Timing the Cycle: When Development Outperforms

Today we’re stealing a page from CRE Daily, who published a write up about a report from Hines (is that a double steal?), regarding returns from development being higher earlier in the real estate cycle.

Per the report, it’s widely thought that the smartest move is to buy assets early in the cycle when prices are lower, then hold off on development until later, when rents and values are higher. On the surface, that seems logical, but the study shows a more nuanced reality.

According to Hines’ research, the development return premium (how much development outperforms existing acquisitions) tends to be greatest early in the cycle. As the cycle matures, that premium diminishes, and eventually, the absolute returns on development fall below the levels investors need to justify the added risk.

This tracks with our experience - private/entrepreneurial groups get in early and prove out the market. This gets the attention of everyone else and they all pile in until the market turns and we do it all over again.

Early-Cycle Advantage

Hines’ findings help explain why early-cycle development often outperforms:

• Costs vs. Values - Early in the cycle, land prices and construction costs are typically lower. By the time the project delivers, the market is often stronger, rents are rising, and values are climbing.

• Supply Positioning - Developers who build early capture demand before the market becomes crowded with competing projects.

• Capital Willingness - While financing is never easy, lenders and equity partners tend to see early cycle projects as opportunistic plays with room to run, rather than late cycle gambles.

In Arizona, where population and job growth create persistent long-term demand, these advantages can be even more pronounced.

The Late-Cycle Trap

The same Hines research highlights the risks of developing later in the cycle:

• Land and Construction Are Expensive - Higher input costs squeeze margins.

• Competition Increases - More projects are delivering at the same time, creating downward pressure on rents and absorption.

• Returns Don’t Match Risk - Even if rents are higher, the cost of capital and rising expenses erode returns to the point where development may no longer justify its risk profile.

For landowners, this shift has real implications. Developers in late-cycle mode may prefer to buy existing, cash-flowing assets rather than take on the uncertainty of building from scratch.

What This Means for Landowners

If you own land, your property’s attractiveness isn’t static, it changes with the cycle. Early in the cycle, developers are looking for sites that allow them to capture the premium of delivering into a strengthening market. Later in the cycle, their appetite for raw land may cool as acquisitions look safer relative to new projects.

That means two things for landowners:

1. Entitlement Matters Early - If you can shorten the timeline by having zoning and infrastructure in place, your land is more likely to catch early-cycle developer attention.

2. Know When Demand Peaks - Waiting for “the top of the market” to sell can backfire if the market turns and developers shift their strategy away from new builds.

The Takeaway

The belief that “develop later for bigger gains” doesn’t always hold up. Hines’ study suggests the opposite: the best development returns are often earned early in the cycle, not late. For landowners, the key is positioning property so that when developers are looking to strike early, your land is at the top of their list.

Thanks for reading, as always, please reach out with anything we can help you with.

Thanks,

John & Ramey