes up nearly 10 percent of all mall space in the country and is visited by 40 million customers each week. In addition, the company develops and operates office buildings, hotels, and office parks. Other holdings include the San Francisco 49ers football team, the Pittsburgh Penguins hockey team, and horse racing tracks in Ohio, Oklahoma, and Louisiana. DeBartolo had a keen foresight with regard to real estate trends. He foresaw the exodus to the suburbs in the 1950s and capitalized on it by developing suburban shopping centers. In the 1960s he anticipated the coming real estate boom in Florida and purchased large tracts of land there. When the boom hit, the company had one-third of its holdings in Florida. DeBartolo Realty pursued a strategy of developing one mall every year, diversified further into entertainment ventures, and went public with its real estate investment trust (REIT) in 1994. Upon his death in December of 1995, founder Edward J. DeBartolo Sr. left a diversified corporation of malls, racetracks, riverboat casinos, and sports teams, although future growth was temporarily stymied over matters of probate that endured into the twenty-first century.

Trammell Crow Company, based in Dallas, Texas, is one of the nation's largest real estate developers. Its $14 billion portfolio of owned and managed properties approaches 500 million square feet of commercial properties in the United States, with 350 office buildings in 50 cities; 90,000 residential units; 35 hotels; and 160 shopping centers. Crow began his illustrious real estate career in Dallas shortly after World War II. An accountant who earned his degree in night school, he became successful when he joined with the Stemmons brothers, and together they built more than 50 warehouses in Dallas in the 1940s. Crow had a knack for anticipating the needs of the market and adding building amenities that appealed to his tenants. He formed partnerships with other developers and shared incentives and rewards generously with his partners. In fact, the Trammell Crow Company built a reputation both as a skilled developer and as an incubator for smaller developers. Nonetheless, in the early 1990s the depressed real estate market affected even Trammell Crow Company. Problems in the Southwest forced the company to refinance 150 properties in 1990, and new construction totaled only $500 million in 1991, down from $2.2 billion in 1985. By 1999 the company rebounded, maintaining 158 offices worldwide, including Canada, Europe, Asia, and South America. With 7,100 employees in 2002, Trammel Crow Company posted revenues totaling $653.6 million for a net income of $16.9 million.

Catellus Development Corporation headquartered in San Francisco, California, is the largest private landholder in that state. Catellus's holdings are spread throughout the western United States. The company oversees its holdings under its property management firm, Catellus Commercial Group, and separately operates the Catellus Residential Group as a development corporation, under the auspices of a REIT. Catellus holds an estimated 15.5 million square feet of income property; 5,400 acres of land leases; and 854,000 acres of land. In 2001 Catellus reported $480.7 million in sales, for a net income of $96.5 million.

Workforce

Land subdivision and development requires complex entrepreneurial skills and a solid knowledge base in many disciplines. Developers work with experts in many fields, including architects, builders, planners, financiers, attorneys, urban government and inspection personnel, community representatives, and investment partners. Developers must additionally acquire a thorough knowledge of every local community associated with a development venture, including the local political machinery, local economy, and local real estate markets. Local policy shifts and economy swings might affect any development project to a dramatic degree; successful developers respond with flexibility, shifting strategies abruptly in order to insure the ultimate viability of any project. Successful developers must be skilled at problem solving, which is the essence of development. They must have a clear vision and a penchant for minute details—the omission of appropriate soil tests or the wrong clause in a title insurance policy can devastate an undertaking. As master planners, developers absorb ultimate responsibility for any mistakes associated with a development project.

According to the U.S. Department of Labor Bureau of Labor Statistics, land subdivision and development industry employed 128,570 people in 2001. Management positions accounted for over 14 percent of the total industry jobs. Property, real estate, and community association managers reported a mean annual salary of $63,010; general and operations managers, $81,400; chief executives, $111,010; and construction managers, $74,200. Over 22 percent of the industry's jobs were in building and grounds cleaning and maintenance occupations. Landscapers and groundskeepers reported a mean annual salary of $20,830. Sales-related occupations totaled nearly 12 percent. Real estate brokers' mean annual salary was $82,490, and real estate agents' mean annual salary was $46,170. Office and administrative support occupations accounted for over 23 percent of the industry's jobs and had a mean average salary of $28,670.

America and the World

Foreign real estate investment in the United States in the late 1900s was partly to blame for the overbuilding of commercial office space. Experts agreed that the U.S. economy might be several years in absorbing the many vacant office buildings in U.S. metropolitan areas, a situation further aggravated by the increasing number of U.S. companies that shifted manufacturing operations over-seas, further reducing demand for domestic facilities.

Elsewhere in the world, global real estate development occurred rapidly. Currency, regulatory, and logistics—as opposed to market demand—comprised the most significant obstacles for developers, as market risk virtually vanished. Sites in North Africa and Asia were among the more lucrative markets for land development at the turn of the twenty-first century, with the Asian nations among the most accommodating to foreign investment. In Hong Kong, residential prices rose 25 percent in the late 1990s, causing the government to seek promises from developers to concentrate on residential development over commercial sites. In the Philippines, a rapidly expanding economy resulted in a proliferation of U.S.-style residences in a near risk-free market. Capital infusions from the International Monetary Fund (IMF) to alleviate financial crises on the Asian continent further contributed to a growing interest in the Far Eastern economies on the part of astute developers. Continued restrictions meanwhile prevailed in the Arabian countries in the form of strict licensing controls on the construction and engineering trades, a condition that served to enhance the appeal of the less restrictive Asian sector.

