Deal people - how’re you feeling right now? My group has been on freeze for the last 6 months or so. Lots of pressure to produce, but little inclination to actually transact. Want to poll the audience to how everything is going for everyone? Product focus? Geo? Underwriting standards? Strategy?
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Based on the most helpful WSO content, it seems like the sentiment and strategies in the deal-making space are indeed mixed, reflecting a cautious approach in some areas while others are still actively pursuing opportunities. Here's a breakdown of what's happening across different sectors and geographies, as well as insights into underwriting standards and strategies:
Product Focus:
Geographical Focus:
Underwriting Standards:
Strategy:
In summary, the overall mood among deal professionals appears cautious, with a focus on quality and resilience in the face of economic uncertainty. Strategies and focuses are being adjusted based on evolving market conditions, with a keen eye on maintaining strong underwriting standards and navigating the uncertain cycle.
Sources: Q&A: Non-Bank Commercial Lending, What is your opinion where we are in the cycle and how is your firm preparing for the next 12-18 months?, Real Estate focused hedge funds, Basic Overview of the Consumer Sector, Investment or Lending Strategy by Product - 2020
Last 12 months, underwrote maybe a 100 deals. We even went outside of our region and other criteria. We bid on 20 of them and got zero of them. We were very far off on 18 of those, the other two we were a bit closer but there were 1031 buyers that were more aggressive that wanted it.
Its been slow. Layoffs about to happen. I think it'll get worse. CPI number actually is higher than the Fed wanted. Rates are not coming down. The buyer seller spread is just too wide to make any deal work.
how much longer can this buyer and seller bid/ask spread last for though. owners dont want to hold onto these properties with such high expenses and insurance renewals
Funny enough, out of the other 18 we bid, I believe only 7 sold. The sellers are not happy with the market pricing.
Theres just so many issues. You mention insurance renewals. Thats a good point. We looked at one deal where seller insurance was $300K. We underwrote $400k. Well we were wrong, we went to 6 different insurance companies and the lowest quote we got was $650K. Yes, freaken $650K. It destroyed our underwriting and IRR. We then asked the seller to share their insurance company's contact. We reached out to them, they said $700K! They basically said theyre only holding onto these low rates for legacy customers, but on a new policy owner they are effectively putting a price increase, hoping that a buyer doesn't use them. The insurers want out. Owners are only benefiting because they're legacy customers.
At a medical sponsor. Acquisitions is pretty dead. Not for lack of deals, but capital (open ended core+ from mega funds and the likes) is decently dry. Development is very active on the other hand. Hospitals and top private practices need new facilities and aren’t willing to slow down
I was just in California for one of the two largest MOB conferences (maybe you were too) ...... health systems say they can't afford and won't pay the new rental rates required for new ground-up properties to pencil.
Operator level. Most are just trying to survive. But the firms that have an appetite- feels like there’s more dry powder in the market than there was in the fall, however it’s all for distressed deals, reset basis type stuff.
Feels super dry for core. Which is funny because on a PSF/per unit basis I don’t hate prices in that space for the right deals.
Yes, we think this is a great time to be a buyer for certain asset classes. We're focused on retail of all sorts. Have closed several large deals over the last year and currently seriously underwriting 3 more.
Echoing this. We’re shopping (no pun intended) some of our suburban grocery anchored and infill unanchored strip centers and generating a lot of interest. Lots of groups willing to close all cash and with short DD and closing timelines.
Pricing isn’t where it was it but definitely lots of groups looking to get ahead of a rebound in the market.
Why is it a good time for retail specifically? Looking to park money and make something so retail with high occupancy and long term is a good place right now if they need to deploy?
Fund manager, I underwrote a few hundred last year, closed on 4. We’ve been busy and not being rewarded for the same. Leads me to wonder what the expectation is in a more normal environment because this isn’t sustainable.
You fully underwrote a few hundred? Or screened?
East coast multifamily and equity needs to stabilize above a 7 uyoc. Have several LOIs out but still disconnected on pricing. Generally bidding a going-in 6 turning into a 7 something. Looking at deals with some complexity on them beyond a normal value add.
Curious what rent increases are you assuming? Have seen and heard in general oh the 2-3% bumps going forward are not the norm anymore, does that mean you're UW 0% or negative first year or two or are you still using that growth assumption of a few %?
Seems people are trying to overthink it but even if you UW rents declining in year 1 and 2 you need to see some growth for the deal to make sense.
Nobody cares about what you are underwriting for growth, they all just hyper focus on UYOC
East coast major brokerage shop. Focus on retail assets, grocery anchored shopping centers. Deals in the market we are getting record numbers of CA’s signed and double digit offers on deals. A lot of capital chasing retail right now.
We do STNL retail development nationwide. We’re extremely busy. All the tenants we work with are beating down our door for new locations.
Past couple years were tough getting rents out of tenants so deals could pencil, but they’re finally coming around and paying what it takes. Increased construction costs, seller expectations, etc.
Are this pre-leased sites? Are you using whole loans to capitalize or how does the cap stack look?
We only work with 4-5 tenants, chase sites at their direction. Try to keep it single tenant to minimize leasing risk. We'll take a small equity position then raise the rest from our investors, and then get some debt to cover the acquisition and construction. LTC has been around 30%. These are bit size deals, relatively, so the capital stack typically doesn't get too complicated.
At a large brokerage shop in the northeast. Work focus is solely on open-air multi-tenant retail shopping centers. Most people are aware of the solid fundamentals now behind the retail asset class and we’re seeing insane numbers of CA’s signed to look at on market deals, seems like EVERYONE is at least curious about retail. Getting between 8-12 offers sometimes more on every deal. People are starting to accept new pricing. Insane pipeline of deals for this year.
Job I left just closed on a suburban surface parked multi deal last week. Looks to be a great deal. They're hoping to close another two this year at least. Absolutely no one I know of in the city is pencils down on new deals except for our traditional equity partners. Too bad for them though - there is a shit ton of foreign money thrilled to get into US multi.
I meanwhile got zoning approval on a deal about a month ago and submitted for site plan and design review approval about two weeks ago. Looking to be about a three month process (knock of wood) but our partners may close on the land here in a month which would be weird but cool. Negotiating the GMP right now.
We’re about to close on acquisition #3 this year and #4 will be awarded our way this week. 150+ unit multi, 5.5-6.0 caps, $150m total.
Similar situation in the southeast.
Curious to hear how people are comfortable with 5.5 caps in the sunbelt with demographics… seems like many submarkets don’t have incomes to support significant future rent growth.
LP shop focused on multifamily value-add. We've bid on a few things with some of our operators but have lost by 5-10% on everything. Our Investment Committee is pretty split right now, half thinking the buying window is closing, the other half thinking pricing still has runway to come down. We are fund structure so fees are keeping the lights on, but still doesn't feel great.
Similar story here. Active across asset classes so comparatively RE is a tough case to make.
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