Entitled site in hand. Do you break ground into the trough or sit on the dirt

Question

I look at small markets and low price points so my numbers are a fraction of what most of you work with, but the question is the same shape everywhere and I'd like to see where this room actually lands.

The setup. Say you have a site, entitled, plans permit-ready, and 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. If you break ground today on a 24 month build, you deliver into a market where very little else is opening.

The case for going now. You are buying construction at a moment when the pullback in activity has taken pressure off labor and material pricing. You deliver into a thin pipeline. Rent troughs have historically been decent moments to start, since the building takes two years to exist and the market you underwrite is the one two years out. Anyone waiting for confirmation delivers behind you.

The case for waiting. Financing cost is the binding constraint and it hasn't broken your way yet. Deals that pencil at today's debt cost pencil thin, and thin does not 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 they're small next to a construction loan running through a slow lease-up. If debt gets cheaper in eighteen months you start then with a better deal and the pipeline is still thin, because everyone else waited too.

There's a third answer, which is that the right move is to sell the entitled site to someone with a lower cost of capital and recycle into the next one. And a fourth, which is to build a smaller version of the approved project so the loan is a size you can carry through a bad lease-up.

I genuinely don't know which of these I'd do with my own money. Vote and then tell me why.

hannah_west29 · Answer

I'll give the arithmetic version of why I lean one way, and then the number that would change my mind.

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 is roughly a third of your equity in a lot of these deals right now. If debt is 200 basis points cheaper in eighteen months, you save real money on that line and you also get a lower exit cap, 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 your money doing nothing while property taxes on entitled land go up, because the assessor eventually notices the entitlement. And extension risk is not a footnote. In some jurisdictions a permit extension is a form and a fee. In others it's 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 my mind is the spread between my yield on cost today and my exit cap assumption. Above about 125 basis points I go. Below 75 I don't, no matter what I think rents do in 2027, because a spread that thin means I'm making a bet on cap rates rather than on building something.

hollow, the thing your framing skips is that going now and building smaller aren't really separate options. Most people who go now are going with a smaller version.

nicole_adeyemi · Answer

Land is a different animal from the building and the vote treats them as one thing.

Entitled dirt is not idle capital in the way ledger describes. It's an appreciating position in a market where the supply of entitled sites is shrinking, because 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'll be shovel-ready sites, and the people holding them will be selling to builders who can't wait to start.

That's the honest case for the sell option and it's stronger than people give it credit for. You take the entitlement premium in cash, you keep your equity, and you skip the construction risk entirely.

The counter I'd make against myself is that the entitlement premium is only real if a buyer exists. In thin markets the buyer for an entitled 60 unit site is three regional developers and if all three are waiting out the same cycle you are holding an asset with no bid. I've watched a client sit on approved dirt for four years in a small market. It was worth more on paper every year and never once had an offer.

Voted for holding, with the caveat that holding is only a strategy if you have a reason to believe your extensions are routine in your jurisdiction. Check that before you assume it.

Entitled site in hand. Do you break ground into the trough or sit on the dirt

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