Design-Driven Development
When design experience means better development margins through math, not through paint color "vibes."
People talk a lot about “design”, or design-driven development, and how focusing on design can drive better outcomes and better investment returns.
But what do we actually mean when we say design?
Many people probably think of what countertops to use or what shade of grey to paint the walls. But in development, design is so much more, and it starts at the very beginning of every project.
Below, we’ll detail a ground-up development project (using an actual site in Manhattan) and show the various ways that design, in all of its forms, can impact outcomes.
There was a recently listed development site in Lower Manhattan with the following details:
Lot size: 12,590SF
Allowable FAR: 12
Buildable Sq ft: 151k SF
Estimated sales price: $60.5mm (or $400/buildable sq ft - BSF)
Let’s underwrite the deal 2 ways, while changing some of the main variables that are impacted by design.
Under a standard design framework:
Gross sq footage as a % of BSF: 110%
Net sellable sq footage as a % of BSF: 90%
Total loss – Gross to Sellable: ~20%
Number of units: 124
Average selling $/SF: $3180
Presale %: 25%
Units sold/month: 2
HOA charges ($/SF): $1.70
Pre-development: 2yrs
Construction: 3yrs
Total Project duration – to final sellout: ~8.5yrs
Project IRR: 16%
Equity Multiple: 2.7x
By all accounts, a great project. And with $154mm in profit on $257mm in total costs, very profitable, as well.
Now let’s change a few assumptions, and see how much “design” can impact returns:
First, we’ll reduce the total common spaces – i.e. amenities and other spaces that can’t be sold
Gross sq footage as a % of ZFA: 108%
Net sellable sq footage as a % of ZFA: 92%
Total loss – Gross to Sellable: 16%
Next, we’ll reduce unit sizes across all unit types, increasing the number of units by ~15% (also impacted by the above efficiency numbers).
Construction costs will also be higher. After all, we’re building more kitchens and more bathrooms in the same envelope. However, this will be more than offset by higher sellable ft and higher sellout prices per ft.
Number of units: 142
Then, because we are selling smaller units, we’ll slightly increase the PPSF of each unit, while still lowering the total sales price of each unit:
Average selling $/SF: $3250
Then, because the units are less expensive, the available buyer pool is much larger. So, we’ll increase the % presold and also the # of units sold per month.
Presale %: 40%
Units sold/month: 4
With less expensive amenities, we’ll reduce the monthly common charges a little:
HOA charges ($/SF): $1.40
Finally, with a more thorough and precise predevelopment process (along with more relentless execution management), we’ll reduce the construction timeline by 6 months:
Pre-development: 2yrs
Construction: 2.5yrs
Put all of these changes together, and the impact is obvious. With smaller, more efficient, and more accessible units, our total project timeline is reduced by 2 years.
With less amenity space, more sellable square footage, a slightly higher PPSF, and less operating and interest reserves, profit is higher, and investor money is returned faster.
This results in a higher IRR, AND a higher equity multiple.
Total Project duration – to final sellout: ~6.5yrs
Project IRR: 23%
Equity Multiple: 2.9x
THIS is what we mean when we say “design-driven development”.
An aside:
Development is near the top of the list of what many investors consider "risky."
However, risk varies depending on the execution.
This is where many confuse risk with consequence. (There is no better explanation than how Alex Honnold describes the distinction between risk and consequence.)
“Risk is the likelihood of something going wrong, while consequence is determined by the severity, if something does go wrong.”
Keeping the consequences in mind and using our experience to mitigate risk, the deal above illustrates some of our risk mitigation strategies.
Here are out top 4.
1 - Lot Selection
One of our key criteria is buildable area. In Manhattan, developers tend to max out allowable square footage per zoning regulations. No one leaves density on the table unless the cost becomes prohibitive (like in areas with mandatory inclusionary housing requirements).
We target sites under 200,000 buildable square feet for two strategic reasons: reduced competition and to manage market saturation. Staying below this threshold means we're not competing against developers backed by low-cost institutional capital who can outbid us. We also prefer smaller buildings that create a more desirable end product, selling faster at higher per-square-foot prices without flooding the neighborhood with too many units.
2 - Right-Sized Amenities
While studying the market, we toured many condo buildings where it was clear that one of their major causes of inefficiency was multiple underused amenity spaces. The problem wasn't just oversized spaces. It was over-programming. We saw buildings with multiple lounge areas and pools that were constantly out of order.
By avoiding the amenity bloat, we maximize sellable area while still providing what buyers expect: a well-designed gym, generous package room, and thoughtfully designed common areas. This approach eliminates underutilized spaces that mostly saddle owners with higher maintenance fees.
3 - Efficient Floor Plates and Units
We design from the building level down to individual units. First, we optimize how all units fit within the overall floor plan. Then we focus on making each unit as efficient and functional as possible.
This creates more (and better) units overall, which drives down individual unit prices, expanding our buyer pool, while promoting faster sellout, which reduces risk while maintaining strong per-square-foot pricing.
We're not talking about micro-units. We're talking about making a 625-square-foot one-bedroom feel as comfortable as a 700-square-foot unit. Buyers looking for a one-bedroom unit may not notice the difference (aside from the increased price), and in many instances, prefer the feel of the smaller unit simply because it is better laid out and therefore, more functional.
The math tells the story:
700SF × $3,180/SF = $2,226,000 vs 625SF × $3,250/SF = $2,031,250
The smaller, better-designed unit costs the buyer $194,000 less while achieving a higher price per square foot.
4 - The Team
This includes both our in-house team and the external partners we rely on for project execution. We're not building relationships on the fly or scrambling to assemble teams from scratch, because we've spent years working together and refining our processes.
We also know when to engage the team in the most meaningful way, which means we can preserve capital at the beginning stages of the project, when there is the most risk.
Why Share This?
Points 2-4 are incredibly difficult to execute well while managing budget and timeline constraints. Knowing the strategy and executing it successfully are very different challenges.
We’ve executed these predevelopment strategies with our clients for over 5 years. We’ve helped make their buildings/units more efficient and assembled the best teams, leaning on our network and experience.
As always, the aim of the newsletter has been to share how we approach the work. In the past, we’ve focused on project management principles and best practices, but as we expand to test out our ideas, we have found it valuable to share our perspective.
Either as a way to illustrate how we approach crafting a strategy, or as a way to clarify our thinking.
If you are interested in investing in our fund, let us know via the investor interest form below.
AND
We are looking for long-term capital partners interested in a 5 to 10-year hold and looking for investment opportunities in the $10-$50mm range.
OR
If you have a development site with at least 40,000 buildable square feet zoned for residential use as of right in Manhattan or a good candidate for an office-to-residential conversion, let us know!
Most importantly, we want to meet and begin building relationships with people who are interested in what we are doing and who believe in how we approach the work, regardless of interest in our current deals.
Send us a note if you’d like to chat!
Aside from our development work in NY, MADDPROJECT provides fee development and professional project management services across the US.
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