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Ugly time to be doing development. We’re on hold on our entire pipeline beyond stuff thats already too far in to make sense stopping.
It's not JV Equity, but I've seen a few groups get HNW equity raised for multifamily deals. I don't really understand how you can conservatively underwrite multifamily dev today and attract equity let alone get debt.
The only way is having a great land basis
The deal wouldn’t work most of the time if you got the land for free lol. Equity wants close to a 6 yoc or cost basis is at 500k with trades at 400ish… you can’t build bro!!!
Construction costs have gotten so high that land is such a small part of the equation, total yield ends up being very insensitive to land price. As the other guys said, we're rarely seeing anything come up with any sort of residual value even if the land is free.
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Agree w/ above comments. Though to OPs question, my take is it’s basis today that’s separating the haves from the have nots on ground-up MF. Untrended yield is somewhat subjective, basis is easier defined and clear cut. It’s mainly why so much capital is attracted to the risk-adj. return profile of pref today vs common, everybody’s circling their last $ basis. Minimal to no cost relief and truly there are very few dev shops out there who can build for less than you can buy today. Until that math equation is fixed, development will be idle for most.
The few people that can get something out of the ground this summer and deliver in ‘25/‘26 will be well positioned as the wave of deliveries this year is absorbed over the next few.
This is my take as well, and still think there are tailwinds in multifamily once we get past some of this supply and economy (hopefully) stabilizes. Home ownership will continue to be out of reach for a large swath of people, particularly younger generations.
IMO you have to essentially bet on market/submarket right now and accept that underwritten returns/YOC will be lower than you'd like with prudent assumptions. Obviously doesn't help the story on getting the deal capitalized, but otherwise you have to make assumptions not rooted in any sort of reality right now on rents, cap rates, static and trended exit basis, etc.
A good buddy of mine is at a very large merchant developer who gets extremely aggressive. Production is the sole focus. When a deal doesn't work, they'll go through typical VE (which never completely solves the return issues), but otherwise it's just constantly jacking up rents. It has worked for them historically but I personally don't think I could ever work at a shop where you think you'll get top-of-the-market (or completely unproven) rents on almost every project.
Flip side of that is my shop, who underwrites pretty damn conservatively and methodically. We have zero deals in our pipeline right now and are finishing off the last 6 that we already started. We'd like to start tying up some land again, but to other posters' points, very little pencils right now even with land basis of essentially $0. If you can go buy a completed deal for replacement cost or less, why bother?
As an aside for anyone focused on multifamily in western MSA's, Vegas is a bloodbath right now. Operations continue to decline and there have been virtually no Class A trades in the past 10 months outside of a 2010-vintage off-market deal that just closed on the west side for $265k/door. We built a project almost next door back in 2020 for $150k/door and sold it in early 2021 for ~$290k. Our cost basis on two new dev projects further south is more like $280k/door, and when we UW them before land close we thought static basis should be in the $340k range. Brutal
It's a brave new world in terms of basis. Just crazy seeing what we were building/selling things for pre-COVID vs where we are today.
Sounds like a good way to get deal experience, but a shop that makes risky bets and run into issues when their unproven rent doesn't work is bad as an employee because you'll be out of a job.
The fact that capital is sidelined means that it's probably a really good time to get aggressive about development.
I agree with the merch build strategy you mention here - the business of development (especially merch build) is dollar-cost averaging projects. If your business plan is to time the market, it's pretty hard to win in this business. It's really tough to flip the switch and turn the machine on fast enough to get the timing right. My prediction is that those that have the capital to land bank and get sites shovel-ready over the next 6-18 months are going to hit some homeruns during the ramp up of the next cycle.
As mentioned previously, its a damn ugly time to be in development.
Our most recent deal this year writes to a 6.52% untrended YoC. 2021 & 2022 we liked to see at least 6.0%. I should note that this deal is unique in that the owner carried a 4 yr note on the land that was already pretty underpriced , really helping our YoC.
Most 98% of the deals ive looked at the last few months have been overpriced and or complete garbage
Not in multifamily but medical developments are getting capitalized left and right
got a few capitalized in the 6.5% range using the PFC program in Texas. Looks like thats going away though.
Yes. We are actively developing 12 retail projects in the SE USA with another 15 under contract. UYOC ranges from 9% - 18%, average 12%. We are performing better than we ever have and hiring for new roles.
Takeaway from this thread: the US economy is going to have one hell of a recession / reversion to the mean.
Better hope the Fed goes back to 0
The only developments we're seeing any reasonable yields on are industrial. We have a few opportunistic/unusual plays out there, but we also already have an industrial dev fund set up, so we're pretty much looking for deals for the capital, not the other way around. Yield spreads are like 1.25% on cap rates.
Recently closed on a few ground up developments at ~6.3% untrended (industrial and mf) in a few east coast markets as JV equity. Have been UW'ing to 6.2-6.3%+ untrended in general and also honing in on areas where the S&D imbalance is significant and drilling down from there.
In an environment where any deal with anything less than unanimous approval from equity (UW'ing conservatively to begin with) and debt aren't getting capitalized, you have to believe in these projects outperforming upon delivery as you'll be presumably delivering into an improved economy and an environment with much less competition.
Of course deals that check all these boxes are few and far in between... but with land basis low and still retrading lower, we still have been seeing deals out there. Just a bigger pain in the ass to find and more negotiation on the JVA with sponsors.
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