Can a market be too hot? Should smaller developers get worried when bigger developers pile in

The Florida real estate market has reached unprecedented heights with major projects getting funding from developers across the country and even overseas. But the arrival of big money doesn’t mean that the smaller players need to bow out entirely; having a comprehensive and detailed business plan can help smaller developers hold their own even in a blazing 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 pushed forward with ambitious redevelopment efforts. The skyline of downtown Miami is littered with the fruits of these labors, and luxury condos and hotels now dominate. 

For smaller developers, however, this heat can be a turnoff; too hot of a market and the smaller players may be left holding the bag if the winds suddenly change. 

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 leverages their understanding of local market dynamics to avoid the pitfalls. 

Labor is everything

A crowded construction market can make costs more variant, particularly in today’s strained labor market. Accessing the skilled labor, necessary materials, and the right artisans is significantly more difficult — not to mention expensive — when a market like Florida’s is seeing such high demand. 

According to the Associated General Contractors of America (AGC), the construction industry faces a shortfall of approximately half a million jobs, even before considering ongoing hiring needs. This labor gap has led to higher construction costs, which can disproportionately affect smaller developers with tighter budgets.

Some of the risks, however, have been mitigated by recent economic improvements. Federal trade policy efforts have helped alleviate some supply chain issues, providing a slight reprieve in terms of material availability and costs. 

Smaller developers without limitless capital need to be cautious and plan projects with variance towards cost and time—especially when operating near large projects that may soak up available resources.

But smaller developers also need to be willing to play a bit of defense to protect its labor as its most valuable resource. The competition for skilled workers—especially engineers, architects, and specialized contractors—can be fierce in hot markets. To protect their investments in training, smaller firms might 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 labor talent is, the better off they’ll be as things heat up. Especially if a smaller developer is playing in a slightly new sphere, having strong partnerships with industry professionals early on can bring a project to the next level.

Experienced architects, engineers, and contractors can provide valuable guidance during the feasibility stages of a project, offering insights into cost, scheduling, and construction methods. These are also the people who will know what sort of tenants are out there, and what they might be looking for in a build. Working collaboratively, they can help identify and attract the right tenants, guiding the project toward success. 

Know your limits

It can be alluring for small developers to follow the money, and take on the risk of building more complex projects. But doing so is only wise when it’s in line with the business plan set out in line with a developer’s sector, capacity, and risk. 

Rather than rushing to compete for the massive, luxury projects gaining international attention, it’s often better to grow incrementally, building up organizational capacity step by step. More than one developer has gone belly-up after taking on a much bigger project than they’re accustomed to. 

It’s not that small developers can’t grow in a hot market, but doing so needs to be done cautiously. Joint ventures with other small developers can be a smart approach, allowing firms to share resources and expertise while tackling more substantial projects.

This collaborative approach is something we see from developers of all sizes. One of the bigger developments in Miami’s Brickell district, for example, was developed by major players like Swire Properties which hired Americaribe, a joint venture of Bouygues, and John Moriarty & Associates. This model on a $1B 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 of the development epicenter. Hot markets create spillover opportunities in nearby areas. While luxury condo and hospitality projects dominate downtown Miami, the demand for residential units in neighboring districts has surged. Smaller developers can find niches in infill projects, where the city’s land-use plans aim to build density and revitalize less developed areas. Such projects may involve less financial risk and provide steady growth opportunities.

This sort of forward thinking is how something like The Villages was developed in Central Florida, taking on land where there was nothing 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 while still benefiting from the region’s overall growth.

Despite the influx of big money in Florida’s 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 may be the key to big growth. 

Claramargaret Groover is of counsel to Becker Lawyers, specializing in construction law.

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

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