Knowing when to sell a newly completed development can have a meaningful impact on returns, liquidity, and a developer’s ability to move on to the next project. From rent commencement and occupancy to cap rates and capital needs, several factors can influence the right time to exit.
Dave Wirgler is Vice President, National Developer Services at Sands Investment Group, based in the Austin office. Dave works closely with developers on new-construction assets, helping them forecast, structure, and execute dispositions. Dave leads the growth of a national developer platform that connects developers with capital, tenants, and buyers across the country, using a collaborative, data-driven approach to help streamline projects, accelerate growth, and deliver consistent results. Below, Dave shares his perspective on how developers should think about exit timing in today’s net lease market.
Q: What factors influence the decision to sell a newly completed development?
Timing mostly depends on the product type. For merchant-builder developers, there isn’t really a waiting period, because building to sell is the entire business model. They build properties to fill immediately, hence the name built-to-suit. Typically, the property will hit the market three months ahead of rent commencement/certificate of occupancy. If it’s any earlier than this, a complication can arise around rent credits, which is explained further later in this piece.
Q: How do you determine the optimal time to exit a project?
There is essentially no upside to waiting past the three-month window explained above. If it didn’t sell off-market but was a really strong deal, the developer may delay and list closer to completion, but this is rare. Dave explains that “if somebody does close on something three months early, what they typically ask for, because they’re not getting any rent, is a rent credit.” A buyer who closes early, before rent has actually started coming in, will demand the seller credit them for those “dead” months at closing, which ultimately reduces the seller’s net proceeds. This reinforces that waiting is less of a strategic advantage and more of a defensive decision to avoid leaving money on the table.
Q: How does occupancy impact exit timing?
Dave explains that listing a property with vacancy present, typically in multi-tenant deals, can be seen as a market liability. Buyers may see the unleased space and read it as a risk, even in situations where a lease is close to being signed. Dave’s advice, specifically to developers, is to hold off listing until the remaining vacant space is leased or very close to being leased. If the asset is strong, there is little reason to rush to market with a vacancy present, unless there is real financial pressure on the developer.
Q: How do interest rates affect sell-versus-hold decisions for developers?
Interest rates are important, mostly because they move the disposition cap rate, and cap rate movement drives the sell-or-hold decision. Developer margins on these deals are relatively thin to begin with, so even the slightest cap rate shift can meaningfully affect the developer’s profit. In situations like these, we’re seeing developers typically hold and refinance with more permanent debt rather than sell immediately and take a loss. Permanent debt at higher rates isn’t ideal, but it’s better than losing money outright. “From the outside, a developer may appear to be doing very well, but much of their capital is often tied up in active projects. As a result, they can be asset rich but cash constrained.” Dave explains that this also highlights a key difference between brokers and developers: the skin in the game. As Dave puts it, “They’re putting their own money, and often their investors’ money, on the line. When you’re that invested in a deal, every market shift feels personal.” This is another reason everyone craves a stabilized market. Cap rate shifts hit developers personally.
Q: What market indicators signal that it’s a good time to sell?
It’s difficult to point to a single metric; it’s more about overall market stability. As Dave explains, “The perfect world is a stable market where pricing and expectations are realistic, product moves at a consistent pace, and both sides of the table feel like they’re getting a fair deal.” A stable market gives people in roles like Dave’s greater confidence when advising clients on potential deals. The more consistent and predictable the market is, the better positioned he is to confidently guide clients toward the right opportunities and away from the wrong ones.
Q: Are there situations where selling before the asset reaches stabilization makes more sense than waiting?
Yes. Dave points to two scenarios where this happens. The first is when a deal is an extremely strong off-market opportunity, where not waiting for the typical stabilization timeline makes more sense. The second is when the market is stable enough, similar to what’s outlined above, that a developer can forecast future conditions with confidence. Dave explains that in these cases, it can make sense for developers to sell at a reduced profit, in order to free up capital that would otherwise be locked into a single deal. As he puts it, “It’s really about recycling the capital. You have to keep putting that money back to work.” If a property is sitting there making no money, that capital stays tied up, and if all of a developer’s capital is tied up, they don’t have the funds to do more deals. At that point, they either need to find new partnerships or find a way to move or sell something so they can free up money to work other deals.
Q: What risks come with holding a property longer than originally planned?
