Can you think of an industry where people make decisions on millions of $$$ like this?
I wrote about our re-branding, team, and core values in the last 3 posts. You may be wondering what our product is. I would like to tell you about why we’re building what we’re building first. Can you think of an industry where people make decisions on big chunks of money like throwing darts with closed eyes? You may be thinking of people gambling thousands of dollars at casinos but that’s not what I’m talking about. Billions of dollars are invested in real estate development projects every year and they all start with a process that’s pretty much like throwing darts with closed eyes. If you’re in the real estate development/construction industry, you may have guessed what I’m referring to. For those who aren’t in this industry, let me give you some background.
Prior to starting Zebel, I had a rewarding career experience in the Pre-construction group of Western National Contractors (WNC), a large multifamily construction company. WNC works closely with Irvine Company, one of the largest multifamily developers/owners in the country, as the general contractor of their apartment development projects.
A couple of years into my job, I noticed a problem in our processes and took an initiative to solve it. Not only did no one ask me to solve it, but also most people didn’t even recognized it as a problem. Everyone was just used to it as part of their job and did not see it as something that should and could get fixed. The fact that it was not identified as a problem actually made it a lot more attractive for me to tackle. I’m just more interested and curious about the problems that are not obvious to everyone. In my experience, such non-obvious problems often require simple solutions that create much greater value compared with complicated solutions that solve obvious problems.
One of the critical functions of our pre-construction team was to deliver preliminary construction cost estimates to development companies during early design stages. Our team would go through an extensive process to create a cost estimate in a few weeks only to receive a follow up request with slightly adjusted design for the same project. After some research, I realized our cost estimating work was part of a bigger iterative process called project feasibility analysis.
Real estate developers run feasibility analysis when considering a new project. Once they identify a piece of land to develop and build a building on, they run feasibility analysis to make sure the project is financially viable before they make a big financial commitment and purchase the land. First, they hire an architecture firm to draw a conceptual design that looks good and meets the city requirements. The developer then takes the design to their favorite contractor and asks for a rough construction cost estimate and plugs it into their pro forma (project cash flow projection) to calculate a measure of Return On Investment (ROI). If the ROI is not high enough, they will ask the architect to change the design and the contractor to update their cost estimate and their internal team to recalculate the ROI based on the updated design and cost estimate. Each cycle takes about a month and costs thousands of dollars. The developer iterates through this process until they either find a design that hits their ROI target or run out of their pursuit budget for that project.
Too often developers do not find any design that makes the project pencil. They give up and lose the deal after spending months and tens of thousands of dollars worth of resources and move on to another site. That is why it is so hard for developers to make deals happen, especially when the construction costs are soaring, there is a significant labor shortage in the construction market, and rents or sale prices are not rising at the same pace as costs.
Multi-million dollar investment decisions are made through such a trial and error process. It is painfully slow, expensive, and inefficient. No other industry operates like that and our Trillion dollar industry should and could do better than that. We started Zebel to offer developers a targeted feasibility analysis solution instead of throwing darts randomly. Stay tuned on how our data analytics technology solves this problem and helps developers make more deals happen! Learn more about our product at www.zebel.io/product
