Key Takeaways
- • Buildability, not demand alone, now determines CRE development viability. Projects must demonstrate a clear execution path across financing, labor, costs, power, entitlements, and permitting to advance in the current market environment, according to Ryan Severino, chief economist at BentallGreenOak (BGO).
- • Market tolerance for weak assumptions has eroded significantly. Elevated interest rates, selective construction financing, labor constraints, and infrastructure limitations have fundamentally reshaped which projects can move forward, requiring developers to demonstrate stronger fundamentals than demand projections alone.
- • Pipeline favors projects with pre-committed demand, capital, or existing infrastructure. The current development environment rewards projects that have already secured anchors, equity commitments, or necessary infrastructure in place, creating structural advantages for well-capitalized developers and those with committed tenants.
- • Commercial real estate development is not frozen but increasingly selective. While the sector continues to function, gatekeeping mechanisms around construction feasibility and financial viability have tightened considerably, filtering out marginal projects.
Summary
Commercial real estate development remains active, but market dynamics have shifted decisively toward projects that can demonstrate operational and financial feasibility across multiple dimensions. Ryan Severino, chief economist at BentallGreenOak and head of research for the firm, characterizes the current environment as increasingly defined by "buildability"—a concept that extends far beyond traditional demand analysis.
Severino's framework identifies six critical pathways that projects must navigate: financing availability, labor availability, cost predictability, power infrastructure capacity, entitlements and permitting, and execution capability. In prior market cycles, strong demand estimates often justified development approval and financing. This cushion has narrowed substantially. Higher construction costs, elevated interest rates reflecting the Federal Reserve's stance, selective underwriting by construction lenders, and labor market constraints have created a more rigorous screening process for new projects.
The structural shift reflects both cyclical and secular challenges. Construction financing, in particular, has become more discriminating, with lenders increasingly skeptical of projects lacking strong pre-leasing, sponsor capital commitments, or infrastructure prerequisites. Labor constraints in key markets further constrain supply and increase execution risk. These factors have combined to create a development pipeline that favors projects with committed demand (typically through anchor tenant leases), committed capital (equity or mezzanine financing already in place), or critical infrastructure components already operational.
The implication for investors and developers is clear: the era of development driven primarily by favorable growth projections has given way to a market that requires tangible evidence of feasibility and capital support. Projects lacking these attributes face materially longer timelines or may not advance at all, regardless of underlying demand fundamentals.
Severino's framework identifies six critical pathways that projects must navigate: financing availability, labor availability, cost predictability, power infrastructure capacity, entitlements and permitting, and execution capability. In prior market cycles, strong demand estimates often justified development approval and financing. This cushion has narrowed substantially. Higher construction costs, elevated interest rates reflecting the Federal Reserve's stance, selective underwriting by construction lenders, and labor market constraints have created a more rigorous screening process for new projects.
The structural shift reflects both cyclical and secular challenges. Construction financing, in particular, has become more discriminating, with lenders increasingly skeptical of projects lacking strong pre-leasing, sponsor capital commitments, or infrastructure prerequisites. Labor constraints in key markets further constrain supply and increase execution risk. These factors have combined to create a development pipeline that favors projects with committed demand (typically through anchor tenant leases), committed capital (equity or mezzanine financing already in place), or critical infrastructure components already operational.
The implication for investors and developers is clear: the era of development driven primarily by favorable growth projections has given way to a market that requires tangible evidence of feasibility and capital support. Projects lacking these attributes face materially longer timelines or may not advance at all, regardless of underlying demand fundamentals.
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