The biggest risk of holding a property longer than originally planned is rent sustainability. Rents in today’s market have continued to grow, and there’s a broader concern about whether actual sales volume can keep up if rent continues to climb on standard escalation schedules. As Dave explains, “Five or six years ago, rents for smaller-format fast-food concepts like Taco Bell and Popeyes were typically around $125,000 to $135,000 a year. Today, similar concepts and operators are averaging closer to $175,000 to $185,000 annually. The question is whether tenants can sustain those increases. Do store sales and volumes justify these higher rents?” There’s also a longer-term ownership consideration. Many of these assets are held by investors whose investment horizons may not extend through future renewal periods, potentially leaving the next generation to navigate renewal risk, changes in income, and shifts in asset value. “When it comes to new construction assets, your highest and best use of the property is the day the lease is signed.” At that stage, the value hasn’t yet naturally eroded, so the day the lease is signed is when its value is at its highest. Holding inherently works against value unless something else offsets it.
Q: What financial metrics are most important to developers when evaluating a sales opportunity?
Developer underwriting fundamentally comes down to three inputs: achievable rent, land acquisition cost, and construction cost. “What rent can they achieve from a tenant at a given site? What are they paying for the land? And ultimately, what will it cost them to develop the site, whether they’re constructing the building themselves or pursuing a ground lease?” Dave explains that deals often fall apart because the land seller’s pricing expectations exceed what’s achievable in rent, and what rent is required to support the developer’s required profit margin. Dave lays out the following example:
- Start with achievable rent: If the tenant will pay $150,000 in annual rent, that establishes the income the property can generate.
- Estimate the exit value: At a 5% cap rate, $150,000 of annual rent implies a sale value of approximately $3.0 million.
- Subtract the land cost: If the land costs $1.0 million, approximately $2.0 million remains.
- Subtract construction costs: If construction costs $1.2 million, the total project cost is $2.2 million, leaving an $800,000 spread.
- Stress-test the cap rate: A 50-basis-point increase in the exit cap rate can materially reduce the property’s value and compress the developer’s margin.
- Evaluate the remaining spread: What initially appears to be an $800,000 spread could quickly fall to roughly $400,000, illustrating how sensitive the economics are to relatively small changes in underwriting assumptions.
The deal ultimately comes down to whether achievable rent and the resulting sale price can support the land cost, construction cost, and required developer profit. The best developers are the ones who religiously look at the entire picture as a spreadsheet and acknowledge that it’s a numbers game.
Q: How are developers adjusting their exit strategies in today’s market?
Dave explains that developers don’t necessarily adjust their strategy so much as react directly to whatever cap rates and achievable pricing are at the moment. “If cap rates have moved higher and begun to erode the developer’s margin, the developer may simply choose not to sell. They might be willing to transact at a 5% cap rate, but not at 5.5%, because beyond that point the economics no longer support the required return.” It can take upwards of two to three years to put these deals together, so developers understandably aren’t willing to accept zero profit. That said, as mentioned above, in some cases, typically when the market is more stabilized, developers are willing to accept reduced profits for the purpose of recovering capital to redeploy into new projects.
Q: What advice would you give a developer deciding whether to sell now or wait?
If rent commencement is approaching, sell, unless there’s a specific reason to hold. One legitimate reason Dave lays out is tax strategy. In some cases, developers wait 12 months after rent commencement before closing on a deal, since that holding period reduces their tax liability on the sale. “Outside of that consideration, waiting simply reduces the remaining lease term, which can negatively impact value, particularly for 10-year leases.”
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Frequently Asked Questions
When is the best time to sell a newly completed development?
For merchant-builder developers, the ideal window is typically around three months before rent commencement or the certificate of occupancy. Selling too early can lead to rent credits, while waiting too long can reduce the remaining lease term and potentially impact value.
Should a developer wait until a property is fully occupied before selling?
For multi-tenant developments, vacancy can create additional perceived risk for buyers. If remaining space is likely to lease soon, waiting until there is greater certainty around occupancy can help position the asset more favorably.
How do interest rates affect the decision to sell or hold?
Interest rates can move disposition cap rates, which directly affect sale pricing and developer margins. If higher cap rates compress returns too far, a developer may choose to hold and refinance rather than sell at a loss.
What financial metrics matter most when evaluating a development sale?
The three core inputs are achievable rent, land acquisition cost, and construction cost. Developers also need to consider the anticipated exit cap rate to determine whether the projected sale price supports project costs and the required profit margin.
What are the risks of holding a new construction property too long?
Holding longer can expose a developer to rent sustainability concerns, changing market conditions, renewal risk, and a shorter remaining lease term. For new construction assets, value may be strongest when the lease is newly signed, making the timing of an exit particularly important.
