If you’ve been paying attention to real estate headlines lately, you’ve probably noticed a contradiction.
On one hand, development activity has slowed dramatically. Construction starts are down, capital is tight, and many sponsors are sitting on the sidelines waiting for interest rates and costs to stabilize.
On the other hand, some developers are still breaking ground. That disconnect raises important questions for passive investors:
– How are certain developers still getting deals done when others aren’t?
– What does real risk mitigation look like in a ground-up development?
– And how can passive investors properly vet a sponsor to make sure execution matches the pitch?
On a recent episode of Ritter On Real Estate, I sat down with Justin Gooden, Founder and CEO of Gooden Development, to unpack exactly those questions. Justin is actively developing high-quality multifamily and mixed-use projects in one of the most challenging development environments we’ve ever seen. Here’s what passive investors need to understand.
Why Ground-Up Development Still Makes Sense Right Now
At first glance, developing new multifamily projects in today’s environment seems counterintuitive. Interest rates are elevated. Construction costs remain high. Rent growth has flattened in many markets. But when you zoom out, the supply-and-demand story tells a different tale.
Justin pointed out that while 2024–2026 represents a peak in new supply deliveries, future supply is projected to fall off a cliff. By 2027 and beyond, new multifamily deliveries are expected to drop back to levels last seen around 2013—historically low levels.
If demand for apartments remains steady (and there’s little evidence it won’t), that lack of future supply puts long-term pressure on:
– Occupancy
– Rent growth
– Asset values
Combine that with a still-constrained single-family housing market, and well-located multifamily developments become even more compelling over a longer horizon.
Why Most Deals Aren’t Getting Off the Ground
So if the long-term fundamentals look strong, why has development slowed so much? It comes down to a perfect storm of factors:
– Elevated construction costs
– Higher interest rates
– Flattening or declining rents in oversupplied markets
– Increased uncertainty around underwriting assumptions
For high-quality, Class A projects in particular, this creates a problem: the cost to build often exceeds the value of the property at stabilization. That gap makes many projects unfinanceable without additional support.
The Finance Gap That Stops Development
In commercial real estate, value is driven by income—not construction cost. A developer might spend $20 million to build a project, but when the ribbon is cut, the stabilized value could be only $15 million based on current rents and cap rates.
That $5 million difference is the financial gap that prevents many deals from moving forward.
Historically, developers filled that gap with more equity—but doing so dilutes returns to the point where the risk no longer makes sense for investors. This is where public-private partnerships come into play.
How Public-Private Partnerships Change the Equation
Justin’s projects often involve partnerships with municipalities that want high-quality development but recognize the economic realities developers face. These partnerships can include:
– Tax Increment Financing (TIF)
– Cash incentives
– State and local grants
– Forgivable loans
– Deferred or abated property taxes
The key point: These incentives are not equity that shares in the upside.
Instead, they help close the financial gap upfront, allowing the deal to pencil without over-leveraging or over-equitizing the project. Investors retain the upside created through lease-up and stabilization.
For passive investors, this also adds an extra layer of diligence—cities don’t hand out incentives lightly. Projects, assumptions, and sponsors are thoroughly vetted before public dollars are committed.
How Value is Actually Created in Development
One misconception is that development profits are created at construction completion. In reality, the biggest value creation happens after the ribbon cutting.
The true lift comes from:
- Leasing the property
- Stabilizing occupancy
- Creating predictable cash flow
- Applying a market multiple to that income
There are few ways in real estate to create as much value as taking a project from raw land to a fully leased, stabilized asset. That’s why—when executed correctly—development can deliver outsized returns.
Understanding the Risks of Development
Ground-up development does carry a different risk profile than value-add investing. But not all development risk is created equal. Justin addressed several common misconceptions.
1. “All development deals are highly leveraged”
Not necessarily. Some deals are, but Justin’s recent projects were underwritten at 53–55% loan-to-cost, significantly lower than many assume. Public incentives and conservative underwriting allow for lower leverage and more equity cushion.
2. Cost overruns can’t be controlled
They can be mitigated. Key strategies include:
– Guaranteed Maximum Price (GMP) contracts
– Strong general contractor relationships
– Experienced architecture and engineering teams
– Meaningful contingency reserves (5–10%)
Justin also defers a large portion of his development fee, effectively keeping additional capital in the deal as a buffer—real skin in the game.
3. Developers just “hand it off” once construction starts
Good developers don’t. Active oversight matters:
– Weekly site visits
– Budget and cost reviews
– Ongoing coordination with contractors
– Catching issues early before they become expensive problems
Development is managed risk—not blind risk.
How Passive Investors Should Vet a Sponsor
One of the most important parts of the conversation centered on sponsor diligence.
Justin’s advice for LPs was straightforward:
– Ask for real investor references
– Look beyond websites and social media presence
– Talk to past investors about actual performance and communication
– Use third-party platforms like InvestClearly.com for verified sponsor reviews
– Don’t overlook something simple but powerful: background checks
Commercial real estate is a small world. Reputations travel quickly, for better or worse. Strong marketing doesn’t equal strong execution—and investors should verify the difference.
Looking Ahead: Opportunity with Caution
Justin remains bullish on multifamily long term, especially if the projected supply drop materializes. However, he also shared a thoughtful concern around AI and employment trends—particularly how automation may impact entry-level jobs and renter demand in certain markets.
As with every major technological shift in history, disruption creates uncertainty—but also opportunity. The key is thoughtful market selection and conservative assumptions.
Final Thoughts
This conversation reinforced a simple truth: Development isn’t about chasing risk—it’s about managing it intelligently.
For passive investors, the opportunity lies in:
– Understanding how deals actually pencil
– Knowing where value is created
– Vetting sponsors beyond the pitch deck
– Aligning with operators who plan for what can go wrong—not just what can go right
When those pieces come together, even a challenging market can produce exceptional outcomes.