RE Development Costs and Yields
Hello all,
Curious what you all are seeing with regards to yields on cost in different types of development projects given fluctuation in commodity costs.
Which property types/markets are people getting the highest yield on cost?
Any change in construction cost estimates given recent collapse in commodity prices?
mostly we will UW deals north of 7.5% YOC. Honestly, today it has been much harder, forcing deals to pass through investment committee at a 7% that never would have 2 years ago. Office I've seen the yields be a little juicier as well as retail. Though if I'm being honest I always thought the retail assumptions were a little rich by our developer, especially given the overall market for that sector. Unfortunately with regards to commodity prices, I do believe that developers are being squeezed the most. Everyone else is adjusting to keep their margins as needed, but the big bad rich developer can afford to take a cut...
Thank you. Which cities do you tend to focus on? Agree developers getting squeezed!
We (multifamily and student housing developer) underwrite to a 7, although I know competitors that only need a 6.5. Construction pricing is just stupid anymore - garden deals costing as much as 5 story wraps should. Quartz alone is up 25%-30% just from terrible economic policy coming from the white house.
Interesting. Thanks for the insights. What market/s do you all operate in?
Costs are nuts but hopefully they'll get better.
Logistics in Indonesia - 13%+... Retail malls in India 12%+
We at least need a 7% YTC to get through committee. I'm a development analysis working for a REPE fund focus on last mile industrial properties throughout the US.
Great returns. Impressed! Are you developing in lower competition markets?
In the long run, land and asset prices will generally fluctuate with non-controllable variables like construction (read: commodity) costs, rents, leasing velocity, etc. Yields are generally going to be determined by asset class and market. The safer the asset, the lower the yield required to attract capital.
Industrial build to a 6.25 - 7 depending on where in CA e.g. infill bay area/socal out to inland empire or central valley. Depends so much on the money. We rely on a yield spread and must exit pretty quickly to realize the mid teen IRR's that are required whereas I have friends that work for other shops who are wholly owned by large pension funds. They are just placing money and clipping small coupons ..they are buying/building to core but have much longer term horizons.
As you alluded to at the back end of your post I'm pretty shocked that it's that high on industrial for you TBH.... I've spoken to/seen a lot of deals and groups that are below that threshold on the west coast.
If you're finding stuff at that range then kudos to you, that's a feat in this market and pretty good returns in my book.
Well I'll be honest, they have crazy hair on them. We are taking very complex projects just to make it work. And its not like I have a ton of data points. I've been working on two current projects for 2 years including entitlements and planning up front. By the time I go get a GC contract signed and update my budget, I have been able to bump rents a cent or two which has helped. I just delivered another 2 which again, we have low basis in, relative to today. It is typically much closer to the low 6's where deals get approved. Now where they end up may move a little. That's why I push back so hard back on the acquisition guys.
MF developer in non coastal but low cap rate market. urban deals look good at 5.75, suburban deals at 6+. target for us is 100 bps above current trades.
no slowdown in sight for construction cost escalation, at least in our market. YOY escalation was close to 7% this past year for some of our projects.
Any updates on this from you all..Curious where Yields are higher. Costs are making it hard!
We try to get 120 to 140 bps over current cap rates on multi. Just underwrote a Denver high rise to. 5.8%. The sponsor underwrote to a 6.2%. Also working on a low basis deal in Houston coming out to 7.0%. 6.25% seems to be the sweet spot right now.
You underwrote the investment to a 5.8% yield on cost?
Where’s the profit?
Cap rates are 4.00-4.5% in Denver right now. 15-16% deal level irr and 1.5 em on a four year hold. Also that 5.8% is un-trended.
Basically everything I've been looking at recently is a 6-6.4%.
Where in houston? UC on 7 acres in houston at the moment.
They’re 4.0-4.5%?? Wow, I would’ve guessed 4.75% at absolute lowest. Are you based out of Denver? Seems to be a ton of development there. Wish I had a project there especially so I could head to vail on the weekends haha
15% IRR for ground up - is that deal level? And that multiple should be higher especially for the GP. Depends on terms negotiated with the LP, but my firm actually gets about a 10x on every building we do.
No. I work for an LP with a national platform. 15 was deal level but I beat up the sponsors uw pretty hard. They were around 22% deal level. You’re getting a 10x multiple? What percentage of the equity check are you taking? You including dev fees in that? .
Also interested. 10x has to be a double promote
We put in 10% and get 50% of the equity once it’s built, which results in about a 8x-12x multiple. And no, doesn’t include the development fee.
Does your LP get a preferred return before the 50/50 residual? Any other return hurdles?
6% pref, no other hurdles
No wonder. What are you building? And why are your investors so clueless?
No wonder. What are you building? And why are your investors so clueless?
That's incredible. Are your LPs family and friends, or HNW investors with no real estate background? That's the only time I've seen splits like this.
Love your LPs!
WTF???
Major cap rate compression going on in Denver right now. Class A apts are trading in the low 4s now as so much institutional equity is pushing to get into Denver. Finally making development spreads pencil for the biggest groups so long as they can accept mid-5s YoC
I understand how these multiples are attractive for sponsors because of fees and promote, but what is the reason an LP would take on development risk, basically anywhere, for a total return comparable to an acquisition. From a risk/return and cost of capital perspective, why would they take on that risk?...
LP’s take on development risk because they need the returns too and it’s attractive. Even without the fees, the LP usually doesn’t sign onto the recourse guarantees, so they get to put a lot of money out the door for an attractive yield even after paying promotes, fees, etc.
And if the LP can negotiate a good completion guarantee with few carvouts then they won't have to come out of pocket for cost overruns. The guarantor will be on the hook. After that their main risks are delays lease-up, which they’re willing to take for 15% and a 1.6 em
Jan 2020 update industrial value add: YOC target 4.75
Wow. Not much spread between exit cap and stabilized yield huh? Are these developers just holding these properties 10+ years?
Maybe about 50-75 bps at most. So At a REIT now, yes. Model rent growth and 10 year holds. Fundamentals are still believed in. Core, prime markets where land has disappeared and can lease in a recession. Previous private shop would vomit on this- so just different and depends on investment strategy
Southeast Multifamily.
We underwrite to a 6.75. Competitors underwrite to a 6.25 or lower - some are taking things out sub-6.
Southeast Multifamily as well, can confirm we're underwriting to a 6.25% stabilized yield
Yeah - it's their money, so I can't blame them, but it certainly makes getting new starts to underwrite more difficult.
Every suburban deal I've seen (Carolinas) is a 6.25 to 6.40 and every urban deal is a 6.00 to 6.25. People are very willing to do crap wraps for like 5.75s in terrible locations though which scares me.
Phoenix/Scottsdale: 5.60-5.75% Dallas: 5.85% SoCal: very low 4%s
ground up multifamily
Goodness. Cap rates in the low 3's/high 2's or is the spread near nonexistent?
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