Status of Multifamily Development heading into 2023
What is everyone seeing out there right now and what are group's business plans looking like for 2023?
- Construction Loan Financing (terms, leverage, how are you getting projects financed)?
- Institutional Equity (terms changing, dropping deals, etc.)?
- Putting new projects together, managing pursuit costs (long feasibility/contract timelines, on pause, etc.)?
Realistically I expect zero starts in 2023 and maybe 1-2 in 2024. Development costs need to come down at least 15%-20% before stuff starts pencilling (even if you assume exit caps of 5%-5.50%).
Financing - fucked. Banks sizing to a 10% DY. On their numbers that's 55% LTC (maybe even lower). How is that going to make sense at a cost of capital between 7% and 7.50% at funding?
Equity - say they want to do deals at 6.25%-6.50% untrended. Too bad yields on realistic underwriting are 5.50% now lol.
Putting new projects together - maybe. Looking to hoard as much cash as we can and hope we make it.
Spot on!
I laugh when some LPs want you to use the best and most expensive GC, conservative rents and hit a 5.75 to 6 untended YOC!! Those sane LPs want to come in 3-6 months before construction starts. Want no part of horizontal/entitlement risk!
Most new deals are single digit, you can barely hit pref with softening rents as we go into winter.
You have to have a “if you build, they will come mentality”.
Good luck ladies and gents!!
We have a few deals starting in 2023 using HUD financing and debt that we secured attractive terms on a bit ago. Institutional equity hasn't been an issue on these deals we have coming up because the debt and land basis makes these deals much better than they other wise should be at market terms right now. And there's no way we would start pursuing new deals unless we get land for practically free or can get HUD debt faster than the normal timeline for approval.
Should be noted that the HUD debt we are seeing are 70-80% LTC in the mid to high 5% interest rates, but the downside is that the process is extremely long and bureaucratic and no refi proceeds at stabilization. The IRR takes a hit but the equity multiples are slightly better and deals can get done.
I'm trying to tie up some sites, if I can. Other than that, completely hit the pause button on all new multi projects. Business plan for 2023 is to focus on organizational things and asset management.
Total standstill here. No developments planned in pipeline and dont think we'll see any until Q3 2023. Hopefully I have a job by then.
Interesting. I can't imagine that will be common. Not a ton of developers who can afford to idle their entire team for a year; still have a lot of mouths to feed, a lot of overhead, and even if you do get back at it in September 2023 or whenever, it's still 9-12 months before you're breaking ground on your next project. Almost two years without doing a deal will kill a significant number of firms.
Yup, but unfortunately many are in our shoes. Problem is construction costs. The past decade construction costs were increasing, but cheap capital and low rates helped us offset this. This no longer exists anymore. Construction costs are still increasing, sellers not giving discounts on land, entitlement process is even worse now. The only other benefit was rent growth was good enough to keep our YOC by completion okay, but rent growth is calming down now, although still increasing. We are self performing GC and literally we cannot build to more than a 4.5%-5% YOC untrended, which is scary because multifamily sales brokers are stating sales are stagnating because sellers think they can get a 3 cap and buyers want a 6 cap now. So theres virtually no point in building to a 4.5 YOC if the market is going to want a 5.5-6 cap deal. Its going to be tough times and your right its not sustainable and do imagine several firms to either pack up shop or do mass layoffs. I am already starting to look for a pivot out of here.
This is somewhat eye opening but I suppose makes sense given uncertainty. I would've thought there'd still be some general chasing to get a a start in 2023 due to undersupply of housing but sounds like it's legitimately slowly to a halt with pricing and cost
On the ground, we are no longer able to push rents. Some of that is that we are out of leasing season, but I think we hit the top of rents - at least in my markets for Class A. So that, combined with costs that somehow are still climbing (albeit slowly) and interest rates that are at least 100 bps above a realistic untrended ROC, is just f-ing brutal. I’ll let others build us out of being undersupplied of housing for the time being
Interesting to see the "pencils down" approach by people here and I wonder if it's market-based. Obviously underwriting is more difficult and equity isn't blindly approving anything that comes across their desk anymore, but we're closing on a suburban garden deal today and have another two lined up for February/March.
What do you think your untrended YOC is? Any retrade on the land?
Agree. Not everyone is pencils down. I am working with multiple groups that are moving forward with 2-5 starts next year. Many others are on the sidelines, but certainly not all.
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