Related Companies is a vertically integrated real estate development company. I was very fortunate to spend the summer before my 1st Year at Harvard Business School at Related. Most of my analysis is based on what I learned about the business over that summer.
During an executive summer seminar, someone pitched Related as “A group of small (related) businesses that operate with the same back of house functions.” By having everyone in-house, Related is extremely effective at extracting value by making the real estate process less fragmented. The company also gains a lot by hiring a talent-diverse workforce and empowering these individuals to perform at their best.
Regarding the “less-fragmented” process, since the company is private I do not have access to its financials, but I do know at each level of fragmentation, money is extracted by the player at that level. For example, a broker for an apartment lease can get 10% of a one-year lease and 30% of an office lease. For that reason, bringing a broker in house is really beneficial for a property manager because they could align incentives to work better for them and the broker.
To further describe the fragmented process of real estate development, below is a list of the typical steps involved in developing an apartment building in the United States:
- A site becomes available, a developer sees an opportunity to make money
- A developer uses its own money for pre-development costs such as acquiring land, getting entitlement from the local municipality, and paying architects, engineers, etc… to create documents that can convey the vision for a site
- Raise equity from limited partners
- Raise debt from bank
- Use capital to hire architects, engineers, lawyers and a general contractor to finalize design and construct the building
- Lease-Up the Building
- Manage the Building to get the highest market rent, until the Building is obsolete
Related has all of the above listed capabilities in-house. There are active development/acquisitions teams looking for opportunities; a construction management team that can both help with cost estimation for potential projects and assist in selecting the contractor for the project; a debt/equity fund in house that can issue loans/equity for a transaction, if it is positioned right for its portfolio; a realty company that leases apartments and sells condominiums within the Related portfolio and outside of it as well; and a property management team that ensures the buildings are properly maintained and that the tenants are thoroughly satisfied.
Related also recognizes real estate is a local business. Therefore, it has offices in different regions that manage real estate development in those areas and many of those offices have all the in-house functions that were just described. The offices consult within each other and share expertise across regions. Also, some of the offices share capital and the company is able to diversify its risk by not solely focusing on a particular market.
Related has continued to extend its business. To supply the massive Hudson Yards Development Project located in New York City, Related started its own curtainwall factory in Pennsylvania. This venture was created purely to cure the supply/timing problem of curtainwall from China. There were one too many times where buildings had to wait to be glazed because of the delayed arrival of curtainwalls. Though this may be a cost-intensive way to solve a problem, getting a building to full occupancy and delivered is extremely important in the real estate development business, as this is when cash is flowing and the building is creating value.
Another way, Related went outside of traditional real estate development firm is by acquiring Equinox. Equinox is a fitness club and a highly perceived brand within its industry. Related wanted this brand to be an offering in its luxury apartment buildings, so they acquired the asset. In Hudson Yards, Related plans to open the first Equinox Hotel catering to the health/fitness conscious traveler. With the acquisition of Equinox and SoulCycle a subsidiary of Equinox, Related has shown its interest to be a lifestyle brand and to create an elevated way of living. These acquisitions ultimately should contribute growth to Related’s bottom-line because unique amenities are necessary to attract the customers that are willing to pay the premium for its luxury apartments.
Related is now a behemoth in the real estate world and will continue to be a market leader because of its integrated process and spectacular product. I have certainly not described every aspect of its business from its offering in retail, office and affordable housing asset management. My hope is that this article articulates the value the firm extracts through it vertical integration and shared resources.
My last note, the $20B Hudson Yards Project will be a major test of Related’s capabilities. But, the project is succeeding/will succeed because of the operational model Related has been executing for some time.
For More Information: http://www.related.com/