The commercial real estate industry in the U.S. suffers from significant underrepresentation of minority developers.
Statistics reveal a stark reality: out of approximately 112,000 real estate development companies in the U.S., only 1,000 are owned by minorities. Furthermore, none of the 383 top-tier developers generating over $50 million in annual revenue are Black-owned, and only one is Latino-owned. The wealth distribution is also skewed, with the wealthiest 1% owning 40% of commercial real estate, while the top 90% own 83%. These statistics were noted by different speakers at Baker Tilly’s 2023 DevelUP affordable housing workshop in Atlanta.
The event aimed to empower underrepresented developers from diverse backgrounds, providing them the tools to thrive in the real estate industry. The event sought to enable developers to scale their businesses and establish diverse teams by fostering networking opportunities and offering educational resources. Brandon Rule, CEO of Rule Enterprises, noted that expanding access to capital to the population at the bottom 90% is the key to expanding wealth for all.
Rule was part of a panel that discussed four ways opportunities for minority developers can improve: providing equitable outcomes for minorities in key sectors like commercial estate and construction; focusing on projects that will build community wealth; improving access and deployment of development capital; and building successful partnerships.
The need for diverse representation and access to capital is crucial for achieving equitable outcomes. Speakers at the event emphasized the importance of enabling historically marginalized developers to undertake projects and secure the necessary capital for success. Expanding opportunities for different communities will lead to more inclusive and desired development outcomes.
Vince Toye, managing director of Community Development Banking at JPMorgan Chase, said the commercial real estate sector will be more equitable “when we see projects being built, wherever they may be, by different folks that historically have not done them, and who have access to the capital and the investment that they need to do these projects.”
Nawal Noor, CEO of Noor Companies, Minnesota's largest woman- and minority-owned general contractor, said, “A similar conversation is happening involving equitable inclusion in the construction world. Inclusionary goals are created, yet they don't yield the impact they’re supposed to. With real estate, equitable development is the same as representation. If communities are built without representation, they aren’t built in the context our communities want.” Noor noted that because so many areas of the country remain underdeveloped, and these are often communities with majority non-white populations, the country does not provide as much economic development or opportunity as it could.
Vicki Lundy Wilbon, principal and president of real estate with the Integral Group in Atlanta, said affordable housing and community development go hand-in-hand. The bottom line to successful, equitable development is executing a transaction, understanding and avoiding the pitfalls, and coming out of the deal with profit and knowledge that will help you grow. She said that partnerships and mentorships are essential to assisting developers just starting out to avoid these pitfalls.
Rule agreed that a key to more equity in real estate is creative partnerships in the public and the private sector “that can accelerate the growth and the wealth in our communities.”
A key aspect of equitable development is creating opportunities for developers to build wealth. Currently, minority developers often find themselves limited to affordable housing projects, hindering their ability to generate substantial wealth. Community wealth can be nurtured and sustained by moving beyond the competitive nature of real estate development, fostering public-private partnerships and offering diverse housing options.
Latresa McLawhorn Ryan, CEO of Blackbird Strategy Group, who moderated this discussion, said there is an issue of market permissions where historically underserved developers find the dollars available to them are limited to affordable housing projects instead of overall commercial development, which limits the ability of these developers to build wealth. Rule expanded on that notion, saying that in terms of growing and scaling a company, it’s a challenge if affordable housing is all the company does. He noted that much wealth is created through asset management, but only 2% of asset managers are women or people of color. Further, it isn’t easy for a developer who builds a track record in affordable housing projects to pivot to raising a fund where they don’t have a historical record for investors to depend on.
Wilbon noted that their community-building success came despite the substantial hurdles of raising capital. Her organization, Integral Group, has tried to move beyond the traditional competitive nature of real estate development to build public-private partnerships and create a network of developers focused on community development work that delivers a variety of housing types that meet the needs of a variety of middle- and low-income families. She said, “Making home ownership available to those earning incomes across the bracket creates interest and drives people to the communities we're building.”
Toye said, “You can build all the housing you want, but if we have to go somewhere else to the grocery store, for daycare, or to see a doctor, we're never going to build community wealth. That’s not going to change that community.” Part of the goal of JPMorgan Chase’s work from a long-term wealth-building perspective, he said, is helping people who want to develop moderate- and low-income communities to stay there even as the neighborhoods change.
