Is anyone else in multifamily space doing a lot of development deals right now (i.e. preparing to close on new sites, rather than stuff that's been in the works for 12 months +)? If so, what tolerance for yield spread does your shop have over prevailing cap rates? In my shop, we are very focused on current (untrended) yield vs. stabilized (trended), and need to be at 125 +/- bps greater than cap rates (untrended) and 150-175 bps +/- trended at stabilization. Core/urban stuff obviously falls in the lower end of this spectrum, whereas suburban product is in the upper range. Is this the norm where you work, or my group extremely conservative?
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hi, I'm a newbie, could you explain this for me please? "In my shop, we are very focused on current (untrended) yield vs. stabilized (trended), and need to be at 125 +/- bps greater than cap rates (untrended) and 150-175 bps +/- trended at stabilization". So, your yield on cost should be 1.25% more or less greater than cap rate untrended? How would it be greater than cap rate if no rental increases are taken into account- this is what you mean by untrended right? I appreciate it!
I'll use small numbers for simplicity. Let's say your stabilized NOI is $5, and cap rates today for similar, stabilized proeprties are 5%. That means your property at stabilization should be worth $100. So if you are thinking of building a new building that will have a $5 NOI, would you want to build it for less or more than$100? You obviously want to build it for less so you can make a profit. Let's say you can build it for $80. That means your $5 NOI would be a 6.25% yield ($5/$80). This would be a 1.25 bps spread that the OP mentioned, and would fit within his spread tolerance. The reason you don't trend rents in this analysis is because you want to compare your yield on costs to cap rates TODAY. The reason you want a spread is to build a buffer for potential losses (mostly selling your building for less than you built it for). There are a ton of other factors but this is the high level.