Appropriateness of Real Estate Development Principles in Construction Education

 

Paul W. Holley

Assistant Professor

Auburn University

Auburn, Alabama

In addition to traditional construction coursework, students in most construction and building science programs are exposed to architectural and engineering issues, particularly as these topics relate to the building industry.  Construction programs expose students to multiple areas so that they have a basic understanding of what to expect from their future industry counterparts.  However, few programs spend significant time covering business principles from a project Owner’s perspective.  This author believes that including real estate development in construction curricula would be particularly beneficial in preparing students for entry into the construction industry by understanding the course of events occurring prior to and after the construction phase.  This paper proposes to validate via industry the need to regularly include this facet of the building industry in construction education.

Keywords:  real estate, curriculum, owner, finance, proforma

Introduction 

Are the dynamics of real estate business principals that are important to future constructors similar to the foundations that they receive through the study of structures and of interaction with design professionals?  If constructors are expected to understand bending moment and the issuance of an architect’s certificate of substantial completion, should they not also understand the source of funding for a project?  Most constructors will, at some point, work with or for owners, engineers and architects, and in many cases will act in a design or ownership position themselves.  Currently, in most construction or building science curriculums at the university level, real estate development principles as they relate to construction are not a significant part of required coursework, being offered either not at all, through a cursory overview, or in limited cases as an elective. 

As the development, design, and construction process becomes more sophisticated, industry participants are finding the need to become more versed in their counterparts’ business understanding and vocabulary.  For many construction markets, it is no longer sufficient to simply be prepared to assemble a bid and construct the building with no further obligation.  As Construction Management techniques and preconstruction services become more dynamic, constructors can be much more valuable and productive with knowledge of development proformas, equity sourcing, planning and zoning issues, and development exit strategies.  These development issues relate to construction in many ways, such as life cycle costs, sensitivity to schedule, and infrastructure costs.  However, the constant tangents between development and construction are clear:  money and risk. 

Owners’ final objectives for procuring construction services are to create a tangible structure where they can accomplish their intended goal of commerce.  For whatever result an owner foresees in developing real estate, constructors must be equipped with a healthy vocabulary in order to intelligently converse with them and help bring the project to fruition. This type of dialogue being taught in the classroom prior to employment would present a distinct advantage to students entering industry.  By accelerating acclimation to these issues, constructors would not only be able to “speak” development to support their own interests, but also become an industry asset via credibility as perceived by project owners.

Literature Review

In their book, Real Estate Principles Sixth Edition, Floyd and Allen (1999) offer the definition “real estate development involves the subdivision of land and the construction of improvements such as roads, utilities and buildings ranging from individual homes to multimillion dollar office buildings and shopping centers.” (p. 11).  This suggests that while the two professions are not synonymous, construction is indeed closely related with the development of real estate.  Floyd and Allen also note that a collegiate course in real estate principals is often found under the general umbrella of business school curriculums.  Although real estate principles are important in business studies, this author disagrees with their notion that they are “much too specific for adequate coverage in other areas of academic study.” (p. 2).

The research of E. H. Chan, M. W. Chan, Scott, and A. T. Chan (2002) takes a closer look at construction education curricula and the multidisciplinary topics that need to be covered.  They believe that construction education is becoming more of a general academic study because of the increasing demands placed on construction professionals today.  They offer that the roles and characteristics of individuals in the construction industry are becoming less defined.  They state:

Building professionals are adapting to the needs existing in the industry and are trying to exploit every area of potential revenue for survival in a competitive market. Tensions have been building up between construction professionals in the industry because of the changing nature of their work. In recent decades, the management and organization of the construction industry has been changed.  Relationships among construction professionals have become more complex in nature and substance, and they have affected their practices. Increasing expectations from clients for professional services have also wrought pressure for change on all professions. These changes have eventually induced structural changes in their traditional roles as professionals (p. 47). 

With regard to constant change and growing complexity, they further that “construction projects always involve a number of different disciplines of construction professionals.  It is apparent that no one single discipline within the construction profession is able to manage the entire process of a large development project.” (p. 47).  This suggests that equipping constructors with basic knowledge about real estate could thereby offer an owner a distinct advantage.

