Savvy building developers are reaping the vast majority of rewards
While architects are responsible not only for the design of buildings but also for their economic performance to the extent that their designs meet the demands of the marketplace, it is the building developers who reap the vast majority of the rewards.
Developers conceive the projects, select their locations, acquire the land, determine the target market, obtain the financing, oversee the design and construction, and lease-up or sale of the completed building. Because they do not take the risks that the developers do, architects rarely capture a significant share of the value created by their designs. Based on the AIA Firm Survey 2012, for instance, the overall cost of architectural services averages 6.1 percent of a project’s total value. Assuming they get a ten percent profit margin, the net value of these services for architects is well under one percent of total construction costs, putting them near the bottom of the pecking order of the building industry, at least economically. This compensation is at odds with the outsized role that architects typically play in the development of a building project. As a result, for many practitioners the profession is one of long hours with relatively low pay.
Architecture graduates can typically expect to earn less than their peers in other fields with comparable schooling and for many securing a full-time job comes after a slew of unpaid or underpaid internships. The prevalence of design competitions make it so architecture firms must sometimes work for free in hopes of landing a commission, and often times firms find themselves relegated to the role of consultants instead of exerting meaningful leadership on building projects. Such are the common gripes with traditional architectural practice. There is, however, a different path. The architect-as-developer business model provides an attractive alternative to this traditional method of practice. For the architect, the architect-as-developer practice model presents an opportunity to exert greater project leadership, have more freedom in the design process, have more control over what is built and the quality of its finishes, and, of course, make more money.
The idea of an architect acting as her own developer is not new. John Portman, for example, has been championing this business model for decades. Additionally, a quick Google search of the term “architect-as-developer” leads one to the website of Jonathan Segal, a San Diego based architect-developer who has been holding popular seminars that promise to teach architects how to develop their own projects for years. While not new, however, the practice model is rare. Traditional architectural pedagogy skirts the issue of money, choosing instead to focus on the development of the art of architecture. For many, this mindset carries over into professional practice. In architectural circles, money has traditionally been an issue that is seldom broached. However, in the wake of the Great Recession — and the resulting erosion of the architectural profession and its earning potential — this has begun to change. There is a growing interest on the subject and alternative methods of practice, both professionally and in academia. Indeed, the last edition of The Yale Architectural Journal, “Perspecta 47: Money,” was devoted entirely to the subject. Courses on alternative practice methods are also becoming more popular at architecture schools.
“When I went to school, ‘money’ was a dirty word, and nobody talked about it” says Alex Barrett, principal of Barrett Design and Development, and architecture and development firm based in Brooklyn, New York. “And it’s great that we talk about the economics of architecture and design because, at least in my experience, in school it just didn’t get talked about.”
Last fall, Barrett, Jared Della Valle of Alloy LLC, and Cary Tamarkin of Tamarkin Co. took part in a panel discussion at Harvard’s Graduate School of Design (GSD) to speak on the architect-as-developer business model. In front of a room overflowing with architecture and real estate development students, the three presented the work of their respective firms and spoke openly on their decisions to pursue this unorthodox business model. All three firms practice architecture and development in New York City. While each firm operates in different sub-markets and at different scales, however, the three practitioners were all driven to begin developing their own projects for similar reasons: a general discontent with their experience with traditional architectural practice and a desire for greater control over and compensation for the final outcome.
“I started to become disaffected with the practice of architecture,” says Alex in describing his motives for pursuing development. Before founding Barrett Design and Development in 2005, Barrett spent seven years working as an architect at a number of firms in New York City. It was this experience that drove him to find another way. “Architecture as it is practiced today has a variety of challenges. It tends to be a quite passive profession in the end; we’re always waiting for a client to walk through the door with a project and a site and a budget, and we don’t really have too much input on those things. And that was something that started to trouble me.” As a result, he decided to strike out on his own and pursue a different method of practice. With the help of friends, Barrett bought a rundown row house building in Carrell Gardens in 2005 and began practicing as both an architect and a real estate developer.
