This is related to multi-family and an idea that I have seen some white papers about, the bar to entry for multi-family operators on the GP side is too low... The lower cap rates are going to start pushing people out, and once rates rise some people will be giving back the keys.
There is this idea floating out there that the industry is going to consolidate, and instead of sales there will be re-caps, and the amount of good deals to enter the market will continue to dry up.
I am starting to see it, deals in the 100MM+ range are getting marketed running a process then recapping internally anyway, do you guys think this is a trend that will continue? Will it cause the next drop in going-in cap rates, just the requirement to pay to play?
Not totally following. Are you saying the $100MM plus asset size market is going to consolidate because instead of selling, people will just refi?
It’s possible. But it’s also a symptom of today. It’s mostly funds that buy those assets and many have to sell eventually. But why sell if you can recap and sell in a few years. If it’s a life co with an extremely long hold horizon, they were never sellers anyway. And on top of that, if they did sell, what would they do with the proceeds today? Which explains why people hold assets. I think it’s a symptom of the capital markets.
So GPs are able to leverage and solicit the value of their in-place, below market debt to fresh equity?
It sounds like some operators are reading the tea leaves that the best "value-add" investment opportunities are already sitting in their portfolio. Time to see if these folks are actually efficient operators vs just being good traders in an accommodative environment.
Refi and Recap with new equity
Looking for a Oaktree White Paper on Real Estate secondary, but you hit the nail on the head.
This secondary market is going to provide liquidity for close ended funds to get out and recap into their next fund with themselves, and they forecast a 100% increase in this type of transaction in 2022, and for it to continue in the future.
Ya but the new equity is new fresh equity. Sure the sponsor doesn’t change, but the equity doesn’t. It may not sell in a traditional sense, but it sells.
In medical office, all the big portfolios are being re-capped, rather than sold by the aggregators. They keep their AUM, keep their fees, show returns to LP's. Eat their cake and have it too. As prior poster said, it's a symptom of the capital markets and too much liquidity out there.
Big time macro multifamily thesis inbound: Many smaller-cap REITs will be acquired and either taken private or absorbed by larger REITs and mega funds. Eventually, smaller private owner operators will transact their whole or a significant chuck of their portfolios. The days of single asset transactions are numbered in our industry. It's accretive from a seller standpoint to gather 2-10+ like-assets together and sell them as a package- operationally and from a buyers perspective. For my shop, we would certainly pay a premium if we could get $ out the door quicker on geographically close like-assets that are more efficient to manage.
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