Companion to: Real Estate Decoded Chapter 28 (Multifamily Development) - Workbook tab 14_Ground_Up_Dev
Inputs
Outputs
Total project cost
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Construction loan
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Sponsor equity
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Stabilized NOI
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Yield-on-cost (NOI / total cost)
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Exit value at stabilized cap
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Development profit
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Development spread (YOC - cap)
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How to read this tool: Development profitability is dominated by the spread between stabilized yield-on-cost and exit cap rate. 125+ bps of spread is the institutional minimum. Below 75 bps the project is not adequately compensated for the construction-and-lease-up risk. Current cycle (2024-26) compressed spreads dramatically as cap rates expanded and construction costs stayed elevated.
What this tool is for
Ground-up multifamily development is the institutional development practitioner's bread-and-butter category. The discipline: yield-on-cost target 5.5-6.5%, exit cap target 4.5-5.0%, 125+ bps spread, 18-month build, 12-15 month lease-up. When the spread compresses below 75 bps (current cycle), institutional starts decline materially.
Benchmarks the practitioner watches
- Yield-on-cost target: 5.5-6.5% Sun Belt institutional
- Exit cap: 4.75-5.50% institutional Sun Belt stabilized
- Required spread: 125+ bps healthy, 75-125 marginal, sub-75 sub-optimal
- Build period: 16-24 months garden-style, 24-36 months high-rise
- Lease-up: 12-18 months stabilization
Common mistakes
- Underwriting exit cap at acquisition cap when the construction-period spread has widened
- Missing the construction-period interest carry (capitalized but real)
- Underestimating soft costs (architecture, engineering, permits, legal, FF&E) at 15-20% of hard cost
- Assuming stabilized rent at year-3 underwriting when market rents have moved 10%+ since underwriting
Educational reference only. Not investment, tax, legal, or real-estate advice. Confirm market-specific cap rates, lender terms, and tax overlay with your own advisors before acting.