MF Development Spreads
What are you guys seeing get done for Class A MF high rise development? I’ve been told 6.50 - 7.00 YOC is the standard right now. Anyone seeing other metrics used or in line with this?
I can’t get anywhere close to an untrended 7. Can hover around a legitimate untrended 6.50 though.
I'll give you the math on a high-rise in NC. It's very, very bad and I'm being aggressive in my assumptions too.
Units = 300
Total Cost = $165,000,000
Total Cost Per Unit = $550,000
Avg SF = 800
Cost PSF = $688
Untrended Rents = $2,880 ($3.60 PSF) or 20% over top-of-the market mid-rise
Other Income = $200/unit monthly
Vacancy, NR Units, Collection Loss = 6% of PGI
Management Fee = 2.50% of EGR ($261K/yr)
RETAX = $3,500 / unit
Insurance = $750 / unit
Controllables = $2M/year or $6,667 / unit
Total OpEx = $11,785/unit or 34% of EGR
NOI = $6.89M or $22,957/unit
Untrended RoC = 4.17%
Stabilized top-of-the market mid-rise probably trades between a 5.00% and 5.25% cap. Assuming high-rise would trade 25-50 bps inside, that is a development spread of -58 bps to -83 bps.
All of this is to say that the out of town money that did high-rises in Charlotte and Raleigh are completely toast
This is excellent, thanks for sharing. I'm not building high rise buildings in my day to day, but this math matches the general trend of what I'm seeing. True return on costs at or below cap rates. There is a development deal out in my market looking for equity and the return on cost is 5.25%. Deal probably trades for a 5.75-6%, maaaaaybe 5.5%.
Have costs skyrocketed in NC? I've looked in other markets that I've always thought are higher cost than NC and $550K/unit would be 15%-20% too high in those markets.
For high rise, this feels pretty standard to me.
Great analysis. Do you know what the basis on the multi is for the old strip club site in south end is?
I do. It starts with a 6
$750 PUPY for insurance? I wish…..in South Florida we’re seeing $2,000-2,500. It’s killing every deal. Out of curiosity, where are you seeing hard costs price out per rentable foot for highrise? How about midrise and garden?
Seeing insurance per unit > tax per unit in mid west coast market
Can confirm these numbers are extremely similar to what I'm seeing for Atlanta high-rise.
Depends upon product type, location and market, BUT - I’m on the equity side and we need untrended yields still to be at least 150-200 bps above what WE think the market cap is today, which is 99% of the time wider than what our development partners think it is. So broadly speaking- I’d say untrended YOC needs to be at least 7.0%, probably closer to 7.5%. We’re using a 6.0% exit even in the best markets. Obviously this is very hard to find especially using more realistic rent/opex UW.
We’ve seen deals in this range but usually there’s something wrong - start up developer who missed something, location turns out to be worse than we initially thought, etc
Have you actually done a deal at a legit 7.5 Untrended YOC? Even if I got my land for free I don’t know if I would be at 7.5.
On the GP side and I’m curious too. Our best deals are untrended 6.50 yields, which looked great a year ago. Our LPs are telling us 7 is the new threshold, which I’m not saying is necessarily unreasonable given rates and the environment - but tbh it just seems like a nice way of saying they’re pencils down.
Yes. Southeastern surface park multi in suburbs of major cities can hit that, er, could hit that. More like low 7's now.
On the GP side and I’m seeing the same thing. Need to be 7%+ untrended yield for LP’s to get comfortable. We had a killer site in South Florida tied up penciling to a true 7.25% yield and still couldn’t get LP‘s excited because it was unentitled even though we were at a ~50% discount / door on the land
Florida is a bloodbath right now. Can't make the insurance numbers work. The Tampa market is great otherwise but insurance alone is killing deals.
What are you using for market cap? Green street?
We’re based in south Florida and have a great handle on the market down here
Started land development on a 347 unit stick build in a SE USA tertiary market. We’re in at 6.54% untrended. Not my favorite use of resources right now.
If people are building to a 6.5%, how are you justifying exiting at a 5-5.25%? Interest rates for stabilized multi are 5.5-6%. Who’s buying all these negative leverage deals?
People are assuming that the Fed starts to cut rates within the next year. 5% - 5.25% exit probably assumes a 100-150 bps spread over the 10-year Treasury today, with hopes of refinancing at a lower rate when rates come down.
Your first mistake is thinking people are building to a 6.5%
Yup. Haven't been able to get away with that for a while now.
Everyone wants 7% yield and 20% IRR like it's 2018-2019
No shortage of institutional buyers who raised the money and have to spend it. Also some super rich people / families, some motivated by tax benefits. It’s insane to me but I’m still seeing sales at sub-5 cap rates.
The sub 5-cap trades we are seeing are on in place, with every broker assuming concessions burn off and you get to mid 5s low 6s, and still calling that "untrended" - when in reality that's 20% - 25% net effective rent growth
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