Thoughts on multifamily development 2025?
What is general sentiment as far as putting new deals together, transaction activity, business plans, etc?
I am in the sunbelt and it is still extremely challenging to get anything to pencil given supply’s impact on rents and continued escalation in expenses. Capital is avoiding all high supply markets.
The midwest
New development is dead.
That is also what we are hearing from our development partners and merchant builders. Some of them are even starting to expand into acquisitions and asset management. Why build a 3% cap when you can buy a 5% seems to be a common theme.
Agreed. I think top down from an equity provider perspective that real estate is not super attractive right now, and that credit>acquisitions>development, so the little money being allocated to re is probably not looking for development deals
BTR is an asset class that’s still pencilling in some sunbelt markets if you have a good land basis. Why? land is cheaper in suburban markets (more land availability), cheaper to build, faster to build, typically higher rents than conventional class A multi
If we're using qualifiers, then same could be said about office deals. They pencil .... if your basis is good enough.
I think you might be implying that anybody can “just backsolve it" argument to get to a good land basis..for context it requires acknowledging the reality of land values and market dynamics. When backsolving for land basis it still operates within the constraints of market realities. Sellers have their own motivations and price expectations. They're unlikely to drastically reduce their asking price. Land values are influenced by location, zoning, and potential use, comparable sales, market trends, holding costs, and competition establishing a baseline for pricing. In desirable areas, multiple developers may be bidding for the same site…the competitive bidding environment drives up land to market prices. All of which limits the ability to backsolve to an ideal basis.
I mean isn't price always a qualifier for every single investment (real estate and everything else) ever? Please let me know what investment is always a good investment regardless of price. I'd be interested in investing
That's not necessarily true though. I've definitely looked at projects where it still wouldn't pencil even with free land.
Negative price is still a price lol
Waiting for the day to find one of those lol
Midwest here...I can't get anything to pencil, even with a healthy TIF. I've moved on to other deal types in the meantime. No supply here so rents continue to move up, but high costs + high property taxes + so/so rents are just really challenging to pencil.
Everyone keeps saying the sky is falling and can't make anything pencil. Maybe true for some areas, but the northeast is hot right now. New Jersey, Boston, NY. Tons of new product starting and tons of developers circling looking for sites....
What ROC are you seeing developers in the northeast shooting for?
Seconding this. Northeast markets with high barriers to entry still have a massive shortage of housing that's needs to be backfilled. Construction pricing makes it tough but the biggest barrier has actually been capital markets in my experience.
Definitely true - deals work better in supply constrained markets (places where it takes 2-3 years to get permits). This is always true, its development 101, but some many developers got bailed out by the market over the last 10-15 years that it's probably not as obvious as it should be. You're not going to be developing in sunbelt and mountain west markets with a shit ton of commodity housing that will take a very long time to absorb.
The problem is that you can buy existing assets for less than what you can build today, so how can someone possibility defend developing a project in an IC today. You need someone who can look past the market today, and fundamentally understand supply is tightening and there is a shortage of supply in some markets, sub markets, or micro areas. The problem is that this probably eliminates 80-90% of the funds out there that will invest in real estate - there is just not that much money out there that can take this bet.
I operate in a major northeast market that just increased the affordable housing requirement on 10+ unit developments from 10% to 20%. As if the high interest rates, high construction costs, long entitlement period, and new sustainable construction rules weren't bad enough, this is just the cherry on top. Too early to say what the effects are, but in my opinion, it's an absolute development killer. I was looking at a couple deals where you can build 10+ units and upon underwriting I realized how much of an effect the new 20% requirement is going to have. Sellers with large parcels believe they are sitting on gold so they ask stupid prices, but in reality, they don't realize that the new affordable housing rule significantly reduces the value of their land. Before, when I came across an opportunity to develop 10+ units, I would be all over it. Now when i come across such an opportunity, I don't really even care. I will underwrite it to see, but I am already 90% sure it doesn't work. Now my focus has switched to sub-10 unit development opportunities, gut renovations of existing product, or hairier deals where significant zoning relief is needed.
I used to get upset about increased affordable housing requirements because they just make the housing crisis worse...but honestly, it makes the barrier to entry higher and increases my profit margin on each development since prices rise at an even faster pace.