South Korea, which revitalized its economy during the second half of the twentieth century, grew to constitute the eleventh largest economy worldwide but subsequently fell prey to the vestiges of a monetary crisis in nearby Asian countries at the end of 1996 and throughout 1997. In an effort to encourage long-term capital flow into the country and to revitalize the waning won, South Korea, like other Asian nations, embraced liberal trade policies and opened development arenas to foreign investment. Early in 1998 the seaport city of Inchon, near Seoul, announced its intent to establish an international free-trade city, open to foreign development, for the purpose of increasing industrial and distribution complexes. Also the ancient city of Taegu in South Korea's North Kyongsang Province announced in mid-1998 a plan to encourage foreign development at industrial sites within the city limits. The program permitted foreign investors to purchase and develop land for subsequent sale or lease. Taegu further proffered subsidy guarantees to foreign investors who might undertake tollways and highway bridge-construction projects.

Also hit hard by the financial crisis of the late 1990s, Malaysia rebounded late in 1999 and into the year 2000 with an upsurge in development on a variety of fronts. Sunway Masalam Sdn Berhad, a subsidiary of Sunway Holdings Incorporated, signed an agreement on December 30, 1999, to build an expansive golf resort in Selangor, including both residential and commercial property developments, to be known as the Serendah Golf Resort. The planned development, to be surrounded by condominiums and commercial areas, was scheduled for completion in 2007. Rapid growth in nearby Kuala Selangor on the Strait of Malacca led that town to adopt a program of planned progress, in order to ensure that new development in that arena might proceed over a widespread area, and in particular to abate imminent over development in the valley town of Kelang. The city's planned growth allowed development to proceed throughout various locations in Kuala Selangor, Bukit Belimbing, Puncak Alam, and other locales. SAP Holdings Berhad and Golden Hope Berhad were among the prominent developers named as participants in the project. Also scheduled for controlled development were certain locations in the vicinity of Penang. In nonurban development, Kwantas Corporation announced an under-taking early in 2000 in conjunction with Indonesian PT Agronesia Makmur Sentosa, to develop oil-palm plantations from existing timberland on both the Indonesian and Malaysian sections of the large island.

Research and Technology

In Houston, Texas, the Land Tejas Company, in collaboration with IBM Corporation, made bold strides into the age of computers by creating "intelligent neighborhoods." In developing new communities such as its Stone Gate development, Land Tejas and IBM took technology one step farther than simple prewired Internet access for the new homes. Instead, the development partners designed the building specifications to include the installation of Category 5 telephone wire and RG6 cabling at the subdivision, in order to connect the homes via a professionally architected community intranet. The intranet at Stone Gate, scheduled to go live early in 1999, provides homebuyers with on-line access to immediate traffic conditions for their neighborhood, as well as with weather and communications links to local school administrations. After work and school, and during inclement weather, Stone Gate residents "camp in" with video-on-demand and Internet access through their neighborhood backbone cable. Home owners at Stone Gate make restaurant reservations online, collect electronic coupons for use at local retailers, and enjoy other conveniences at an estimated cost of $1,000 per home for the cabling, plus an additional $1,000 per home for the IBM Internet connector center.

Further Reading

"1998 Country Reports on Economic Policy and Trade Practices," submitted to the Congress by the U.S. Department of State, 31 January 1999. Available from http://www.state.gov .

"Call for Council to Develop Wakaf Land." New Straits Times, 9 November 1999.

"Catellus Development Corporation." Hoover's Online, 2 March 2000. Available from http://www.hoovers.com .

Chapman, Parke. "Apartments: Recovery After the Storm." National Real Estate Investor, 1 December 2002.

Daniels, Thomas L. "Coordinating Opposite Approaches to Managing Urban Growth and Curbing Sprawl: A Synthesis." The American Journal of Economics and Sociology, January 2001, 229.

"Edward J. DeBartolo Corporation." Hoover's Online, 25 February 2000. Available from http://www.hoovers.com .

Fitch, Stephane. "The Great Suburban Overbuild." Forbes, 6 September 1999.

"Housing Prospects Good Despite War Concerns." National Association of Realtors, 4 March 2003. Available from http://www.realtors.org .

"Housing Starts: 1978-1999." National Association of Home Builders, 23 February 2000. Available from http://www.nahb.com .

King, Danny. "Residential, Retail Combine for Greater Use of Space." Los Angeles Business Journal, 21 October 2002, 22-24.

"Kwantas to Develop Land in Indonesia." Business Times, 14 February 2000.

McLeister, Dan. "Builders Sell Technology." Professional Builder, 1 January 1999.

"Mobil to Develop Land in Selangor." New Straits Times, 12 September 1999.

"Simon Property Group, Inc." Hoover's Online, 25 February 2000. Available from http://wwww.hoovers.com .

"Statistics: Industry Trends by the Numbers." Landscape Management, January 2003, 17.

Sweeney, Margy. "Think Big—In Small Towns." National Real Estate Investor, 1 December 2002.

"Trammell Crow Company." Hoover's Online, 3 March 2000. Available from http://www.hoovers.com .

Ursery, Stephen. "Consulting Witten's Wit and Wisdom." National Real Estate Investor, February 2000, 128.

U.S. Department of Labor Bureau of Labor Statistics. Occupational Outlook Handbook, 2001. Available from http://www.bls.gov .

Watkins, Andrew R. "Impacts of Land Development Charges." Land Economics, August 1999.



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