A friend of mine just sent me this blog post from the venture capital firm, Shadow Ventures. They specialize in the built environment (i.e. real estate and construction) and the post is called, “What McKinsey gets wrong about the built environment.” Here’s one of the points that they make:
We are project based. While we are much larger, the most similar business is the movie industry. Project based, different source of funding/budget every time, the team changes (but we have our faves).
This is very true. Oftentimes what happens in real estate is that you start with an opportunity. Something like, “buy this building, fix it up, and then sell it for more.” If the opportunity sounds compelling, a common approach is to then “get control of the asset and figure out how to capitalize it.”
What this means is a conditional deal so that you can (1) do your due diligence and (2) figure out how to pay for it. This gets back to the three-legged stool that we’ve spoken about before. To do real estate stuff you basically need 3 things: a piece of real estate, relevant experience, and, of course, some money.
This speaks to the entrepreneurial nature of real estate. But it also speaks to why it is maybe unfair to evaluate the architecture, engineering, and construction (AEC) industry as you might the automotive industry. The auto industry doesn’t capitalize and make each car slightly differently.
This is one of the many things that makes real estate unique. And it’s why we have seen an enduring effort to figure out the “productization” of housing. It’s about being less project based.
BRANDON DONNELLY 
As someone who was a film/TV producer and a real estate development executive and entrepreneur i can affirm this comparison. Nicely done Brandon.
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Resonated with me as well, Brett. Some movies do well. Some don’t.
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I’m not sure who compared real estate to the automotive industry, but it goes way beyond project based component. Keep in mind the face that real estate is the closest to a pure capitalist market as we have (moreso on the resale side). There generally aren’t “cost leader” or “subsidization” pricing strategies. There is simply what a buyer is willing to buy for and a seller willing to sell for that makes the value of a home, regardless of the actual cost to build it. The automotive industry will sell one entry level car at a near break even point in order to create loyalty (ie a $500-1000 profit for a Corolla), in hopes that the buyer will keep upgrading in their brand to the higher profit margin vehicles in their fleet (Camry, Lexus). Even grocery stores will put items with no profit (Ie milk) in the back or take losses on sale items (Walmart) to bring you in so you impulse buy higher profit margin items.
Real estate doesn’t work like this. It’s an entirely different beast within the capitalist system and I appreciate the comparison to the movie industry on multiple levels.
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Thanks Brad.
The construction and auto industries are often compared to show how poor productivity is on the former.
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