Smart Real Estate Strategies for a Volatile Housing Market

Building During Economic Downturns: A Strategic Opportunity

At first glance, initiating a real estate development project during an economic downturn might seem counterintuitive. Economic slowdowns often lead to tighter lending conditions, reduced consumer confidence, and a general deceleration in real estate activities.

However, seasoned investors recognize the potential in such periods. For instance, during the Great Recession (2007–2009), U.S. housing starts plummeted from over 2 million units in 2005 to just 554,000 in 2009—a staggering 73% decline.

This significant reduction in new developments created opportunities for those prepared to act. Given that the processes of entitlement, permitting, and construction are time-consuming, projects initiated during a recession often reach completion as the market begins to recover, positioning them advantageously when demand resurges and competition is limited.

Planning Ahead: The Importance of Timing in Real Estate Development

The journey from project conception to completion in real estate is lengthy. Permitting and entitlement alone can take 12 to 24 months. When adding architectural design, financing, approvals, and construction, the timeline extends further, often spanning multiple market cycles.

Developers who commence projects during downturns are often poised to benefit when the market rebounds. For example, those who secured lots and permits in 2010–2011, following the 2008 housing crash, experienced significant gains when their projects were completed and sold in 2013–2014. Delaying action during downturns can result in missed opportunities during subsequent recoveries.

Success in real estate often hinges on proactive planning and anticipation of market shifts, rather than reactive responses to current events.

Advantages of Building in a Sluggish Market

Economic downturns can offer several benefits to developers:

• Reduced Land Prices: Underutilized or overlooked parcels often become more affordable.

• Increased Labor Availability: As speculative projects stall, skilled labor becomes more accessible.

• Potential Decrease in Material Costs: Global demand reductions can lead to lower prices for construction materials.

• Expedited Permitting Processes: With fewer applications, permitting departments may process requests more swiftly.

These factors can enable developers to progress efficiently, provided they have a clear understanding of zoning regulations, overlays, and project feasibility.

The Critical Role of Zoning in Maximizing Property Value

In periods where home prices stabilize, enhancing property value becomes paramount. Zoning laws play a crucial role in this process, determining:

• Permissible Developments: Such as Accessory Dwelling Units (ADUs), duplexes, or small-lot subdivisions.

• Development Scale: Including Floor Area Ratio (FAR), density, and unit count.

• Potential Risks: Like fire hazards, slope stability, or hillside overlays.

It's essential to recognize that zoning regulations are dynamic, often evolving as cities address housing shortages. Understanding and leveraging these changes can unlock significant development potential.

Resilient Development Strategies During Economic Downturns

Certain development approaches have demonstrated resilience and long-term value, even in challenging economic climates:

Accessory Dwelling Units (ADUs)

ADUs are secondary housing units built on single-family lots. They offer additional rental income and contribute to increasing housing supply without altering neighborhood character. The Terner Center for Housing Innovation highlights that ADUs are cost-effective to construct and can assist homeowners, particularly seniors, in maintaining financial stability.

Small-Lot Subdivisions

This strategy involves dividing larger residential lots into smaller parcels to construct multiple housing units, such as townhomes. Small-lot subdivisions can enhance urban density and provide more affordable housing options, addressing the growing demand in urban areas.

Converting Underutilized Properties

Transforming existing structures, like large single-family homes, into multi-family units can maximize property use. Such conversions can create additional housing units and better meet community needs, especially in areas with housing shortages.

Teardown and Rebuild in Areas with Relaxed Zoning

In regions where zoning laws have been updated to allow higher density, demolishing outdated structures to construct new, multi-unit housing can be a viable strategy. This approach aligns with urban redevelopment goals and can yield substantial returns.

By strategically navigating economic downturns and understanding the evolving landscape of zoning regulations, developers can position themselves to capitalize on emerging opportunities, ensuring long-term success in the real estate market.

Final Thoughts

Navigating a volatile housing market requires foresight, adaptability, and strategic planning. By initiating development projects during economic downturns, investors can position themselves to capitalize on market recoveries. Leveraging tools like Terrakan to understand zoning regulations and identify opportunities such as ADUs, small-lot subdivisions, and property conversions can further enhance the potential for success. Embracing these strategies not only mitigates risks but also paves the way for long-term growth and resilience in the ever-evolving real estate landscape.