Is anyone thinking of getting out of development for at least the next 36 months? There is no way deals make any sense, and those who say they do, are lying to themselves. Those that have deals in construction are seeing higher interest rates than they underwrote and while rents may be better than they pro forma'd, there is no way their cap rate is going to be higher than what anyone can put debt on the property at. They're neg leverage.
For those looking to find deals, construction cost keep going and no one knows what cap rates to underwrite…..
Is this industry dead for the coming years to come??
Comments ( 14 )
This is such a classic new guy question lol.
There is a massive housing shortage as well as industrial in many many markets across North America. Inflation and a temporary dislocation in capital markets isn't going to kill development in those asset classes long-term with the huge pent up demand for new supply.
Is development hard to make work in the near term between cost escalations and interest rates? Absolutely. Will multifamily/industrial development be at a standstill for a year or two? Yup. Is it going to extend far past that? Likely not. Rents are exploding due to the lack of supply, there's always going to be people willing to bet on that, and there's always going to be all cash or low leverage buyers who will pick up brand new core assets.
Now office and retail development is a different story. Office for sure is going to be at a standstill for the foreseeable future. Retail development will likely be limited to grocery anchored plazas and centres for new residential nodes in expanded urban boundaries.
If the point of this post is to ask "hey should I avoid getting into development because of the current market conditions" the answer is absolutely not. If it is what interests you pursue it, you're going to see a number of cycles in your career and seeing how a good developer survives the down periods is invaluable.
Rates went up so quickly that even a lot of deals that recently started construction locked in cheap debt. Two deals I've been heavily involved in that broke ground in late 2022 have construction-to-perm debt in the 4%-4.75% range. So those should be fine- even if cap rates are high for a while, you don't need to sell. But no chance of getting debt like that now.
How'd you get the construction to perm debt? We wish.
Institutions have access to this debt. Many life company's offer construction to perm to keep their average life of their loan book higher at rates that work for them, today.
I work in healthcare development for what it's worth but all of our loans are construction to mini perm.
I work for a very large and well capitalized developer and this will be a very active year for us. We are starting construction on 15+ projects this year. Sometimes we use debt, sometimes all cash. Two of the projects that I'm working on we are doing all cash, one is $50M the next is $85M.
Subtle flex. I'm jealous
In multi development and we are wayyyyyy busier than our REPE team right now.
What LTC are you getting from the bank?
57-60 LTC. 25-35 percent repayment guarantee. 300-350 over.
Look at forward rates, if you lock in now at 5-6% and hold for 10-yrs on your refi, rates are expected to drop and by extension, cap rates too.
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