Bonus episode: Development 101
To understand how real estate development could become more inclusive tomorrow, we have to understand how it works today.
“City of the Future” is a podcast that explores ideas and innovations that could transform cities. Season 4 will be all about the ideas and innovations that could lead to more equitable development. But before we can understand how real estate development could be more inclusive in the future, we have to understand how it works today. So, in this bonus episode, we talk to Sidewalk’s Head of Urban Development Alison Novak about how development works.
Vanessa Quirk: Hello. We’ve never met in person!
Alison Novak: No.
Vanessa Quirk: In-person, person.
Alison Novak: You’re a real person.
Vanessa Quirk: I’m a real person. You’re a real person.
Alison Novak: So exciting. You’re a real person. Oh my gosh!
Vanessa Quirk: On a hot, windy day in August. I bicycled across Brooklyn to meet up with a new colleague of mine. Someone who I had only ever seen in the small square of a Zoom call.
Vanessa Quirk: Just in case we need it. Would you mind introducing yourself? Who are you? What do you do at Sidewalk Labs?
Alison Novak: I’m Alison Novak. I’m the head of Sidewalk Urban Development. I joined Sidewalk about eight months ago. I came from being a developer in New York City, mostly of housing.
Eric Jaffe: Well, I am very jealous that you got to hang out with Alison in person, person.
Vanessa Quirk: As well you should be, Eric. It was a lot of fun. I’d asked Alison to meet me at a building that she had helped develop so that she could explain to me some of the challenges that come up in the traditional real estate process.
Vanessa Quirk: Where are we right now? And why are we here?
Alison Novak: You’re standing in front of The Parkline, also known as 626 Flatbush Avenue in Brooklyn. This is a building that I built when I was with my previous firm, the Hudson Companies. It’s in Prospect Lefferts Gardens.
Vanessa Quirk: Today, Prospect Lefferts Gardens, or PLG, is a predominantly Black neighborhood with strong Caribbean ties. Back in the 1940s, this neighborhood was predominantly a mix of Jewish, Irish, and Italian immigrants.
Alison Novak: And then, in the 1960s, with white flight, a lot of them left. And since then, since like the 1960–70s, it’s been probably, primarily, like a Black middle-class neighborhood, but pretty diverse overall. And I just think that it’s really lively and really friendly. It has all of, sort of, the bones. It has access to transit the access to amenities like the park. It has a vibrant commercial district, and it’s got a neighborhood that is able to and wants to invest in itself.
Vanessa Quirk: Just wait for the party car to…
Alison Novak: Like I said, it’s a lively neighborhood.
Vanessa Quirk: Alison fell in love with this neighborhood. So, she started looking for a private lot where she could fit in lots of housing and stores. And after a while, she found one.
Alison Novak: We ended up designing a 23-story building. The front of the building that’s along the street, well along Flatbush Avenue, has storefronts. We wanted to maintain that character and that continuity.
Vanessa Quirk: I really loved the building. When I went, I could see the storefronts were really occupied by cool places. There was a restaurant that had people, locals hanging out, eating, talking. There was a little bookstore, an independent bookstore. There was a school on the second floor. And Alison told me that these were all local institutions owned by local neighborhood folks, and that was super intentional on her part.
Alison Novak: My outlook is to try to add something to the community. So, that was always, sort of, my starting point.
Vanessa Quirk: But back when the building was still an architectural drawing, and it came time for Alison to discuss the building at a neighborhood meeting, not everyone agreed that the project was adding to the community.
Alison Novak: And the strong feedback I got at that meeting was that people there just really did not want it at all.
Vanessa Quirk: Really?
Alison Novak: Not at all, not even a little bit.
Vanessa Quirk: Alison had, of course, gotten push-back on her projects before, but this felt different. For one, the feedback was kind of contradictory.
Alison Novak: Some would say, don’t build it at all. Some would say, if it’s all affordable housing, then I’m okay with it. And others would say, I don’t care if it’s all luxury, as long as it’s not taller than nine stories. These are definitely three opinions, basically quotes that I got from people. And it just, no community is a monolith, and I think that that’s something’s that always really important to remember.
