How High Interest Rates Are Reshaping Real Estate Development in San Diego
And Why Conservative Underwriting Is the Only Way Forward

In today’s market, development has become a game of precision.

With interest rates at their highest levels in over a decade, the math behind every project is more important than ever. Debt is expensive. Exit cap rates are unpredictable. And many developers have hit the brakes—unable or unwilling to adapt to the new reality.

But that’s exactly why smart underwriting matters more now than ever.

Why High Rates Are Killing Marginal Deals

Let’s break it down:

• Higher debt service eats into project returns.

• Construction loans are harder to secure and come with tighter covenants.

• Exit pricing is uncertain, because cap rates may expand over a 2–3 year timeline.

• Buyers are more cautious, which puts pressure on your backend numbers if you're looking to sell or refinance.

Bottom line? If your deal doesn’t pencil conservatively from day one, it probably won’t survive.

How We Underwrite in a High-Rate Environment

While others are banking on future rent growth or rate cuts, we take a more grounded approach. Every deal we move forward on is built around conservative, no-fluff assumptions that protect our downside while leaving upside on the table.

Here’s how we do it:

1. Discounting Market Rents by 3%

When we evaluate a project, we don’t underwrite to what rents might be in 2–3 years.
We take today’s comps and shave off about 3% to stress-test the numbers. That way, if rents soften or stay flat, our deal still works.

2. Third-Party Construction Cost Modeling

We don’t base our numbers on “what we think we can build for.”
We always underwrite as if a third-party general contractor is running the job at standard market pricing—because that’s what a lender or buyer will assume on the backend.

If the numbers still pencil under that model, we’re good. Any cost savings we achieve through in-house efficiencies or vendor relationships? That’s upside—not part of the baseline pro forma.

3. Cap Rate Buffers (50 Basis Points Minimum)

We always add at least 50 basis points (0.5%) to today’s market cap rate when modeling our exit.

If assets in the area are trading at a 4.5% cap today, we underwrite to a 5.0% cap on exit—minimum.
Why? Because no one can predict where rates will be in 30 months.
But we can control how much buffer we build into our underwriting.

Why This Matters

In a high-interest environment, there's less room for error.
Every assumption matters. Every percentage point counts.

Over-aggressive underwriting won’t just kill your project—it’ll put your investors, your brand, and your business at risk.

That’s why we’re committed to playing defense first, even on deals with major upside. Because if the worst-case still works, we sleep well at night—and so do our investors.

The Bottom Line

This isn’t a market for dreamers. It’s a market for disciplined operators.
And in San Diego, where development is hard even in the best of times, it’s the teams who underwrite like it’s already raining that will still be building when the sun comes out again.

Our goal is simple:
Survive the rate cycle. Deliver strong returns. And protect our downside at every step.

Because in this environment, conservative underwriting isn’t just smart—it’s the only option.