What key data points does your firm look at when deciding to build spec on a new project?
Tenants in the market, absorption, vacancy, deliveries, etc... and where are you getting this data - all from brokers and/or Costar?
I'm at a smaller shop and looking to formalize my thought process behind when to pull the trigger and start building.
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Interested as well.
Depends on the property type for metrics to check, though I’ve never been apart of an acquisition discussion where we look at entering a new market based on regional economic data. More of a check the box type of thing or making sure some minimum thresholds are met. If we’re going after a specific tenant, we usually know what filters they use within their target geography and select accordingly. I know this isn’t the case for every shop, just my experience. Recently got to take a look at the analysis one of the larger SS developers’ do in their site selection process, and it was unbelievably rigorous.
Probably should add that I work on deals to sell upon delivery (not to hold), as that influences our process
Seems like this question is geared towards office/retail, but I'll answer for developing Class A Multifamily in a gateway market. Whether to develop or not comes down to return on cost. We like Stabilized ROC to be at least 5%. In terms of deciding which markets to play in, we are exclusively in one market, so that decision is easier. My execs know every block in the city, they zero in on a few neighborhoods they know and stick to those. Criteria for choosing these neighborhoods- allow for higher density, high income, high renter population, other new developments coming to the neighborhood AND surrounding neighborhoods.
Main drivers of ROC are: rents, construction cost, expenses, and acquisition cost- so we are looking to positively impact these. Construction costs are what they are- we don't skimp especially because we're in the luxury realm. Expenses are what they are. We obviously try to reduce these as much as we can, but tbh aren't very successful at it, so many unforeseen events... We mainly focus on ways to reduce acquisition cost and drive higher rents than our competitors.
One of the main ways to drive rents is to have the right unit mix for the market, so ideally we lease up better than our competitors. We look into comps and see what their mix is and whether or not these units are getting leased. In our market, studios are undesirable- they struggle leasing. However a 1BR alcove leases very well. You can market the unit as a 1BR and it's cheaper than larger 1BR. 1BR alcove's drive up rent PSF similar to studios. We add a lot of these units, and they lease up well- this boosts our ROC. We offer amenities that our competitors don't, and thoughtfully think about where to place these amenities in the building. Some of our competitors seem to just put amenity areas in random places where they will fit.
In terms of acquisitions, we buy the parcels on the fringe of the neighborhood, maybe has a lot of entitlement risk, maybe the parcel has a weird lot shape, maybe the use that was there before has a really bad stigma. Probably multiple of these characteristics. All these characteristics reduce the cost to acquire.
I realize I kind of rambled in this post so TLDR- we target a certain return on cost to decide whether or not a development is a go/ no go.
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