Vanessa Quirk: And that’s not the only thing that’s important for developers to keep in mind when interacting with the community. There’s also a long history of developers doing what they want without consideration of the impact of their projects on community members. And in the U.S., the brunt of these decisions has often most acutely been felt by people of color.
Alison Novak: It makes sense with the history of real estate, why people are fearful. This is a neighborhood that suffered from redlining. It’s a neighborhood where neighbors of different races came together to fight redlining. So they, I think, are particularly attuned to concerns around gentrification and displacement. And I always felt in meeting with them, that I overall felt really glad that they were having this conversation. I felt kind of inspired that they took their neighborhood seriously enough and this concern seriously enough to be vocal about it.
Vanessa Quirk: In fact, it was those conversations with the community that got Alison thinking. Development today, the whole process, it’s kind of broken, and it needs to change.
Eric Jaffe: Welcome to City of the Future, a podcast by Sidewalk Labs. We explore the ideas and innovations that could transform cities. We’re your hosts. I’m Eric Jaffe.
Vanessa Quirk: And I’m Vanessa Quirk. Real estate today is a really interesting inflection point as communities around the world are holding developers to account for the industry’s role in perpetuating or even exacerbating social and economic inequalities.
Eric Jaffe: And developers are asking themselves how they can do better while still making money. That’s why we’re so excited to kick off Season 4 of City of the Future, which will be all about the ideas and innovations that could lead to more inclusive, equitable development.
Vanessa Quirk: You can think of this episode as a kind of introduction, not just to the season but to real estate. Because before we can understand how development could become more inclusive in the future, we have to understand how development works today.
Eric Jaffe: To do that, we knew we had to talk to our colleague Alison, Sidewalk’s Head of Development, who you heard at the top of the show, and who spent a lot of her career thinking about just how development could be more inclusive.
Vanessa Quirk: So before Alison was a developer, she worked for the City of San Jose. And back then, she just couldn’t understand why it was that, so often developers wouldn’t do what the city or the community was asking them to.
Alison Novak: Developers would come to us and say that they couldn’t afford to do something. I would find that sometimes to be really confounding. I didn’t understand. I didn’t have the vantage point to understand where they were coming from. So that’s one of the reasons that I went to graduate school.
Eric Jaffe: So, Alison went from San Jose to MIT, where she studied real estate development and city planning. And she really wanted to dig into this question of: why do developers do what they do?
Vanessa Quirk: There are a lot of people in real estate who, like Alison, got into this business because they wanted to make the built environment a better place for people to live in. But as Allison got deeper into her studies, she realized that the whole real estate development process is structured around the financials.
Eric Jaffe: Right. Even as you strive to improve cities through a project, as a developer, you’ve always got to make that project pencil. So Vanessa, shall we break down how a development project traditionally hits that mark?
Vanessa Quirk: Let’s do it. I’m sharpening my pencils. I’m getting out my chalkboard. I’m ready. Let’s teach.
Eric Jaffe: Get your pencils ready.
Vanessa Quirk: So step one is finding a site. If you’re Alison and you’re a housing professional, you’re going to be looking for a site that would let you add a lot of housing to a neighborhood, as well as potentially add something to the urban fabric.
Eric Jaffe: But there are a lot of other factors to consider too. There are zoning requirements. There’s square footage potential. All of these things can ultimately impact the bottom line.
Vanessa Quirk: Exactly. When developers start any project, they create a financial model, what they call a pro forma. And that lets them know the projected costs and revenues of building something on the site. That’s the way that they can figure out if developing on this particular site would be a good deal for them.
Eric Jaffe: So on the cost side, I’m guessing you have things like how much the land costs, how much construction costs, what the architects are going to cost to design it, what are the property taxes, that kind of thing.
Vanessa Quirk: Exactly. But there are actually a ton of other costs that you’ve probably never even thought about. They’re called operating expenditures or OpEx in dev speak. Here’s Alison again.
Alison Novak: Operating expenses are things like having the elevators inspected on an annual basis. You have to be in the building super. You have to pay the exterminator. Do you want fresh flowers in the lobby? You want to give bonuses to people who shovel the sidewalk in the winter. You have to account for all of them.
Vanessa Quirk: There are also capital expenditures.
Alison Novak: So capital expenditures are the dollars you put aside for repairing the building or making other renovations.
