Pulley’s Post

As we open 2024, Thesis Driven tackles how we get multifamily development unstuck in the new year. Today's guest letter from Jonathan Scherr, founder of Juno, studies how a combination of rising rates and construction costs made development increasingly infeasible over the past 18 months and how developers are trying to make things pencil despite the headwinds: ✨ Novel operating models | Flex rentals, coliving, and other site optimization techniques can push rents per square foot but can draw questions from lenders. 💻 Design innovation | Generative design can save design time and cut down timelines, saving on financing costs. 🏗 Construction speed |  In light of a construction labor shortage and high construction and financing costs, improving construction speed through better tech or optimized management has a major impact on project returns. ⏱ Wait it out | If consensus holds, rates will likely drop in 2024. Many developers will simply choose to wait it out until lenders move back into the market and rates normalize. Jonathan dives deep into the underlying economics to paint a picture of how development can rebound in 2024! Full letter linked in comments.

This Thesis Driven post sums up my year of deal underwriting perfectly and where Malick Infill Development is headed in the future. https://lnkd.in/gVw5gsFE To explain the housing development market in 2023, we created a simple time adjusted YOC example scenario (in the comments below) and used it as a key tool when negotiating redevelopment site acquisitions. Explaining to a landowner, in urbanizing San Diego, that their property is worth dramatically less than a year ago has not been easy. Re-trading on land price, for deals negotiated late 2022/start of 2023, without it falling apart, has been even harder, but inevitable. Our projects in 2023 needed to find savings of 20% or more to get off the ground.  The cost/value doom loop has felt especially acute in San Diego, where significant upzoning in 2020 left property owners seeing inflated dollar signs; a skinny GC marketplace increased hard costs; and labor shortages increased build timelines on the standard 5-over-1 podium project from 18 months to 24. Each has further heightened the development spread disconnect. We see a path forward with a DfMA process and land closing timeframes of a year or greater on redevelopment sites, but it’s not going to be easy to get there. 

Title: Pros and Cons of Investing in Under-Construction Flats Investing in real estate is a significant decision, and one of the choices investors often face is whether to invest in under-construction flats. This decision comes with its set of advantages and risks, and understanding both sides is crucial for making an informed investment. In this blog, we'll explore the pros and cons of investing in under-construction flats. ### Pros: 1. Lower Initial Costs: - Under-construction flats often come at a lower initial cost compared to ready-to-move-in properties. This can be appealing for investors looking to enter the real estate market with a more manageable financial commitment. 2. Potential Price Appreciation: - During the construction phase, there's a chance that the value of the property could appreciate. If the real estate market is on an upward trend, investors may benefit from an increase in the property's value before even taking possession. 3. Customization Opportunities: - Investing early in the construction process allows for customization. Buyers may have the opportunity to choose certain aspects of the property, such as finishes, layouts, or fixtures, according to their preferences. 4. Payment Flexibility: - Developers often offer flexible payment plans during the construction phase, making it easier for investors to manage their finances. This can include staggered payments linked to construction milestones. Cons: 1. Construction Delays: - One of the most significant risks is the potential for construction delays. Delays could result from various factors such as weather, labor strikes, or financial issues. Investors need to be prepared for the possibility of not getting possession on the initially promised date. 2. Market Conditions: - Real estate markets can be unpredictable. Changes in economic conditions, interest rates, or local market trends could impact the demand for properties. Investors may face challenges if market conditions shift negatively during the construction period. 3. Uncertainties in the Final Product: - Buying before completion means relying on floor plans and project brochures. There's a level of uncertainty about the final product until construction is complete. This uncertainty can lead to dissatisfaction if the finished property differs significantly from expectations. 4. Financing Challenges: - Financing an under-construction property can be more complex than financing a ready-to-move-in one. Lenders may have stricter conditions, and the investor might need to manage both rent and EMI payments during the construction period.

