Updated July 21, 2026
Yield on cost (also called development yield) is a project's stabilized net operating income divided by its total development cost — the ground-up-development equivalent of a cap rate, used to underwrite whether building is worth doing versus simply buying an existing asset.
A developer compares yield on cost to the market cap rate for stabilized, comparable assets — the spread between the two is compensation for taking on construction, lease-up, and entitlement risk instead of buying a finished building. When that spread compresses too far, building no longer pencils better than buying.
In LA, elevated construction costs and entitlement timelines have compressed development spreads meaningfully since the 2021 peak — a real reason some LA multifamily land that would have been a development play a few years ago is now more realistically an assemblage or long-hold candidate instead.
The Sterman archive has closed land sales on both sides of that calculation — 10401 S Figueroa St ($2.41M, 2023), 4339 Berryman Ave in Mar Vista ($5.3M, 2018), and 1526 S Westgate Ave in West LA ($2.05M, 2021) — each a real buyer underwriting whether their development yield on cost would clear the market cap rate for a finished building before paying that land price.
From the Sterman LA Multifamily Glossary — defined the way a broker actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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