Laura Caicedo: What’s Behind Profitability in Design

Profitability in real estate is often discussed before construction begins and completely separate from the design team. Developers build the financial model, while architects are expected to produce the best building possible within its limitations. But many of the decisions that determine whether a project succeeds financially are in fact design decisions.

Laura Caicedo, an architect turned real estate advisor at Hayat Brown, a P3 and infrastructure advisory firm in Washington, D.C., has spent 12 years working across architecture, urban design and real estate. She believes three subjects should be discussed with the design team from the start: the program, the building's efficiency and where the budget is concentrated. These questions should not be resolved by the financial team and later handed to designers as fixed instructions, she argues, because architects are trained to solve competing problems simultaneously, and excluding them from the financial discussion can mean losing the possibility of a better solution.

"If you bring the design team in before the assumptions are fixed, you'll often get something smarter than if finance sets them alone and hands them over as a given."," she says.

At its simplest, profitability means the value created by a project exceeds what it costs to produce, including the cost of capital and the time required to deliver it. Yet time is often underestimated. Entitlement, construction, absorption and lease-up all influence returns, and they are often the variables design can influence most. The right unit mix can accelerate absorption, while an active ground floor can support retail occupancy.

Profitability is also not a single number. A development can be financially viable and still fail if its ownership model, timeline and obligations work against one another. A merchant builder expecting to sell within three years and an institution planning to hold the same property for 20 years are not evaluating the same opportunity. One may see public space as an expense, while the other may see it as an asset that strengthens demand over time.

But a profitable project does not necessarily make it a successful one. Financial performance can be measured by whether lease-up or absorption matched what was underwritten and whether the property retained its value beyond the first year. Those signals matter, but they're only one part of the question. Projects are often supported because they promise affordable housing, public space or new commercial activity. If the affordable units do not reach the households they were intended for, or the public realm is poorly maintained, the project has not fully succeeded simply because it produced the expected return. The more honest assessment is whether the original intentions survived delivery.

Caicedo points to Oxford North in the United Kingdom, where she was part of the masterplanning team at Fletcher Priest during the early phase of a roughly 74-acre employment-led district on the northern edge of Oxford. The commercial program and the open space wanted the same land. Rather than treat the parkland as whatever was left once the buildings were placed, the team fixed it first and concentrated development around it, so the density the financial model needed survived and most buildings ended up with frontage onto something valuable. The client was the other half of it. A long-horizon owner like a college endowment can underwrite the public realm as an asset rather than a cost to be engineered out.

That question of whose capital is behind a project runs through much of Caicedo's work now. Her clients are largely institutional landowners, such as the Maryland Department of Transportation and Howard University. These owners control land and want something built on it, but their goals are not a developer's goals. A transit agency looking at the land around a station is thinking about ridership, housing, and whether the place works at 8pm. A university is thinking in 50 or 100-year horizons, and about whether the project supports its academic mission. Neither is trying to maximize the return on that parcel. Both still need a private partner who is, because that is who brings the capital and takes the delivery risk.

Her job is making those two things hold together. "That means being honest with the owner about what the market will actually pay for, and honest with the private side about which of the owner's goals are not negotiable," she says. The rest of it is structured. That alignment has to be built into the ground lease, project phasing and performance requirements so that it survives beyond closing. Get that wrong and you end up with a private partner who delivers exactly what the contract requires without delivering what the owner intended.

For Caicedo, the harder question lies beyond profitability. A project that is penciled and a project that delivered what it was approved to deliver are not automatically the same project, and the difference between them is usually set long before anyone breaks ground.