Development Spread

Development spread is the gap, in percentage points, between a data center project's yield-on-cost and the cap rate at which a stabilized asset would trade. A project built to a 9 percent yield-on-cost and valued at a 6 percent cap rate shows a 300 basis-point spread, which is the profit developers earn for taking construction, power and leasing risk. Spreads of 150 to 300 basis points are commonly cited for pre-leased hyperscale builds, and they narrow when construction costs rise or cap rates fall. Investors use the spread to decide whether to build, buy a shell or acquire stabilized assets, and lenders look at it alongside the share of capacity already leased to a creditworthy tenant.