Entitled site in hand: break ground into the trough or sit on the dirt

Question

This question comes up at every price point, small markets and low price points included, and it's worth working through where this room lands on it. The setup: a site, entitled, plans permit-ready, enough equity to start. Starts nationally have fallen hard and are forecast to keep falling into 2026 and 2027. Completions have been running well ahead of starts, so the units delivering now are the tail of the old pipeline. Breaking ground today on a 24 month build means delivering into a market where very little else is opening. The case for going now. Construction gets bought at a moment when the pullback in activity has taken pressure off labor and material pricing. Delivery lands into a thin pipeline. Rent troughs have historically been decent moments to start, since the building takes two years to exist and the market underwritten is the one two years out. Anyone waiting for confirmation delivers behind whoever starts now. The case for waiting. Financing cost is the binding constraint and it hasn't broken favorably yet. Deals that pencil at today's debt cost pencil thin, and thin doesn't survive a 9% cost overrun or a six month lease-up delay. Entitlements can often be extended, sometimes cheaply, sometimes not depending on jurisdiction. Holding costs on entitled dirt are real but small next to a construction loan running through a slow lease-up. If debt gets cheaper in eighteen months, starting then means a better deal into a pipeline that's still thin, because everyone else waited too. A third answer is selling the entitled site to someone with a lower cost of capital and recycling into the next one. A fourth is building a smaller version of the approved project so the loan is a size that can carry through a bad lease-up. None of these is obviously right. Worth a vote, with reasoning.

hannah_west29 · Answer

Here is the arithmetic version of why one side of this wins, and the number that would flip it. Take a $20M project, 65% loan to cost, 24 month build, 8 month lease-up. Interest on the construction loan through the whole draw and lease-up period runs roughly a third of the equity in a lot of these deals right now. If debt is 200 basis points cheaper in eighteen months, that line gets cheaper and the exit cap improves too, which shows up in the residual. Waiting looks great on that math. What waiting does not fix is the equity. Eighteen months of holding entitled dirt is eighteen months of that money doing nothing while property taxes on entitled land go up, because the assessor eventually notices the entitlement. Extension risk is not a footnote either. In some jurisdictions a permit extension is a form and a fee. In others it is a new hearing under whatever code was adopted in the meantime, and the code adopted in the meantime is not going to be friendlier on parking or energy. The number that would change the calculus is the spread between yield on cost today and the exit cap assumption. Above about 125 basis points, break ground. Below 75, wait, no matter what rents are expected to do in 2027, because a spread that thin means the bet is on cap rates rather than on building something. Hollow, the thing your framing skips is that going now and building smaller are not really separate options. Most operators who go now are going with a smaller version.

nicole_adeyemi · Answer

Land is a different animal from the building, and treating them as one thing misses the point. Entitled dirt is not idle capital the way it's often described. It's an appreciating position in a market where the supply of entitled sites is shrinking, because almost nobody is spending 19 months and six figures to entitle anything right now. In two years the scarce commodity in a lot of these markets won't be capital, it will be shovel-ready sites, and whoever holds them will be selling to builders who can't wait to start. That's the honest case for selling the entitlement, and it's stronger than it usually gets credit for. Taking the entitlement premium in cash preserves equity and skips construction risk entirely. The counter is that the entitlement premium is only real if a buyer exists. In thin markets the buyer pool for an entitled 60 unit site might be three regional developers, and if all three are waiting out the same cycle, the asset has no bid. Approved dirt has sat in small markets for years, growing on paper and never drawing an offer. The case for holding only works when there's a real reason to believe extensions are routine in that jurisdiction. Confirm that before assuming it.

Entitled site in hand: break ground into the trough or sit on the dirt

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