While the fundamentals are fantastic in these markets, I do question how many of the development deals being pitched right now will actually get capitalized. The terminal value rarely works unless you plan on a build & hold strategy - from my perspective that needs to be a minimum 7 year hold and probably 10, even in a “hot” market like Boston. It’s why institutional multifamily development equity is virtually non-existent right now - better off putting capital elsewhere from a risk adjusted perspective as well as the ideal duration of development investment for most isn’t really feasible at the moment. So yes if you find a deal that actually works, jump on it, but reality is there won’t be many.
That said we’ll see groups like Related, Tishman, the REITs, etc. get some deals out of the ground as they build high-end product for long term holds. But merchant builders especially are going to have a hard time capitalizing the next 2-3 years. That’s before you even layer in a typical development timeline in the northeast. Given that, I’m convinced we’re going to see 1) consolidation across the multifamily industry in both existing and development firms and 2) the next round of sunbelt development capitalize and break ground both faster and at a much higher % of inventory than the northeast / mid-Atlantic.
Lies. A three-year entitlement process, followed by three years of development and two years to stabilize, combined with high construction and land costs, is a recipe for disaster.
Not necessarily, really depends on land basis and what you can get entitled for. 8 years is a bit long though. For larger projects in my market, I would say 2 years to entitle, 2 years to construct, and 1 year to lease up. The headwinds in my market is less about the time, since this has been the timeline for many years, but more so the new affordable housing regulations.
West Coast Development. Nothing makes sense due to terminal values of assets (trading at or below cost basis). Seems like traditional institutions will not fund these deals until it's clear the terminal value will exceed basis, meaning the amount of investors out there willing to take bets on sites is small...fundamentally you need to believe there is a shortage in housing where you are developing, and if this is the case, rent growth and terminal values will return to (or even exceed) peak levels.
I don't see ground up multifamily being easy for the next few years. It's not going to return to where it was quickly, I just don't believe rates will come in to the extent they did last cycle, meaning demand is really going to drive the return of values. Things are starting to reset (land value, construction costs), but demand really is what is going to drive things penciling again, and it could take another few years for this to sort it's self out.
Developers are going to need to be a lot smarter on location, supply/demand, and really protect the basis of the deal through smart, data informed design. I think a lot of the shops set up for commodity merchant build are going to struggle with this. I'm really coming to the realization today, that the low interest rate market for the last 10-15 years was an anomaly, and where things are today is actually more the norm. To use a game of thrones reference, we are children born in Summer and winter is now here.
I'm hearing people get greenlit at ~6.5% ROC, but the groups doing these deals have deep capital relationships that gives them a huge advantage on cost of capital. What I do think is true is, those who get things greenlit over the next few years, have the opportunity for grand slams. So what do you do today? Find people who are willing to take a macro bet on demand, control the best sites possible, and be ready for when the switch flips.
Great insight, thank you.
"I'm hearing people get greenlit at ~6.5% ROC, but the groups doing these deals have deep capital relationships that gives them a huge advantage on cost of capital."
By the numbers/quantitative, what advantage are they exactly receiving?
It's hard to quantify but the way that it usually works out is that groups that have cheaper costs of capital are more likely to approve deals when working with top tier sponsors. For example, you may have a life co, pension fund or foreign capital (Japanese for example) willing to provide equity terms which have lower promote hurdles and a nice crystallization/buyout structure.
Same thing on the debt side, the groups that price construction money in the low 200s often times want to see top tier sponsors. Otherwise more conventional pricing is in the 300s or north of 400 if the leverage is higher. I do think that the pricing advantage in the debt markets is overstated however since major players often chase much larger deals and when the deals get large enough, the lender pool is less competitive given less players.
Even if you believe in housing shortage, rent growth, terminal value, etc., it simply doesn't make sense to develop when you can still buy new product at or below replacement cost. All those same things apply to just acquiring the new product so if you can get it for similar cost while foregoing construction risk, down time, etc., it's going to be hard to justify a development.
Not wrong. But assuming you're in a tier 1 market its a solid 2-3 years to get entitlements and permits and another 2 years to build if you buy land now so you actually forecasting when you break ground can you buy for cheaper.
Agreed that unless the yield is very strong today you probably are better off buying existing, but still its a bit like buying a used car or a new car. Totally different thinking.
I am in the southeast primarily working on the development of suburban wood-frame multifamily.
Things are definitely better than they were this time last year or in 2023, but still not very good. My firm will likely only have one start this year and that deal is a really relative high performer with only OK pro-forma returns (IMO).
