Every successful real estate developer I’ve ever known has distilled his experience into a few simple calculations that enable him to quickly analyze very complex deals and decide to move forward on or reject a deal. Add a gut feeling, based on a lot of knowledge, for the viability of the site, and an analyst may be directed to produce a very complex spreadsheet that justifies the developer’s decision, and appears to be the basis for it.
Steve is a self-described quant whose early ambition was to become a college math professor. Here’s one of the rules of thumb he shared with the students:
Rents are low enough in the South Loop that land today is basically worth nothing for apartments.
Every ten cents of rent is worth about $13,000 a unit in land value. If rents in River North are $2.90 a [square] foot and they’re $2.20 in the South Loop – which are facts – that 70 cents means that the site in River North … that’s a [large] swing between them.
What it really means is that if the land is worth $50,000 a unit in River North, it’s a minus on that site right there [pointing to the South Loop].
The segment that includes the above quote begins at about 38:00 in the above video. If you have time to watch the whole thing, we’re confident you’ll find it fascinating.