Equitable capital allocation strategies prioritize the fair distribution of resources to promote inclusivity and address systemic disparities in access to funding. These strategies involve intentional efforts to ensure that capital is allocated to underrepresented individuals and communities, taking into account historical disadvantages and barriers. Equitable capital allocation strategies may involve partnerships with community development financial institutions (CDFIs), offering preferential funding opportunities to minority-owned businesses, establishing mentorship programs, and providing education and support for marginalized entrepreneurs. By implementing these strategies, stakeholders can help level the playing field and create opportunities for those who have traditionally been underserved, fostering greater economic empowerment and reducing wealth disparities.
When discussing the need for additional capital options for emerging developers, Ryan said, “There has to be a concentrated strategy to bridge the gap between those who need capital for investment and those who are distributing that capital.” Most minority real estate developers do not have the benefit of generational wealth to depend on for initial capital investment. For these developers, Toye said, knowledge is critical. For a new developer, that may mean time spent working in the real estate section of a bank or a construction company to learn how deals are put together.
Toye highlighted JPMorgan Chase’s work with Community Development Financial Institutions (CDFIs) or funds in different parts of the country. He said, “We're putting equity into other funds … to lend out to developers of color across the country so they can make those investments and figure out how to support people in their communities.”
Noor noted that developers of color need to become more direct with capital partners who are considering investment in the affordable housing space. She related her experience working with a fund that was looking to support a Black developer fund – but in the past, had been nonresponsive to proposals she had made. She was direct with the fund – what can you do differently from what you have done in the past to engage with minority developers? Ryan noted that the onus is on capital providers to ask those questions internally, and they must be intentional about engaging with developers they're providing capital to understand what practices they need to shift and what will be helpful to get capital into the hands of developers so they can successfully execute on projects.
Wilbon added that while a variety of public and private institutions talk a lot about wanting to work with minority developers, the traditional underwriting, liquidity or guarantee requirements remain the same, maintaining the same hurdles minority developers have always faced. “If you are really trying to break existing barriers, there has to be some changes,” Wilbon said.
Ryan’s message to capital providers at the DevelUP event – “We have to start out small because we weren't given access to commercial real estate and the business through generational wealth or through others who have taught us so that we can leapfrog into larger deals. As a result, if you are intentional about serving this market, you have to meet us where we are and ensure that we have the ability and the capital to scale.”
Noor had a personal example about thinking differently to access capital for development projects. In part because of her background of emigrating from Somalia and living in public housing until she went to college, Noor knew she wanted to build a business focused on affordable housing. She realized after spending almost a year on one project that netted her a $15,000 profit that she needed to figure out a different business model that would include a more consistent stream of revenue to support various development projects.
“My intention was always to do two things,” she said, “One was, what can I bring to the table other than money that would make me a good partner for other people? And the other part was, what is it that will help me mitigate the highest risk in the real estate development – construction costs?” Her answer was to start a construction company. It still took almost a decade to develop successful partnerships. She said, “what worked for me is being a construction company and developer who has executed on projects, even small projects. People are really hungry for people who can execute.”
Rule urged minority developers starting out to look to municipal projects on public land with a low-cost basis and a longer timeline for completion. This will allow new developers to build experience without facing some of the pressures, costs and potential penalties working with private developers. “From a partnership perspective,” Rule said, “I think the first thing is understanding the game and then finding nuggets from each person you connect with.”
“From a capital perspective,” he said, “understand that construction debt is different from pre-development debt, which is different from permanent debt. So when you're talking to people at conferences like this, understand what that person you're talking to actually does. It's super important to understand what lane you want to go down and how the person across from you can assist with that.”
Toye added, “It’s important to understand why a bank, a CDFI or someone else says ‘yes’ to you and why they say ‘no.’ If somebody says ‘no’ to you, have them explain why. Every opportunity, every interaction is an opportunity for you to get knowledge.”
“What has worked for me is a proven track record both in the construction and development sides and then moving to that next big deal, " Noor said. “Every single deal that we do, there's something we learn that we can take to the next project.”
Wilbon said, “Make sure as you're growing your business ... that you're also thinking about how you grow your platform; a lot of that comes through partnerships.”
Improving opportunities for underrepresented developers in commercial real estate is a complex but essential undertaking. The industry can become more inclusive and diverse by driving equitable outcomes, focusing on community wealth building, facilitating access to capital and nurturing successful partnerships. Efforts from all stakeholders, including capital providers, developers and government entities, are crucial to achieving these goals.