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...

 

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.

Commercial Real Estate Developer
 

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.

"Who am I? I'm the guy that does his job. You must be the other guy."
 
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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.

 

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.

 

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? .

 

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

 

Southeast Multifamily.

We underwrite to a 6.75. Competitors underwrite to a 6.25 or lower - some are taking things out sub-6.

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Commercial Real Estate Developer
 

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