Why Planned Projects Are Abandoned Before Construction

Planned commercial projects are abandoned because approval is only one gate, and the economics can move during a planning period that averages about 1.5 years for projects that do reach construction. Nearly half of projects in planning never start building. The outcome turns on whether cost and expected property value still support the build when the project is ready to mobilize.

Planned status is an entitlement milestone and says nothing about funding

A planned project holds the required municipal approvals and has not started construction. A proposed project is still waiting on those approvals. The two labels mark different risks.

Entitlement risk sits mostly behind a planned project. What remains is whether the budget and the expected value at completion still clear the hurdle set at the start. Approval changes neither number.

Nearly half of projects in planning are abandoned before construction begins, so the planned label marks a milestone only. It carries no information on whether a building follows.

How the planning clock stretches the underwriting horizon

Projects that reach construction spend about 1.5 years in planning, roughly the same as the average construction period. A sponsor who underwrites at the start of planning needs the assumptions to hold for about twice the build period before the building is complete.

Planning is also variable. The 1.5 year average covers only projects that made it to construction. Projects that stalled and were abandoned fall outside that average, so it says nothing about how long a failing project spends in planning.

Delay compounds the problem. Development takes a long time, and snags in entitlements, in construction or in the market can sink even a well-conceived project. A longer planning period gives costs and exit values more time to move.

“The average time spent in planning for projects that make it to construction is about 1.5 years, roughly similar to average construction times. Second, a significant number of projects in planning (nearly half) are abandoned before beginning construction.”

Property prices and the planning pipeline decide how many projects proceed

Higher property prices reduce the likelihood that a project in planning is abandoned. The mechanism is value. Appreciation widens the gap between what a finished building is worth and what it costs to build, and a wider gap lets a project absorb cost growth.

Supply cannot respond at once. Near-term construction depends on how many projects are already in planning, because new planning starts take years to turn into construction. A price signal that arrives when few projects are in planning produces little building soon.

Forward indicators of value exist. Aggregate REIT premiums to net asset value have generally preceded property price appreciation over the following twelve months. Whether that appreciation reaches a given project before its decision date is a separate matter.

How a single cost line can stop a capital-constrained project

For a multifamily project with minimal land, structured parking can add millions of dollars to the construction budget. That addition can halt a project that is capital-constrained or subsidized.

The mechanism is arithmetic. Capital raised against an earlier budget does not grow when a line item does, so the added cost becomes a funding gap of the same size. A project with fixed equity or a fixed subsidy has no automatic source for the difference.

Why a planning-stage count overstates what will be built

In one annual report on Canadian hotels, close to 9,000 rooms were under construction and more than 30,000 were in planning stages, more than three times as many.

A planning count describes intent. Among United States commercial projects in planning, nearly half are abandoned before construction. Applying that rate to hotel rooms in another market would be an extrapolation, so the 30,000 rooms read as a pool of candidates and give no build schedule.

Worked example: an entitled $32 million project when costs and cap rates move

The following hypothetical project holds its approvals and is ready to commit. Projects that reach construction spend about 1.5 years in planning, and that stretch is where the inputs below can move. Stabilized net operating income (NOI) is projected at $2.8 million a year. Land and soft costs total $8 million and hard costs are $24 million. Both cases use the same NOI, the same land and soft costs and the same planning period. Cap rate here is one year of NOI divided by price, so it describes a single year.

Base case: at a 7 percent market cap rate, value is $2.8 million divided by 0.07, or $40 million. Total cost is $8 million plus $24 million, or $32 million. Value minus cost is $8 million, which is 25 percent of cost. Yield on cost is $2.8 million divided by $32 million, or 8.75 percent, which is 1.75 points above the 7 percent cap rate.

Stressed case: hard costs rise 12.5 percent during planning, an added $3 million ($24 million multiplied by 0.125), so hard costs become $27 million and total cost becomes $35 million. The market cap rate also moves to 8 percent, so value is $2.8 million divided by 0.08, or $35 million, which is $5 million below the base value. Value minus cost is $0. Yield on cost is $2.8 million divided by $35 million, or 8 percent, equal to the cap rate, a gap of 0 points.

Only two inputs changed: hard costs and the cap rate. The $8 million margin fell by $8 million, made up of $5 million lost on value and $3 million added to cost. A project with no value margin over cost leaves nothing to pay for construction risk, and that arithmetic makes shelving an approved project a rational outcome.

Mistakes in reading planning statistics and project margins

Treating a planned project as certain to break ground confuses municipal approval with construction readiness. The definition says the project holds approvals and has not started construction. It makes no claim about final feasibility.

Reading nearly half as an abandonment probability for every property type and market overstates the finding. The figure covers commercial projects in planning in the United States and is not split by asset class or local market.

Using 1.5 years as a planning schedule turns an average into a promise. The average covers only projects that reached construction, so projects that stalled and were abandoned are excluded, and the planning period for any one project can run well away from it.

Testing only whether value exceeds cost misses the cushion. In the example the stressed case sits at value equal to cost, a margin of $0, and a project can clear a bare value test while having nothing left to absorb a further move.

Reading the 1.75 point gap in the base case as a measure of profit over a hold misstates both figures. Cap rate is one year of NOI over value and does not measure a return or an IRR. The gap compares two single-year ratios, one over value and one over cost, and says nothing about exit timing or financing.

Counting every hotel room, apartment or square foot in planning as future supply ignores the abandonment rate. With nearly half of United States commercial projects in planning abandoned, a planning count sets a ceiling on starts and gives no build schedule.

Questions that test whether a planned project still supports a build decision

Does the project hold the required municipal approvals, or is it still proposed? A planned project holds them, and a proposed project is still waiting, so entitlement risk remains open.

How much of the planning period has elapsed, and what work remains? Projects that reach construction average about 1.5 years in planning, a figure that leaves out abandoned projects.

Where has total cost moved since the budget was set? A single line such as structured parking on a tight multifamily site can add millions of dollars.

Does committed capital cover the revised total cost? Capital fixed against the earlier budget leaves a funding gap equal to the increase.

What yield on cost does the revised budget produce, and how far is it above the market cap rate? In the example the gap fell from 1.75 points to 0 points.

What has happened to property prices since underwriting? Appreciation reduces the likelihood of abandonment, so the direction of values bears on the decision.

How many projects sit in planning in the same market? Near-term building depends on projects already in planning, because new planning starts take years to convert.

Is a pipeline count being read as intent or as expected starts? Nearly half of projects in planning are abandoned before construction begins.