Since its founding, Barrett Design and Development has completed nine projects with two more in the works. Operating in Brooklyn, the firm has specialized in condominium projects, with the project sizes to date ranging between 6,000-24,000sf. The firm is now working on what will be their largest project to date, a seven-story, 35,000sf condominium building in Crown Heights. Just about all of the staff at Barrett Design are trained architects, and ten years in, the firm has an impressive track record. “We are proud of our results,” says Barrett. “We have had good financial returns in addition to creating buildings we are proud of.”
The firm has returned an average IRR of 37.76 percent to its investors since its founding, a point that Barrett, understandably, is not shy about disclosing. To date, the firm has invested just over $23 million of investor equity on current and completed projects “from an ever increasing pool of people I like to call friends,” says Barrett. The firm has achieved an impressive 102.13 percent return on equity on its completed projects and is expecting to reach similar levels on its current projects. Total project costs for the firms completed projects have been approximately $51m with gross sales just above $71m, $14.6m have been profit. The firm’s focus on design as a value driver is a tactic that has clearly worked well for Barrett.
For Jared Della Valle, co-founder of Alloy LLC, the move into development also seemed like a natural next step. “I like to say I quit architecture,” says Jared. “It was difficult to say I was an architect-developer because everybody thought it was some ‘light’ form of development. And if I said I was doing development everybody thought I quit architecture. It was easier, to a certain extent, to just say, ‘we’re a development company. ” Before co-founding Alloy LLC, Della Valle was one half of Della Valle Bernheimer, an architecture firm he co-founded after architecture school. While successful, his desire to have greater control over the building process and capture more of that value his designs created led him to leave this architecture firm to co-found Alloy LLC. Founded in 2006, the company has completed eight projects to date, and has steadily grown in scope and scale.
In addition to Alloy Development and Alloy Design, the real estate development and architecture arms of Alloy, over the years the Alloy umbrella has grown to also include Alloy Construction, their contracting company, and Alloy Advisory, a brokerage company. The spirit of this growth strategy is “to do whatever it takes to control the outcome,” says Della Valle. “You kind of have to be involved in everything, at least from my perspective. It’s one of the differences between the desire for ultimate quality and making great architecture and the volume and the money.” It is a process that has proven to be successful for Alloy.
Jared credits much of the success of the company to its architectural roots. Everyone at Alloy is a trained architect, and this is what gives the firm an edge on the competition, according to Della Valle. It is something that has especially helped the firm win public RFPs like their most recent project, 1 John Street. “In the public process we actually do quite well because as a team of architects we just spend so much time making the perfect presentation and using the presentation skills that we learned over the years to make a very provocative public presentation.” The architectural skillset at the foundation of Alloy is also what Jared believes gives Alloy an edge in acquiring difficult sites. “Our company tends to buy the worst best real estate. We find the things that other people can’t address because in house we can do the due diligence to solve the problem. Or we can spend the time or see something that a lot of the other development companies might not be able to.”
For Alloy this approach has proven lucrative. The firm’s mission, which Della Valle sums up as being “to produce great work and to leave behind great buildings,” has allowed it to consistently out-perform its competition. Average sales prices for many of Alloy’s developments have outpaced the Brooklyn average per square foot, at times by significant amounts. On 192 Water Street, for instance, the sales price per square foot was 33 percent above the average. Alloy’s projects have also sold quickly. 55 Pearl Street, for instance, a townhouse development in DUMBO, Brooklyn sold out only months into construction and did so at significant premiums, fetching between $4.1m and $4.8m per unit, well above the projected sales price of $3m per unit.
