The Development Spread Explained
Investing involves risk; however, some investments have higher risk levels than others. In real estate investment, the “Development Spread” refers to the additional return that an investor can expect in exchange for the added risk of developing or constructing a property. This spread is the difference between the expected return from the completed development and the cost of developing the property.
From a mathematical perspective, the development spread is the difference between the entering cap rate (or YOC) and the exiting cap rate, which can be projected using an untrended YOC calculation.
The development spread is an important factor that developers and investors like Fish Capital Investments consider when deciding whether to undertake a multifamily development project. It reflects the risk premium that investors demand for taking on the uncertainties and challenges of the development process, such as delays, cost overruns, and changes in market conditions.
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