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estearum 5 hours ago

> Like if prices fall 10% but demand rises 20%

Not as a developer you wouldn't...

You already have razor thin margins. Prices going down 10% means you cannot get financing for your project.

Holding real estate is generally a good investment. Developing real estate actually is not.

> Real estate developers and construction are solid, safe businesses with great unit economics

No they are not lol

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cuuupid 4 hours ago | parent | next [-]

If you live in a magical fairy world where supply and demand are fixed, sure. In the real world, prices going down 10% leads to a surge in demand, and so you can fill more of your units. This leads to either equal or increased revenue, for the same construction (flat cost), which actually yields higher margins. This is why developers are usually concerned with occupancy rates, and prices are more a concern for homeowners.

There are only really 3 scenarios where prices are low and demand is low:

[1] There is a dramatic surplus of supply, in which case if a developer is trying to build they've not done research and probably should not get financing

[2] There is some other factor (usually high crime) in which case again, developer should do their research, and the market is operating fine

[3] You are developing super early and operating within incentives offered by the city, usually tax abatements, which drive down the carrying cost and make it a better investment.

Also important to note that in scenario [3] a smart developer will slowly release inventory to restrict supply to meet demand, and as demand grows, release more inventory at the newly raised price, continuing to do so as long as the tax abatements advantage the strategy. This is common in successfully developed areas e.g. Jersey City, and is fine as long as broad scale collusion doesn't occur

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bpt3 5 hours ago | parent | prev [-]

Can you define razor thin? Grocery stores have very small margins, as little as 1%.

Homebuilders make at least an order of magnitude more on a very expensive item.

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estearum 5 hours ago | parent | next [-]

Grocery stores don't require millions to billions of dollars of capital to execute each new transaction.

So it's not the margin itself but actually the spread between the margin and what investors could get by investing in alternatives. Real estate investment opportunities are often measured by their advantage (measured in fractions of a percentage, .2% advantage being considered solid) over 10 Year Treasuries or S&P 500 returns.

Real estate developers do often actually lose money, but the more salient boundary condition is whether they can get financing for a project, where they have to clear a bar well above the "just make >$0" bar.

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eigen 4 hours ago | parent | prev [-]

> Grocery stores have very small margins, as little as 1%.

Looking at the Kroger 2024 Annual report shows that they have 22.3% gross margin . they pay dividends, had a stock buy back, etc so its entirely possible that they had a very low margin but gross margin seems to be similar to a home builder.

Sales $ 147,123

Merchandise costs $113,720

Rent, Depreciation, Amortization $655

Gross profit $32,748

for a gross margin of 32.7/147 = 22%

	▲	ghufran_syed 2 hours ago \| parent [-]
		The net margin of around 1.5% seems more relevant: the gross margin is just the revenue minus the cost of good sold plus cost of transportation. The net margin is the money you have left after paying things like Rent, employee wages, electricity, taxes, interest on debt.