Title: Pros and Cons of Investing in Under-Construction Flats Investing in real estate is a significant decision, and one of the choices investors often face is whether to invest in under-construction flats. This decision comes with its set of advantages and risks, and understanding both sides is crucial for making an informed investment. In this blog, we'll explore the pros and cons of investing in under-construction flats. ### Pros: 1. Lower Initial Costs: - Under-construction flats often come at a lower initial cost compared to ready-to-move-in properties. This can be appealing for investors looking to enter the real estate market with a more manageable financial commitment. 2. Potential Price Appreciation: - During the construction phase, there's a chance that the value of the property could appreciate. If the real estate market is on an upward trend, investors may benefit from an increase in the property's value before even taking possession. 3. Customization Opportunities: - Investing early in the construction process allows for customization. Buyers may have the opportunity to choose certain aspects of the property, such as finishes, layouts, or fixtures, according to their preferences. 4. Payment Flexibility: - Developers often offer flexible payment plans during the construction phase, making it easier for investors to manage their finances. This can include staggered payments linked to construction milestones. Cons: 1. Construction Delays: - One of the most significant risks is the potential for construction delays. Delays could result from various factors such as weather, labor strikes, or financial issues. Investors need to be prepared for the possibility of not getting possession on the initially promised date. 2. Market Conditions: - Real estate markets can be unpredictable. Changes in economic conditions, interest rates, or local market trends could impact the demand for properties. Investors may face challenges if market conditions shift negatively during the construction period. 3. Uncertainties in the Final Product: - Buying before completion means relying on floor plans and project brochures. There's a level of uncertainty about the final product until construction is complete. This uncertainty can lead to dissatisfaction if the finished property differs significantly from expectations. 4. Financing Challenges: - Financing an under-construction property can be more complex than financing a ready-to-move-in one. Lenders may have stricter conditions, and the investor might need to manage both rent and EMI payments during the construction period.

In a year of expected interest rate drops, real estate could come roaring back from its beauty sleep—here’s what to expect https://lnkd.in/guSMuwqG #liveconnect #iLeads #revive #loans #hottransfer #nextgen #analytics #experience #results #fintech #realestatetech #creditleads

File under: "Evidence to support common sense": permit approval times significantly impact housing production. A new report by Stuart Gabriel and Edward Kung, via Tyler Cowen at Marginal Revolution, via via Kevin Lewis at National Affairs. It takes a lot of work sometimes to make something obvious a bit more defensible. We hope it compels adoption of technology and innovation in this space. Full disclosure: that's what UrbanForm is doing :) Here's an excerpt from their report: "The analysis derives from a novel dataset of development timelines for all multifamily housing projects permitted in the City of Los Angeles between 2010 and 2022. As a lower bound, simply by pulling forward in time the completion of already started projects, we estimate that reductions of 25% in approval time duration and uncertainty would increase the rate of housing production by 11.9%. If we also account for the role of approval times in incentivizing new development, we estimate that the 25% reduction in approval time would increase the rate of housing production by a full 33.0%." #zoning #permitting #contech

Did you know you can invest with New Land Enterprises? This year, I was told multiple times that people didn't know we accept investors! So, over the next few weeks, I'll share how we look at how we structure and underwrite our investments so you can see WHY you should invest with New Land. Underwriting is part art, part science, part BS. Many investors are focused on IRR, but IRR is comprised of many underlying factors: rents (I'll address the puzzling focus on $rent/sf in another post), expenses, interest rates, hold time frame, and cap rates. Today, I'll focus on cap rates. Cap rates are simply a measure of the rate of return someone expects on a set of cash flows (i.e. if you're willing to get a 5% return on a thing that produces $1,000/year cash flow, you'd pay $20k for that "thing"). Cap rates have traditionally averaged 200 basis points (bps), or 2%, over the 10-year treasury. The spread has been as low as 100 bps ~2008 (that ended well), and as high as 400 bps in times of uncertainty. In the 80s, the spread was negative (!!) with anticipation of rates coming down. Some would want to draw a parallel... but I think they're wrong. Some syndicators based cap rates off SOFR (short-term rates). If you invested with those people in the last 5 years, chances are, you didn't just miss return targets - your principal might be gone. Cap rates based on SOFR are snake oil. Currently, the 10T is ~4.4%. So, a 200 bps spread would indicate a cap rate of 6.4%. Now, that's an average. High-quality assets would command a lower cap rate, and vice versa. People have been predicting that "rates will drop", but that doesn't refer to the 10T. In fact, Chatham Financial has the forward curve (i.e. forecast) relatively flat/slightly increasing. The forward curve is often wrong (after all, the 10T today is 4.3% vs a predicted 4.47%), but if you think you're consistently better than forecasters - take my money. There's another important factor: rent growth. If the gross revenue is predicted to grow at a faster rate than expenses, then the cap rate may be lower. And in many markets, that had been true... but in many no longer is. We underwrote the exit cap rate for our Green Bay development at 6%. That's more conservative than every deck I've seen come across my desk. But I think it's also very realistic. If I'm wrong, and interest rates and cap rates drop, our investments outperform pro forma. If I'm right, our investments outperform the market. Either way, you'll be glad you invested with us. Our Green Bay project is currently accepting accredited LP investors. If you're interested, click the link below and register. And I'll keep posting on this topic until we get through all the contributing factors.