While we have seen costs come in materially, even the best deals are only a high 5 to (maybe) 6 untrended RoC. Most are still underwriting to a low to mid 5 RoC on realistic UW. I imagine it is worse for the infill guys.
In the suburbs, the supply has largely delivered so it is just a matter of absorbing the excess supply resulting from the 2021-22 starts. By my read, this should happen within the next year (in the suburbs). After that, you will start seeing some pretty good rent growth as long as the job market holds up. If no relief on the home ownership front, that will just juice things to the better.
There is still a fundamental math issue that needs to be fixed. While I was pretty optimistic about cost relief last year, I think most of the fat has already been trimmed from GC and sub numbers as well as A&E (soft costs). To me, there are two questions that still need to be answered by lenders and LPs: 1) what untrended return on cost am I comfortable with; and 2) what will 2025-27 rent growth total?
This is how I think about it. In order to figure out what untrended RoC I need, first you need to have a view on cap rates (your exit). Right now, the investment sales market is highly dysfunctional, so I hesitate to use current quoted cap rates as an assumption (4.75% to 5.00%). Why people have been buying at these cap rates with big negative leverage I have no idea. Actually I do, it's because they are salesmen, GP/LP interests are difficult to align, and they need to keep the fees rolling to keep their jobs. Eventually they will have to make some money off free cash flow, just like they did from the 90s to 2022. If you assume that the 10Y UT will average 4% (which I think is a safe assumption given historical inflation rates, and a spread of 150 bps over the 10Y), multifamily cap rates should land in the mid-5s. You need to exit at a spread of 150 bps to 200 bps over your exit cap (25%-30% premium vs cost). This generates a 20%+ IRR. In order to get there, you need to have an untrended RoC in the 6.25% to 6.50% range to hit a low 7 to mid 7 RoC on exit (assuming 3% rent growth, 2% other income growth, and 2.5% OpEx growth). Probably going to need another 18-24 months of rent growth, to get there.
TDLR - things are better than they were in 2022-24, but still not good. Demand is strong and will stay strong as long as economy holds. Need a 6.25%-6.50% untrended RoC and 7.00%-7.50% RoC at exit. Not optimistic about additional cost relief. Underwriting improvement will have to come from NOI growth which will take another +/- 2 years to get the train gets rolling again.
I've got an MF surface-parked 4-story development with an all-in cost of $370K per unit with a soft 5.75% YOC.
Sales comps are between $275K - $325K per unit.
We need top-of-the-market rent growth while supply is still hitting the market until mid 26.
I think we are closer to 3 years away from new all-time highs in rent which we need to pencil most anything.
Said differently does this make development basically impossible (from a money making perspective) for the foreseeable future? Smells to me like the supply brought on in 2021-2022 will start hitting the end of loan periods at the same time development continues to be dead meaning development continues to lag as smart GPs will run towards these distressed assets from 2021 as the prices will likely be cheaper than developing per unit.
I'm sorry. If you don't mind me asking, what type of market are you in? West Coast? NE?
If you gave me $370K/unit I could build you something niceeeee
While your expectation of a +/- two-year timeline for NOI growth aligns with historical absorption trends, recent household formation data and persistent housing shortages suggest the potential for accelerated rent growth in suburban markets where single-family home affordability remains out of reach, Build-to-Rent (BTR) communities demonstrate that targeted product types can outperform broader rent growth expectations by catering to specific renter profiles.
I mean this in the nicest way possible, but is this ChatGPT?
Are you suggesting 150bps+ on trended ROC or untrended? I find it frustrating as LPs won’t give us credit for rent growth. And I would argue if cap rates stay static (ie rates don’t compress) we’re obviously likely see rent growth in under supplied markets like the Midwest. If rent growth doesn’t occur, it implies rates have dropped and new inventory was delivered. If rates stay static, likely limited product has been delivered and we’ll see rents pop. I feel like you can’t underwrite both cap rates staying static and no rent growth. They’re mutually exclusive scenarios. Thoughts?
Whether or not you fund a development deal or you buy a stabilized property next door, you are the beneficiary of rent growth. Therefore the un-trended ROC is the best way to compare the opportunity cost of allocating capital to buy stabilized vs investing in a development deal. The same is said about cap rate compression.
