Development Yield
Also referred to as a project’s Yield-on-Cost, Development Yield is calculated as a development’s net operating income (or sometimes cash flow from operations) at stabilization divided by the total project cost.
Net Operating Income at Stabilization ÷ Project Cost
The net operating income at stabilization may be calculated with (trended) or without (untrended) income and expense grow assumptions.
Putting ‘Development Yield’ in Context
Consider the development of ‘Riverfront Lofts’, a 175-unit mid-rise apartment project located along the scenic Colorado River in Austin, Texas. This project, managed by Clearwater Real Estate Development, focuses exclusively on residential units, emphasizing luxury living and accessibility.
- Location: Austin, Texas
- Development Name: Riverfront Lofts
- Developer: Clearwater Real Estate Development
- Total Project Cost: $45 million
- Units: 175 luxury apartments
Upon stabilization, Riverfront Lofts is expected to generate a Net Operating Income (NOI) of $3.6 million annually on a trended basis. Calculating the trended Development Yield (i.e. Yield-on-Cost):
- Development Yield = NOI at Stabilization ÷ Total Project Cost = $3.6 million ÷ $45 million = 8%
This trended yield provides a direct measurement of the project’s financial performance based solely on the actual cost to develop, rather than the market value. For Clearwater Real Estate Development, comparing this 8% trended development yield to the current market cap rate of 6% in Austin for similar residential projects reveals a favorable trended development spread of 2%. This generally signifies a strong investment opportunity.
Frequently Asked Questions about Development Yield
What is Development Yield?
Development Yield, also known as Yield-on-Cost, measures a development’s expected net operating income (NOI) at stabilization divided by the total project cost.
How is Development Yield calculated?
Development Yield = Net Operating Income at Stabilization ÷ Total Project Cost.
Example: $3.6 million ÷ $45 million = 8% yield.
What is the difference between trended and untrended Development Yield?
Trended Development Yield includes assumptions for income and expense growth at stabilization, while untrended yield does not factor in any growth.
Why is Development Yield important in real estate development?
It helps developers assess how efficiently a project generates income relative to its cost and is used to evaluate project feasibility and return potential.
What does a Development Yield of 8% indicate?
An 8% yield suggests strong potential profitability, especially when compared to a market cap rate of 6%, resulting in a favorable 2% development spread.
How is Development Yield used with Development Spread?
Development Spread = Development Yield – Market Cap Rate.
It shows the “premium” for taking on development risk versus buying a stabilized property.
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