Billions of Multifamily development projects aren’t getting off the ground: Why?
Billions of Multifamily development projects aren’t getting off the ground: Why?
The numbers don’t work. Period.
Lenders won’t issue the financing for construction because today’s interest rates don’t allow for a refinance of the exit post-construction.
Here is the math for a typical project I've seen:
*Multifamily stick on podium (the 5 to 6 story stuff you see everywhere) costs roughly around $400,000 per 2 bed unit to develop (c. $300psf-$450psf) in the Northeast.
*Rents typically range from $3000 to $4500 per month
*Expenses are 30%-35% of rents
*Therefore income is ~$25,000 unit/yr
Income typically must cover debt financing costs by 1.2x so ~$20,000 can be used for interest payments = at 7% rates a developer is capped at borrowing about $300,000/unit towards construction, i.e. only 70% of the construction costs!
That doesn’t include land. Nor the holding costs. Nor the developer's fees/cost. Nor the interest cost during construction. And certainly not the cost of capital to investors.
Furthermore, the land has a value: the development profit has to be greater than the next best alternative use (parking, retail, an existing property… etc…).
So how does a municipality make development work? Subsidies? That’s why affordable housing projects can still proceed.
Or higher rents: i.e. $5000+ rents for 2 beds. However, if municipalities are requiring 20% affordable housing it brings average rents back down to the $4,000 range, so again projects don’t pencil.
The bigger issue is developers don’t want to start permitting projects they know don’t pencil. So, even if rates and construction costs fall, zoning and affordability requirements will mean developers won’t start the process for future projects as there is too much uncertainty.
Post is in response to planning board member Chris Gittins' request to understand the financial considerations of multifamily/mixed-use developments (thank you). And Scott Bailey’s request to make it a post.
I welcome any of the multifamily development pros to opine as well.
And, none of this is investment advice, just my personal observations on the topic.
Follow Sean Kelly-Rand on LinkedIn
The numbers don’t work. Period.
Lenders won’t issue the financing for construction because today’s interest rates don’t allow for a refinance of the exit post-construction.
Here is the math for a typical project I've seen:
*Multifamily stick on podium (the 5 to 6 story stuff you see everywhere) costs roughly around $400,000 per 2 bed unit to develop (c. $300psf-$450psf) in the Northeast.
*Rents typically range from $3000 to $4500 per month
*Expenses are 30%-35% of rents
*Therefore income is ~$25,000 unit/yr
Income typically must cover debt financing costs by 1.2x so ~$20,000 can be used for interest payments = at 7% rates a developer is capped at borrowing about $300,000/unit towards construction, i.e. only 70% of the construction costs!
That doesn’t include land. Nor the holding costs. Nor the developer's fees/cost. Nor the interest cost during construction. And certainly not the cost of capital to investors.
Furthermore, the land has a value: the development profit has to be greater than the next best alternative use (parking, retail, an existing property… etc…).
So how does a municipality make development work? Subsidies? That’s why affordable housing projects can still proceed.
Or higher rents: i.e. $5000+ rents for 2 beds. However, if municipalities are requiring 20% affordable housing it brings average rents back down to the $4,000 range, so again projects don’t pencil.
The bigger issue is developers don’t want to start permitting projects they know don’t pencil. So, even if rates and construction costs fall, zoning and affordability requirements will mean developers won’t start the process for future projects as there is too much uncertainty.
Post is in response to planning board member Chris Gittins' request to understand the financial considerations of multifamily/mixed-use developments (thank you). And Scott Bailey’s request to make it a post.
I welcome any of the multifamily development pros to opine as well.
And, none of this is investment advice, just my personal observations on the topic.
Follow Sean Kelly-Rand on LinkedIn