This ability to create real monetary value as an architect through careful design has long been apparent for Cary Tamarkin. The longest-practicing of the three panel participants, Tamarkin’s decision to move into real estate development came down to one issue: money. “There’s only one reason why anyone would be insane enough to be a developer instead of an architect, and that would be to make money,” says Tamarkin addressing a room full of architecture students on why he chose to pursue real estate development. “I don’t feel like a pig saying that because I devoted my entire life up to that point to the art of architecture,” he continues. Tamarkin attended Harvard’s GSD to study architecture and began a successful architecture practice with a partner immediately following graduation. For him, it seemed almost destined that he would become an architect. “Like most of you,” Cary continues, “I’ve been an architect since age 10.” After practicing for a number of years, however, the zeal began to fade. “I was having a really good time doing architecture,” he says, but the issue of compensation loomed large. “I was thinking about it for like 10 years. How do I make some money?”
“I got to the point where I convinced myself to throw it all up in the air. I thought ‘what can I do that at least has the chance of making some money?’ because I know architecture doesn’t. I was ready to give up the title of Architect even though my whole life had been about that.” Luckily for him, he didn’t have to. After considering going into advertising or set design, Tamarkin settled on becoming a real estate developer.
Cary founded Tamarkin Co. in 1994 to combine his passion for the art of architecture with the business of real estate development. He began his first project on the tail end of a recession by purchasing and renovating 140 Perry Street in New York’s West Village. The success of the project he attributes largely to good fortune and the right timing. “It turned out to be fantastic, but it was not genius. It was just luck. Pure luck. I didn’t even know that there were cycles in real estate.” Since that time, Cary has learned considerably more about development and Tamarkin Co. has amassed an impressive roster of projects in New York City.
The firm has created a portfolio of residential condominium buildings — ranging from conversions of historic structures to ground up development projects — that have garnered acclaim for their aesthetics and sensitivity to the urban context. Notable projects include: 495 West Street, which led the wave of new residential developments along the West Village waterfront and was the recipient of an American Institute of Architects Honor Award, 47 East 91st Street which is the first new residential building in Carnegie Hill to have been approved by the NYC Landmarks Preservation Commission in over 50 years, and the recently completed 397 West 12th Street, 456 West 19th Street, and 508 West 24th Street residential developments along New York’s popular Highline Park. For Tamarkin, development has afforded him the opportunity to both make money and continue to pursue his and his team’s — mostly architects as well — passion for the art of architecture. “We just love it. Everybody in the office just loves what they do.”
For the three practitioners, deciding to bet on themselves has paid off handsomely. For them, acting as both architects and developers has allowed for a greater freedom of design and complete leadership on projects that have overall been very successful on a number of levels, both financially and architecturally. And all three attribute their architectural education as the engine that has driven their success in the development field.
“I’m a big advocate of a design education. I think a rigorous design program is going to teach you how to be a critical thinker. You gain skills and tools that you can apply to any number of things,” says Barrett. This design education has allowed the three to see value in things other developers might overlook. In the end, it is their attention to more than just the bottom line that has allowed them to outperform competitors. Architecture and real estate development, after all, are not all that different of pursuits. “If you’re an architect you are a real estate developer,” asserts Della Valle, “the difference with being a real estate developer is a willingness to take risk on a project. To make a decision to take control. But that’s it.”
“There is no secret on the other side,” continues Tamarkin, “I just think you have to be able to think like a businessperson for the amount of time that you are playing that role.” Combining these roles, however, is rare, and Cary admits as much. “There are very few people that are architects and developers. At some point I turned out to be the old man of this group in New York,” he jokes. Judging by the turnout at last fall’s discussion, however, the practice model is one that is becoming increasingly appealing to both current and future practitioners. If they are able to raise the capital and are willing to take the risks attendant with development, many architects may find that acting as their own developer could prove to be a better way to move forward.
Luis Gil holds a Master of Design Studies degree in Real Estate Development from the Harvard Graduate School of Design and is the founder of Taller (www.taller.la)
Richard Peiser is the Michael D. Spear Professor of Real Estate Development at the Harvard Graduate School of Design.