Multifamily Development - Capital trends

Based on the most helpful WSO content, here are some insights on capitalizing multifamily development projects:

1. Current Market Trends:

   • Yield Spreads: In some shops, there is a focus on current (untrended) yield vs. stabilized (trended) yield. The requirement is typically 125 basis points (bps) greater than cap rates (untrended) and 150-175 bps trended at stabilization.
   • Market/Submarket Bets: Given the current economic conditions, some professionals are betting on specific markets or submarkets, accepting that underwritten returns/Yield on Cost (YoC) will be lower with prudent assumptions.

2. Recent Capitalization Examples:

   • Multifamily Development: There is still interest in development, with some groups willing to close deals before entitlements, especially for well-located sites. These deals are seen as having potential for higher returns compared to many value-add deals over a 5-year horizon.
   • Value-Add Deals: Some professionals are focusing on value-add deals in markets like the Southeast, achieving double-digit cash-on-cash returns in year 2 and a 20+ IRR over a 5-year hold.

3. Regional Insights:

   • NY Metro: In the NY metro area, value-add B/C multifamily deals are challenging to find at reasonable prices. Rent-stabilized deals are being considered, especially if cap rates increase with rising interest rates.
   • West Coast: Secondary markets surrounding core markets in California, such as Riverside and Phoenix, are expected to see growth due to pressure on multifamily rents in core markets.

4. Capital Types:

   • Joint Ventures (JV): Commonly used for larger, more complex projects where risk and capital are shared.
   • Preferred Equity: Often used to bridge the gap between senior debt and common equity, providing a fixed return to investors.

These insights reflect the current trends and strategies in capitalizing multifamily development projects as discussed in various WSO threads.

Sources: Real Estate Trends (All Asset Types), A Discussion on Interest Rates/Macro Fundamentals (Long OP), Spreads on New Multifamily Development, The market is turning rapidly..., Is anyone capitalizing development deals??