Eric Jaffe: All right. So, you’ve got all those costs. Then on the revenue side, I’m guessing you’ve got rents that you collect on apartments.
Vanessa Quirk: That’s right. Which, of course, depends on the apartment size and type, too.
Alison Novak: Now you have those numbers or expenses and your revenues, and you net them out. So take one, and you subtract the other one. And then you find out what you have left. And if it’s a positive number, then you say, this is good.
Eric Jaffe: All right. So, if this is good and you’re ready to go, you make an offer to buy the land, you negotiate, and you hopefully acquire it.
Vanessa Quirk: Yep. Then you ask your investors to give you a loan, please. Alison told us that developers love debt. The less they’re paying out of pocket today, the more they can spend on other projects and, therefore, the bigger returns they think they’ll get in the future.
Eric Jaffe: Of course, this adds a whole new level of difficulty into the mix, because developers have to navigate what banks and other investors want to get out of the project.
Vanessa Quirk: And also it puts pressure on you to make sure that everything goes well with your building since you have to make sure that you’re going to have the money to pay back that.
Eric Jaffe: And then once you have those loans and that money, you can start designing. But here’s the crazy thing. Once developers hire architects to design and develop and you get closer and closer to what this building will actually look like, you have to do your financials all over again.
Alison Novak: In the beginning, you are working with the big picture of what you want to build. You have some hypotheses around the type of project, residential, commercial, but it’s not fine-tuned at that stage. And when you get into design, there you’re really refining it. You’re thinking about, is it brick? Is it cast-in-place concrete? Is it steel? And that becomes an iterative process where you’re either confirming your earlier ideas about the big picture, or you have to tweak or change them.
Eric Jaffe: But if all your assumptions hold true and your financials still look good, then you go to the next stage. Getting a permit for your building.
Vanessa Quirk: Unfortunately, the permitting process is fraught. Depending on how it goes, it could throw your whole timeline and your whole pretty pro forma into chaos.
Alison Novak: The planning documents are enormous. They can be thousands of pages long. You are trying your best to follow the rules of requirements of those planning documents of building codes, zoning codes, fire codes, and you’re submitting your design based on those. And then, depending on the plan examiner, they’ll interpret those rules in one way versus another. And it’s totally reasonable to some extent, because we’re all humans and reading thousands of pages. Why wouldn’t you have a slightly different interpretation or sometimes a massively different interpretation? The problem is that we’ve spent months and months coming up with the design that we think meets them, and now we have a plan review worker say, “No, go and do it differently.” So, we have to go back and redo that work. And we may come in and get a different plan examiner the next time, and they may have the opposite interpretation, which makes permitting really challenging.
Eric Jaffe: That sounds really frustrating.
Alison Novak: As the developer, this permitting process can be exasperating. It is laced with risk and can last a long time because you are not in control.
Vanessa Quirk: So, it sounds like in this process, there’s a hypothesis going in that our objective is to make a profit. And then, the entire process seems to be set up to potentially stress-test that hypothesis. And then it’s kind of a gamble, whether at the end of the day, it’s like, ta-da, building that made you profit or, ta-da, building that did not.
Alison Novak: It’s high-risk, and it’s high-reward. You have to believe that this is going to work out, and it might not. Also, developers basically make their profit off of being willing to take a great degree of risk. So, they were risk seekers. At the same time, they spend the rest of their time in the development process, trying to de-risk.
Vanessa Quirk: Okay. So that was definitely the CliffsNotes version of how development works. We did not get into what happens after permitting like construction, renting out the building, selling your building, but for now, class is adjourned. This is kind of how development works.
Eric Jaffe: I do think we at least got a taste for the kinds of things a developer has to navigate and the risks involved. It also gives you a sense for all of the stakeholders that developers have to work with on a project: city bureaucrats, investors, construction workers, designers, and of course, community members. So what comes now? Recess? Nap time?
Vanessa Quirk: No, no, no. No time for naps yet. Not yet, Eric. There’s still more to talk about because even though we’ve spent some time unpacking how development works today, we started this episode with this question, how could development be more inclusive in the future? And if we want to start to answer that question, I think we’ve got to sit on this concept of risk that Alison brought up. That concept of risk is really important.
