The building was fine. My absorption assumption took lease-up from 5 months to 14.

The phasing number is the thing I'll remember. You priced the option at $230k and declined it, and the miss cost $290k in carry alone before the rent gap. That's a clean way to think about optionality that I have never seen written down like that.

Naive question from the outside, how would you have found the number you say you should have found? "Households a month moving into this submarket at this price" sounds like data that exists somewhere but I don't know where.

@plumb it partly exists and partly doesn't. On the management side we track our own traffic, showings per week, applications per showing, and if you can get two or three managers of comparable buildings to talk to you honestly you get a rough leasing velocity. Some markets have decent data from a paid service, some are too small for anybody to cover.

@orchard the two months free on most units is the part I'd worry about longer term. You've now set a renewal conversation where the tenant is comparing an effective rent to a face rent, and in year two you either eat it again or you get turnover. What did your renewal look like on the first cohort?

Every unit teaches something and yours taught 19 at once. I've never delivered more than four at a time and reading this I'm not sure I want to.

The $27k a month on an empty building is the horror number. That's $324k a year to own nothing.

I want to be careful about where the loss actually came from because I think the phasing story is only part of it.

You were 11% over on hard cost. $138 against $124 on 24,000 sf is about $336k. You were 13% under on rent, $1.61 against $1.85, which on 19 units at 1,050 sf is roughly $57k a year of gross, call it the $52k of NOI you already named, so at a 5.5 cap that's a value hit around $1m before you even talk about the carry. The absorption timing cost you $290k of cash. The rent level cost you the deal's equity.

Phasing fixes the timing. It doesn't obviously fix the rent, because if the market clears at $1.61 it clears at $1.61 whether you deliver eight units or nineteen. It gives you the information earlier, and the honest question is whether you'd have stopped at eight or finished anyway with $2.2m of basis already in the ground. I've watched people phase and then ignore what phase one told them.

@sextant that last line is doing a lot of work. Sunk cost means the information from phase one arrives at the worst possible moment for acting on it.

On the trades side, phasing a building like that is more than 6 to 8% if you're doing it properly. You're mobilizing twice on mechanical, you're running temporary heat and power to occupied units while you're framing next door, and you've got a life safety separation between construction and occupancy that the inspector will want built and then removed. I'd have quoted 12 to 15% on a single story with a shared mezzanine. Your contractor may have been optimistic to get the job.

@solder if it's 15% then the option cost $495k and the carry miss was $290k, so declining it was right in hindsight even though the outcome was bad. Unless the rent information was worth the difference, which @sextant just argued it wasn't going to be acted on anyway.

The "about to happen for a decade" line is the one I'd underline. That describes about four neighborhoods I've been shown as up-and-coming this year.

I'd put the real cause a step earlier than any of this. You bought at $52/sf in a submarket with 40 total units of comparable product. That number is the whole thesis. Forty units means nobody has proven depth at any rent, and the reason the building was $52/sf is that the market agreed.

I've held land in places like that for eleven years waiting for the demand to show up. Sometimes it does. The mistake was building the demand curve into a construction schedule instead of into a hold period.

@parcel so your version is buy it and wait rather than convert it and wait? Doesn't the building cost you carry either way?

@beacon vacant industrial carries for a lot less than a finished 19 unit building. No debt service on the conversion loan, lower insurance, minimal utilities. That's the difference between $27k a month and maybe $4k.

@orchard on the refi, was the lender always going to appraise on in-place rents or did your term sheet contemplate a stabilized value with a lease-up reserve? Those get negotiated and the mechanism varies by lender, so it's worth asking for the stabilized structure in writing next time and confirming what triggers it.

In my time running a service business, the client who says "we'll fill it, this area is hot" is the client whose invoice goes 90 days late. Nothing to add on the underwriting, just recognizing the shape.

What breaks at scale is exactly this. Four units, you can absorb a bad guess with your own cash and a lower rent. Nineteen and the guess is the deal.

@orchard did the mezzanine units lease faster than the ground floor ones? Curious whether the interesting space actually pulled its premium or whether it was just nicer to build.