Your argument does make sense to justify why it's not a bad time to buy stabilized multi right now. Dry development pipeline, means no new supply which means rent growth will occur until development deals start to pencil (whether due to rent growth or cap rate compression). But the big nuance that people are missing is that there is a big glut of permitted properties and when deals start to pencil, there may be a big glut of deliveries which would limit the upside of rent growth to an extent (limited workforce will drive up construction costs to equilibrium so it won't totally eliminate rent growth).
Great input below. Thanks:
"This is how I think about it. In order to figure out what untrended RoC I need, first you need to have a view on cap rates (your exit). Right now, the investment sales market is highly dysfunctional, so I hesitate to use current quoted cap rates as an assumption (4.75% to 5.00%). Why people have been buying at these cap rates with big negative leverage I have no idea. Actually I do, it's because they are salesmen, GP/LP interests are difficult to align, and they need to keep the fees rolling to keep their jobs. Eventually they will have to make some money off free cash flow, just like they did from the 90s to 2022. If you assume that the 10Y UT will average 4% (which I think is a safe assumption given historical inflation rates, and a spread of 150 bps over the 10Y), multifamily cap rates should land in the mid-5s. You need to exit at a spread of 150 bps to 200 bps over your exit cap (25%-30% premium vs cost). This generates a 20%+ IRR. In order to get there, you need to have an untrended RoC in the 6.25% to 6.50% range to hit a low 7 to mid 7 RoC on exit (assuming 3% rent growth, 2% other income growth, and 2.5% OpEx growth). Probably going to need another 18-24 months of rent growth, to get there.
“It's good to be in something from the ground floor. I came too late for that and I know. But lately, I'm getting the feeling that I came in at the end. The best is over.” -Tony Soprano
Sometimes how I feel as someone who started in development in the last year.
It will come back again. Might not be for a while but give it time.
I agree, I'm in it for the long haul and I'm confident in my career path. Only time will tell I suppose.
Development will come back when it becomes cheaper to build vs buy.
Regardless of how bullish one is on demand, rent growth, cap rates, or whatever metrics, it simply doesn't make sense to develop when most markets still offer new product below or near replacement costs. If the market really rips, I will do just as well on my acquisition without taking on all the added risk of a development, so what is my incentive to develop? Same as said above that it needs to be cheaper to build than to buy.
Everyone's scrambling—either suffering or taking advantage—under the same DSCR constraints. That’s the core of issue for most. Yes, some of the bad NPL bloat is getting deflated on workouts, write-downs or organic performance (time cures.. some), but years of cheap money and high leverage UW standards based on that cheap money set developers and their capital partners up for failure. Back in 2019, if you surveyed 100 construction debt fund underwriters, for example, maybe 15 of them would have known what DSCR even was. Oh, napkin underwriting days, how we miss thee!
Now, everyone’s back-testing against next-lifecycle financing capability. But the real problem isn’t the cycle or capital markets—both happen, and both can be stress-tested. The real issue is cognitive blind spots.
Let’s break down the three horsemen of RE deal apocalypse:
The Solution? Get brutally empirical and challenge your biases:
There’s opportunity out there, but we need to look beyond our backyards and challenge the biases that constrain us.
Did AI write this?
It reads like a book report written by someone who only watched the movie...
Turd back at you. Yes. An OpenAI server in Iowa logged in under my user name and decided that this was what it wanted to comment on. No dude. I worked out or helped developers stave off foreclosure on 100's of millions in NPLs at a construction debt fund and I also participate in development, and what I listed are the behavior commonalities I see on the turd pile. I wish we were watching a movie. We aren't.
Lol
This reads like slide 14 of a McKinsey deck. It's just not how developers talk.
Development takes years or even decades. Its a slow-moving train that picks up steam, so it will hurt to stop and then start back. Thus you do everything possible to push on.
I agree with almost everything you said but it's worthless as developers can't pivot as quickly as the market can swing. LP groups already know all of this but should be thinking next level of what will flip next.
Location always wins but it feels like there should be more blood in the streets right now.
The MF development drought should continue for the next 18 months.
I’ll add another update: seems like some LP capital is coming back as “cogp” money. Meaning they’ll bite at stalled projects but you gotta given 50% more of the promote and eat guarantees.
Lovely times were in lol.
Higher liquidity requirements, GC requiring 100% drawing to give bids, and now possibly tariffs. Math ain’t mathing…
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