The residential rents have to be over $3/SF with that development cost, I feel like they are trying to do something similar to The Eastern, curious to see how it works out.
For reference - the Alexan on Glenwood is expected to be ~$63M project (lets just ignore the commercial space), that puts the per unit average basis at $339,000
Let’s say across all their units, they get an average asking rent of $2,200 (some studios/1 beds list for below $1,800 and some 2 beds are high $2/low $3K - but the property mix is heavily favoring smaller units)
Now lets add in some other income (monthly parking, pet rent, some amenity fees, the valet, trash, etc). That is another $200 per month. Combined that revenue per unit annual ends up right around $29,000, however we need to take away 6% of revenue for vacancy/credit losses - so end of day ~$27,250 is flowing down per unit annually.
Operating cost for an apartment generally run in the 30-35%, REITs run well, Greystar is a wonderful PM, yada yada - so lets say they have $8,700 for everything - that’s their common area utilities, the leasing and maintenance staff, the contract services, the insurance, property taxes, repairs, property management fee, admin cost, marketing expenses.
Now we are down to $18,560 for net operating income (NOI) which is only a 5.5% yield on cost (with no trended rent growth or expenses). A few years ago when money was cheap, that was a great metric and the deal would make sense all day for investors and banks. Let’s fast forward to today, interest rates are high, rent growth isn’t exactly occurring in Raleigh, and US treasuries bonds are paying out 5% - this deal wouldn’t go through unless the sponsor/limited partner had major conviction about a bright future and are okay with not having cash flow for the first few years until they exit a negative leverage situation.
Let’s jump over to the Weld now, that’s high rise construction (expensive life safety systems, challenging construction - heck a tower crane rental for a couple years can cost millions, beautiful glass facade, lots of concrete in the structured park component).
Basic napkin math:
Assuming they are north of $375,000 per unit for development cost. Realistically, you want to be north of a 6% yield on cost, so lets work backwards.
$375,000 x 6% = NOI equal to or greater than $22,500. Let’s estimate they their average unit size is 795 SF because they have a mix up to 3 beds. I’ll use the $8,700 again for total operating expenses, because you hit some economies of scale with payroll, marketing, admin, and insurance on concrete building is relatively low compared to stick. Things like property taxes will increase, maintenance for things like window washing is not cheap, and so on. So now we are at $31,200, only thing left is to account for the vacancy and credit loss (6% min) and I’m up to $33,200 per unit. Let’s divide that by 12 months, I’m at $2,765, now we can’t forget other income of $225/month, so base rent ends up at $2,540 and we have around $3.20/SF for rental rate.
Some clarifications - all of these are high level assumptions, not projects I have exact information on (I use Costar/Real Page for most data), investor appetite varies and some groups might be okay with sub 6% yield on cost, but institutional capital markets will tell you above 6% today min. I also excluded any revenue from commercial space, some of that could be used to help boost Net Operating Income.