Chan et al. further their study by noting that it is not unusual for construction professionals to hold several qualifications from accredited institutions.  This multidisciplinary approach will help future construction professionals to diversify and offer the capability of accomplishing many different types of jobs.  They state that this approach “could be complimentary to architects, engineers, and planners in the context of cost engineering, valuation, and financing of development programs.” (p. 48).  Of particular interest is their stating that “The industry requires the education of a new construction professional with good general knowledge to oversee and manage project development and the construction process.” (p.50), as it implies that future construction education should involve some element of real estate development in addition to the core construction curriculum.  (Chan et al. 2002)

Conflicts may occur when an owner’s perception of the effectiveness of the construction service provider is diminished.  As fundamentals such as communication, competence and credibility are compromised, the owner will most likely choose a different service provider.  Maloney (2002) states:

Understanding and knowing the customer involves making the effort to understand the customer’s needs by learning the customer’s specific requirements, providing individualized attention, and recognizing the regular customer. To effectively satisfy a customer, all of the contractor’s personnel must understand the customer’s needs and requirements. In addition, the personnel must perform in a way that addresses those requirements. A customer who perceives that the contractor’s personnel understand his or her requirements and are working to satisfy those requirements will perceive the contractor’s efforts positively. (p. 526)

The notion of “perceived” understanding is a critical part of Maloney’s suggestion, in that a constructor’s knowledge must be appropriately demonstrated and not just have been gained. 

Methodology and Results 

Curriculums of many construction programs were reviewed to determine to what extent real estate development was included in construction education.  The primary source of feedback for validation was gathered via quantitative analysis of survey results from both contractors and real estate developers as further described in this paper.  Survey questions were generated through a series of interviews with select developers and contractors.  The author’s own perspectives provided much of the survey content, as he spent thirteen years in both the development and construction industries. 

Curriculum Search 

Accredited construction programs were reviewed to determine the extent in which universities offered construction students exposure to real estate topics.  Most programs do not include or require coursework in this area.  Certain programs, however, currently include substantial real estate development coursework; they are noted below in anonymity with respect to blind peer review. 

Construction Program “A” allows construction students to graduate with a concentration in real estate development.  Students who choose this route must take seven courses specifically designed to shape their career towards the planning and development of real estate projects.  The courses include topics such as legal, financial, tenant consideration, and the feasibility analysis of development projects.

Program “B”  offers a similar hybrid study.  They require students to study the integration of economic location theory, feasibility reports, development cost data, market research data, and financial analysis into their construction curriculum.

Program “C” offers a course in the Management of Facilities and Occupants in their construction management masters program.  The class covers the principles of decision making for the financial, planning, marketing, and operation of real estate projects.

Program “D” provides construction students courses in construction financing, project planning and feasibility as part of their curriculum.  Principles and practices of commercial land development with an emphasis on construction finance provide students exposure to an owner’s daily operations.  Additionally, by studying the acquisition and management of funds as it relates to construction, their graduates become equipped to pursue careers in development and mortgage brokerage for construction projects.

Program “E” has perhaps the most comprehensive real estate courses to be implemented into a construction curriculum.  These topics include real estate finance and valuation to include the sources and uses of funds for commercial real estate properties.  They also covered the acquisition and development of real estate, construction financing, permanent financing, and real estate ownership structures.  All of which combine to form a thorough multidisciplinary approach to a construction discipline.  

Quantitative Analysis

The questionnaire survey was conducted in the spring of 2003, sent to 120 contractors and developers.  The deployment methods consisted of an interactive web based survey sent out via email, letters inviting response via mail, and interviews via telephone.  The questionnaire remained constant for all industry specific participants, regardless of their delivery method.  The only modification to the survey involved a slight alteration to the wording of the questions for contractors and developers.  The intent of soliciting feedback from both contractors and developers was to separate their perspectives.

Contractor Results

Of the 95 contractors surveyed, 57 responded, representing a 60% response ratio.  When asked how beneficial a course in real estate development would be to a construction graduate, 53% of the contractors responding indicated that it would be very beneficial.  Forty-five percent believed a course in real estate development would be moderately beneficial to a construction graduate.  Only 2% of the construction professionals surveyed believed that they should not be taught in such an environment.  Additionally, 86% of those responding believed that there were no potential problems associated with combining construction education with real estate principals.  Of the 14% who did perceive there could be conflicts, the majority of the respondents believed the problem related to the students lack of knowledge about business transactions.