Eric Jaffe: Right. With the status quo, development is a very risky endeavor, but not just for developers. That’s true for community members, too.
Alison Novak: Development is scary on both sides. For developers, you are afraid that the community is going to derail your plan. Oftentimes developers have put up personal guarantees. This is their profession and they’re afraid they’re going to go bankrupt. For communities, they’re scared the developer’s going to come in and destroy their neighborhood. That they are going to have to move out. That their friends, neighbors, family are going to have to leave the community, or we just won’t be what it used to be.
Eric Jaffe: Many developers are beginning to see that sticking to this traditional approach — it has big risks of its own. Community concerns around things like housing costs and economic inclusion are making projects more complex, and sometimes they’re stopping new developments from going forward at all.
Vanessa Quirk: Right. But Alison is seeing that the industry is starting to recognize that fact, and they are starting to change. She’s starting to see a shift in real estate toward more inclusive development.
Vanessa Quirk: One thing that I’ve heard you talk about in staff meetings before is that, as you were getting into development, you were really conscious of sustainability objectives and goals. And that was something that when you were starting out, the industry just hadn’t really embraced yet. And you saw that evolve over the course of your career and development. And now, I think you’ve said in the past that you feel like the same thing is happening with inclusive development. So, would you mind just talking about what’s happening in the industry right now?
Alison Novak: The first thing is that there’s always been this characterization of the developer as the villain, but in the last five to 10 years, the outcry has become worse. It’s become more intense and, therefore, more challenging to do projects. The second thing that’s happened is 2020, meaning the global pandemic, the murder of George Floyd, Black Lives Matter. All of those things have brought to everyone’s consciousness this incredible racial and other inequities that we have in American society. So, I think those things together are causing a lot of pause for individuals themselves who are saying, what am I doing and how am I impacting the world? And I also think for companies to start to internalize that what people think about and what values you espouse actually really matter to your bottom line.
Eric Jaffe: The fact that you need to start development from that financial model of, is this is a good idea, and then, on the other end of the ledger, you’ve got an inclusive development program that is going to try to incorporate a whole host of community needs and desires. Is that tension insurmountable, I guess? Or how do we even begin to think about whether those two things can work together?
Alison Novak: I don’t think it’s insurmountable. One of the things at Sidewalk Labs that I’m hoping we can make inroads on, and that the team is already working on, is finding ways to make development mutually beneficial to developers and communities. We want to be able to use innovative ways to align developers and communities for better outcomes and development. I think it starts with whether or not you really think that, A, this is the right thing to do and, B, there’s a business case for doing it. And I happen to believe that both are true, in which case, what you do is build it into your financial model from the beginning. That doesn’t mean that you’ve decided what the community wants. It doesn’t mean you’ve decided what programs are going to do. You’re not going to do everything. It just means that you’ve got a placeholder that you’re saying that this is something of value, and I’m going to put money into it.
Eric Jaffe: Thank you for listening to City of the Future. This episode was more of a season preview setting the stage for the questions that developers are asking themselves right now.
Vanessa Quirk: Questions like, can development today potentially narrow the racial wealth gap in our country? How can we make housing more affordable to own and rent so people don’t get priced out of their neighborhoods?
Eric Jaffe: How can we share power and profits in a way that benefits everyone? And how do we do all that and still make sure developers get a return on their investment?
Vanessa Quirk: This season, we’re going to be traveling across the U.S., from California to Oklahoma and more. We’re going to be talking to people who are starting to answer these questions in different ways and who are doing really innovative work that could make a difference for the future of our cities.
Eric Jaffe: We’re so excited to share this journey with you and to kick off this conversation. So subscribe. Tell your friends, tell your colleagues, and especially tell those in the real estate world.
Vanessa Quirk: Oh, and before we go. We have to thank the many lovely people who helped make this episode possible. So thank you to Alison Novak, Jesse Shapins, and Chrystal Dean from Sidewalk’s development team. Thanks to our producer Guglielmo Mattioli, our advisor Benjamin Walker, and our mixer Andrew Callaway.
Eric Jaffe: And as always, our music is by Adaam James Levin Areddy of Lost Amsterdam. And our art is by the great Tim Kau. We’ll see you in the future.
Vanessa Quirk: See ya!