🌟Excited🌟 🏡💸Prediction: Smaller homes could be the big money-makers of the future! With interest rates on the rise and housing prices soaring, downsizing could lead to massive returns for developers, homeowners, and investors alike. Here's why going smaller might lead to bigger profits: 👉 1. Lower costs, higher returns: Smaller homes often come with more affordable construction and maintenance costs, translating to higher profit margins for developers and investors. 👉 2. Increased demand: With the current housing market trends favoring affordability and sustainability, smaller homes are becoming more desirable to buyers looking for cost-effective options. 👉 3. Diversification opportunities: Investing in smaller homes can help diversify portfolios and reduce risk, especially in volatile market conditions. 👉 4. Innovative designs: Smaller spaces challenge architects and designers to think creatively, leading to unique and practical solutions that can attract buyers willing to pay a premium. Get ready to think small and dream big in the world of real estate! The future of housing may just be in downsizing. 💼🏡💰

🎯 The Benefits of Investing in Plotted Development vs. Constructed Property 🏡 📊 Investing in real estate provides options such as plotted developments and constructed properties. Each has its advantages, but plotted developments offer unique benefits that attract investors. Here’s a comparison of the advantages of investing in plotted developments over constructed properties: 📌  1. **Customization and Flexibility** One of the most significant advantages of plotted developments is the ability to customize: - **Personalized Construction**: Investors can design and build homes or commercial buildings according to their preferences and needs. - **Future Expansion**: Plots offer the flexibility to expand or modify structures as required, which may not be possible with constructed properties.  2. **Lower Initial Investment** Investing in a plot of land often requires a lower initial capital outlay compared to buying a constructed property: - **Cost-Effective**: Plots are generally more affordable, making them accessible for first-time investors. - **Staggered Investment**: Investors can purchase the land first and develop it later, spreading out the investment over time.  3. **Higher Appreciation Potential** Plots of land often appreciate at a faster rate than constructed properties: - **Land Value**: The value of land tends to increase as it becomes scarcer, especially in growing urban areas. - **Location-Based Growth**: Plotted developments in emerging locations can offer significant appreciation as infrastructure and amenities develop.  4. **Low Maintenance Costs** Plots generally require less maintenance compared to constructed properties: - **No Depreciation**: Unlike buildings, which depreciate over time due to wear and tear, land typically retains or increases its value. - **Minimal Upkeep**: Without structures, there’s little to no maintenance required, saving costs on repairs and upkeep.  5. **Tax Benefits and Incentives** Investing in plots can offer specific tax advantages: - **Lower Property Taxes**: Plots may have lower property taxes compared to constructed properties, depending on the region. - **Capital Gains Benefits**: Investors can benefit from capital gains tax exemptions under certain conditions when selling land. Conclusion Plotted developments and constructed properties both present unique investment opportunities, but plotted developments offer advantages such as customization, lower costs, higher appreciation potential, and enhanced investment security. For investors seeking flexibility and long-term growth, investing in plots can be a smart choice.