Course material was analyzed in further detail to determine contractors’ perspectives on appropriateness.  The categories included the marketing, funding, construction and operations facets of real estate projects.  The following table depicts the results of the level of agreement that contractors believe students should study in order to be well prepared.

When asked to comment on a proposed real estate course and how it would rank in importance to existing classes in a construction curriculum, the majority of the construction professionals favored real estate.  Of the contractors responding, 80% feel that a real estate class is at some level more beneficial to future constructors than is a class in AutoCAD.  86% believe that real estate is more important that Organizational Theory and Behavior.  The following table represents the majority of the contractors surveyed that believe real estate is indeed more beneficial than some courses currently required in many construction curricula.

Developer Results

When 25 developers were asked to respond to the survey about development topics being taught in a construction curriculum, 64% provided feedback.  Of those responding, 100% believed that the same real estate categories of marketing, funding, construction and operations, would be beneficial for construction students.  The following table enumerates these results; note that the survey response choices were identical to those offered the contractors who were surveyed.

When asked how beneficial they believed a construction program graduate would be to their development firm, 56% of those responding said that they would prove to be very beneficial, while 44% believed a construction graduate would be moderately beneficial to their company.  Further, 56% of the responding developers said that their company currently employed construction professionals while 44% responded they did not.  This suggests that not only are there opportunities for construction graduates in development work, but that more development firms than not employ construction graduates.  The author proposes that this would likely be further supported were large corporations with in-house capital project development departments included in these statistics (e.g., manufacturing firms, healthcare systems.)

In foreseeing conflicts associated with combining a construction education with real estate principals, 94% of those responding did not predict any problems.  The 6% that did sense a potential conflict based their assumption on a potential loss of interest in core construction classes.  Their recommendation was to implement a class that would focus on the relationship between the two professions.  

Conclusions and Recommendations

The constructor’s role in the development process overlaps with many other disciplines.  While construction education should not be obligated to make future contractors experts in real estate development or other peripheral subject matter, at the very least students should acquire a working vocabulary and be able to grasp basic analytical skills needed to effectively communicate with the planners and financers of development projects.  Future construction graduates will find themselves in many career paths other than that of the traditional general contractor.  These roles will include construction management, pre-construction services, owner’s representation, and many others, all of which will require graduates to appropriately communicate with a project owner.  The construction graduate will need to understand and in many cases articulate the needs and expectations of the owner during the development process.  Additionally, certain project delivery systems such as program and construction management call for a more interactive role with the owner.  In these roles, a contractor must assist and advise the owners with regards to feasibility, site acquisition, the selection of financing and even tenant considerations.  It is also not unusual today for constructors to have equity positions in private developments to demonstrate vestment as well as differentiating themselves from competitors by providing the owner with initial cash. 

Construction curriculums have historically included much coursework on the design and engineering facets of the building process, while real estate, ownership, financing and other related topics have often been excluded.  The development industry’s perspective on appropriateness is predictable, as there is no real cost to them but has obvious benefit.  However the building industry’s view cannot be ignored, as the results are strong.  There is indeed a “cost,” considering many construction programs are limited in available credit hours and faculty experience, but the cost is worthwhile.   

Constructors are constantly searching for not only improvements to their services, but also competitive edges in procuring work.  The manifestation of development and ownership material in construction education is opportune for this.  The responsibility of academia in preparing construction graduates extends beyond building principles to that which is constant- money and risk. 

References 

Chan, E. H., Chan, M. W., Scott, D., and Chan, A. T. (2002). “Educating the 21^st century construction professionals.” Journal of professional issues in engineering education and practice., January, 44-51.

Floyd, C. F., & Allen, M. T. (1999). Real estate principles sixth edition.  Deaborn Financial Publishing, Inc., a Kaplan Professional Company

Maloney, W. F. (2002).  “Construction product/service and customer satisfaction.” Journal of construction engineering and management.  November, 522-529.