Yield on Development Costs
What yields are everyone seeing when it comes to development costs? Mainly interested in multifamily. We all know that developers make their money on the spread between yield on development costs and selling cap rate.
However, I have heard conflicting reports that the spread is almost non existent or it is still a 200-300 bps. Any MF developers out there? Just curious to know if it is even worth it to develop MF at this point in the cycle.
In my experience banks are still being overly cautious on new developments, willing and able to lend at lower LTC's, but not at terms that were market 12-18 months ago.
I have seen construction costs continue to creep up but the rate of increase seems to be slowing.
I am currently looking at deals in SLC, Denver, Austin, Portland, Chicago, and some smaller college towns for reference.
Part of banks reluctance to fund new construction is certainly caution but also economic -- banks just don't make enough money on construction loans to justify the risk. I spoke to a major lender a few weeks ago who told me that he gets a shot at the permanent debt on very few of his construction deals because he gets taken out by a life company or agency shortly after completion.
Interested to hear about other markets as well. In DC construction costs are continuing to creep, particularly for trades like concrete and glass. Glass continues to be problematic with extremely long material lead times due to high-rise tower curtainwall construction across the country. But, residential construction which has been out of control is starting to taper--labor, drywall, etc. starting to level off.
Locally, construction financing is drying up, especially for residential. There are just so many units in the DC-area pipeline, that supply issues combined with general market outlook are making banks skittish. Office financing is also getting tighter. Recently went out for term sheets for new construction practically on top of a metro station with a 30% credit pre-lease and only got one offer for partial recourse financing, and proceeds were under 60%. Spreads around L+300.
teddythebear
Past 3 months here are a few deals that I've taken a serious look at:
Phoenix: YOC - 6.4% (Untrended) - 7.1% (Trended) Exit Cap Rate: 5.75% (Market is 5.00%)
Dallas: YOC - 6.2% (Untrended) - 6.9% (Trended) Exit Cap Rate: 5.5% (Market is 4.75%-5%)
Denver: YOC - 5.8% (Untrended) - 6.9% (Trended) Exit Cap Rate: 5.5% (Market is 4.5-4.75%)
There are MF development deals out there but just not as many as there used to be given the leverage issue and the simple fact that the majority of great land sites have already been taking and land sellers has unrealistic expectations of land pricing at this time.
We are still seeing 65% LTC on deals we have closed but most developers are sending out equity packages out at 60% LTC to be on the conservative side.