Is anyone thinking of getting out of development for at least the next 36 months? There is no way deals make any sense, and those who say they do, are lying to themselves. Those that have deals in construction are seeing higher interest rates than they underwrote and while rents may be better than they pro forma’d, there is no way their cap rate is going to be higher than what anyone can put debt on the property at. They’re neg leverage.
For those looking to find deals, construction cost keep going and no one knows what cap rates to underwrite…..
Is this industry dead for the coming years to come??
This is such a classic new guy question lol.
There is a massive housing shortage as well as industrial in many many markets across North America. Inflation and a temporary dislocation in capital markets isn't going to kill development in those asset classes long-term with the huge pent up demand for new supply.
Is development hard to make work in the near term between cost escalations and interest rates? Absolutely. Will multifamily/industrial development be at a standstill for a year or two? Yup. Is it going to extend far past that? Likely not. Rents are exploding due to the lack of supply, there's always going to be people willing to bet on that, and there's always going to be all cash or low leverage buyers who will pick up brand new core assets.
Now office and retail development is a different story. Office for sure is going to be at a standstill for the foreseeable future. Retail development will likely be limited to grocery anchored plazas and centres for new residential nodes in expanded urban boundaries.
If the point of this post is to ask "hey should I avoid getting into development because of the current market conditions" the answer is absolutely not. If it is what interests you pursue it, you're going to see a number of cycles in your career and seeing how a good developer survives the down periods is invaluable.
Right, right.. because markets only go up for developers. No one talks about anything else. It's taboo.
It's not that markets only go up, it's that a smart developer plans their work to work around downturns. If you see opportunities and tie up multiple projects and get them capitalized in the good times it can keep you going for 18-24 months on fee revenue to keep the lights on while you wait out the market. My firm is pretty much accepting the fact that nothing is going to get tied up in the next 6-12 months, but we're still looking at deals, putting in offers, etc. to stay in the market so that once things do start to make sense we can capitalize on it. Plus there still are opportunities out there, real estate is great because it's the most illiquid, opaque and fractured market out there, there are still opportunities to squeeze value. We've shifted priorities, less urban ring 5-over-1s and more garden style 3-story walkups, and that's what you need to do when markets shift, but I can tell you in 3-4 years we'll be right back to urban core markets as rents continue to go up and debt comes down.
I work for a very large and well capitalized developer and this will be a very active year for us. We are starting construction on 15+ projects this year. Sometimes we use debt, sometimes all cash. Two of the projects that I’m working on we are doing all cash, one is $50M the next is $85M.
Hahahaha. "Tell me you don't know anything about development without telling me you don't know anything about development."
My guess is all you know about development is what you learned to underwrite in Excel in that weekend boot camp class you took, right? There are plenty of ways to make deals pencil, from the obvious to the more involved, so no, development isn't dead. And anyone who cuts and runs on a career in which individual projects take 3+ years because they foresee a couple months of slowdown is a freaking moron in the first place.
You are the stupid money that makes everyone else look good. Please, please don't leave!
Lol now is the best time to be in development, if you're capitalized to survive that is.
You'll be the first to deliver to market on the other side of this shitshow, into a supply situation that continues to erode/constrain further since no one can pencil new deals. The tailwinds will be epic coming out of the recession into the new cycle and you'll be the first to get paid for it.
Just gotta survive the storm. This business is not for the faint of heart, which is why those GP returns are so juicy. We earn every penny with the bs we deal w everyday.
You fail to realize that we are going to have double digit inflation for the next 10 to 15 years. Reindustrialization is happening. Get on board.
Are you actually this dense? Or do you just pretned? I said inflation, not rent growth. While inflation drives rent growth they aren't the same. As for the question, yes. You just need to know how to pitch it. If you came to me and said "oh hey bro we are totally gonna get 12% rent growth because hey look at my totally tublar chart over here says so", I would kick you out of my 30th floor office window. But if you said something like "The rapidly chaning global demographics, geopolitifcal landscape, and supply chains are creating underlying frameworks that will drive significant repositioning of populations, industrial bases, and capital through a decade plus long shift of productive capacity out of China and Russia with resulting production landing in America and Mexico that will drive down supply chain costs by X% over that time period." Well I would tell you to sit the fuck down and explain it to me in more detail.
Look at the bigger global picture. The world in changing, globalization is collapsing, reindustrialization is happening, and people are going to make billions of dollars. Well not you, but other people.
Take a look at a construction/development boom and bust cycles since 1950s. Average US construction bust cycles is 2 years with bull-run 5 years. Usually raw land prices fluctuate the most in real estate during downside. Large developers who can afford to buy land during downside collect significant profits thereafter. Where do you think we're currently in the cycle depends on your view.
Not sure if mentioned in the thread yet, but wouldn’t the price of land just adjust until the deal makes sense for someone?? Isn’t this how free markets work? If deals don’t pencil at $10mm land cost then the land is not worth $10mm…
I've mentioned this in other threads but land cost is not the biggest problem. Most deals land would have to pay us to build on it right now lol. The hard costs are the biggest problem and those are largely still not budging in the right direction. Until that happens development will largely be in a stalemate for new deals IMO.