I work for a development shop as a development manager. Most of our projects are infill top 10 markets. Our deals are 6.5% yields in cost, which we all know just doesn’t do it today. Every institutional equity shop has said they are pencils down. I feel like these deals will not get capitalized until the 10 year falls back down to 3.50%. We have already laid of 25% of our staff to date and I am concerned these layoffs will continue if these deals don’t break ground. Is anyone else thinking of getting out of development? Or do you think we’ll be out of this by 2025?
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6.5% is pretty good tbh if that’s real. We are lending at around 7% debt yields
why has land not materially re-price yet and rents not widened out?
Land and expenses will come down. It just won’t happen for 6-18 months, so shit will be sloooooow until then. Once land sellers realize they can’t win the lottery every time and subcontractors and material suppliers realize they can’t buy a new F250, boat, and lake house with every deal and are facing the need to lay off 90% of their staff, their prices will come down.
It all just takes time.
In the Southwest USA, land equates to 8-11% of TDC vs construction which is usually around 70-75%. A 50% haircut on land isn’t even enough to justify current costs of construction, and good luck finding a land seller to take anywhere near a 50% haircut. We have underwritten deals where land at $0 doesn’t justify dev risk as 6%+ yield targets for institutional capital renders most opportunities as too thin. Hard costs needs to either fall, or rents need to take off. I don’t anticipate cap rates will compress back to sub 5’s anytime soon but that could alleviate some of the pressure too.
Nah. It completely sucks right now, mind you, but I’m not jumping ship just because for once in my career you can’t sleepwalk to exceeding underwriting. My current shop will still sell 1 deal this year and 2 next year, start 2-3 deals next year after starting 2 this year, and while they won’t make anywhere near as much money as they would have a few years ago, that’s still a couple million per transaction and a couple million in fees per start. Going to be raked over the coals on term sheets, but it happens. Right now everyone lending and investing has the upper hand.
I’m in this for the long haul. Survive till ‘25, baby.
Weren’t you the one commenting a few months back hating on everyone who was calling for a downturn? Think u said something mocking the people who were saying it will be doom n gloom. Just saying
And I was right then. We got deals done and sold deals at great numbers. Things change, and you readjust. If you aren’t an optimist and flexible you have no right being a developer. The market sucks right now, but it still isn’t as bad as people are making it. Just have to actually use your brain now.
Development is very challenging for new deals (acquiring land today). If you want to pursue a deal today, it would likely need to be preferenced in some way, e.g., a tax abatement, receive tax credits, an OZ deal.
Along these lines, Florida launched a new abatement program called the Missing Middle program. You receive a 100% abatement for 80% AMI rent product (which in some locations is market rent). 3-year rent restriction agreement so you have flexibility for when conditions improve.
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