RE Development Costs and Yields

Wolfy22's picture
Rank: Chimp | 12

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?

Comments (13)

Dec 29, 2018

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...

Dec 30, 2018

Thank you. Which cities do you tend to focus on? Agree developers getting squeezed!

Dec 30, 2018

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.

Dec 30, 2018

Interesting. Thanks for the insights. What market/s do you all operate in?

Costs are nuts but hopefully they'll get better.

Jan 6, 2019

Logistics in Indonesia - 13%+... Retail malls in India 12%+

Jan 8, 2019

We at least need a 7% YTC to get through committee. I'm a development analysis working for a REPE fund focus on last mile industrial properties throughout the US.

Jan 9, 2019

Great returns. Impressed! Are you developing in lower competition markets?

Jan 9, 2019

In the long run, land and asset prices will generally fluctuate with non-controllable variables like construction (read: commodity) costs, rents, leasing velocity, etc. Yields are generally going to be determined by asset class and market. The safer the asset, the lower the yield required to attract capital.

Jan 9, 2019

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.

Jan 9, 2019

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.

Most Helpful
Jan 9, 2019

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.

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Jan 10, 2019
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