Who here has been pencils down for awhile or not buying?
Rates have gotten worse and sellers sticking to their prices.
The bid ask gap has widen as debt pricing has gotten worse. For those that have been pencils down, how long have you been? Either that or how long has it been since you bought anything?
We have been trying to be active, but the problem we're having is that the bid / ask spread is actually not wide at all anymore. What I mean by that is while the bid / ask spread for US is wide (aka why we aren't buying anything), every semi-interesting deal I've seen the last couple months has been ending up in a bidding war. There are just too many groups that need to get money out and are justifying these prices.
Co-sign this.
To add some color, from what I can tell it appears that there are two owner groups today. The first is so underwater (and distressed) on their deal that they don't even bother going to market. The second is a group that based on today's rates you'd think are at best break even, they go to market, a bidding war starts, and the seller comes out relatively ahead versus what you may otherwise expect.
It's a simple supply and demand issue. There's more capital (demand) than there is transactable deals (supply), and thus price moves accordingly. Not sure what stops this outside of some real market distress with portfolios going for reset basis that eats through capital and resets market pricing. Or capital running out and allocations being adjusted at the LP level.
If the extend and pretend would end, I feel like we'd get a better market reset. But doesn't seem like the regional banks or CLO markets have any intention of realizing their losses until the regulators force them to do so.
Makes sense. A deal which works in May 2024 is going to be a great one in May 2026.
I don't think you're going to see much more distress than we have already had, for better or worse. The shitty sponsors have already made deals that wipe out their LPs, and the rest don't need to, so they'll wait it out. If this interest rate environment persists for another 24 months maybe you see some issues, but I doubt that'll be the case
I think this is massively under discussed. I'm on the LP side and get 5 emails a day of funds looking to capitalize on the hurt in RE right now or that is coming due to loan maturities, etc. Smells to me like too many people chasing too few deals and not many funds will actually be able to fully capitalize on any hurt that comes.
In classic fashion, when the hurt actually comes most of these funds will final change their mind and will no longer want to buy it until the all clear sign is back
Actively looking but might as well be pencils down. Partially due to a large spread between buyers and sellers but more so other groups willing to purchase at 5% to 5.5% T3/PF expense cap rates.
This.
For every deal that we can make sense with barely sub-six cap, there seem to be 5 other larger shops justifying a 5 to even sub 5 cap.
Negative leverage doesn’t scare us for the most part, but borrowing at 6 fully loaded and buying at a 5 does.
I'd buy a solid deal at a real 5 cap. every time I really get into it, the 5 cap turns into a 4.5%.
The reason you buy negative leverage today is because you believe today's rates / metrics aren't "real". You say something is going to have to give - either inflation is sticky and rents / NOI continue to grow + new supply dwindles because replacement cost goes up, or they nip inflation and rates finally come down.
Ah I am looking forward to all of these dumbass funds that are deploying money because they have to get fucked in the ass when they don't perform at all on their fund goals.
This sort of came up on another thread, but is there any evidence that this actually happens? I'd bet that most of these people blame the interest rate environment and manage to raise another round. My gut feeling, backed only by anecdotal evidence, is that once you've had a success in this industry it is really hard to fail unless you are an active criminal.
I think it's a mix of both. I've heard stories from current and past bosses during their prior lives at large funds where they'd end up rushing to get money out towards the end of their fund life leading to mediocre performance of the fund.
I've also noticed that once you have momentum as a firm, it seems like missing windows, having some investments perform poorly, etc. don't really derail your future fundraising efforts either.
It's a relative analysis. People allocating money to these firms don't really look at how things were doing 5 years ago when they committed the capital. They will compare things to how it is going today. So if in 5 years the market is ripping again and you bring me a 7% annualized ROI when the stock market is generating 10% with full liquidity I am going to wonder what the fuck you have been doing.
Chiming in that I'm seeing this all as well (I'm in Midwest and Southeast major markets in the 2000s and newer space). Any well located deal in a Nashville or Charlotte or Tampa is seeing pricing push to a sub 5 cap. The buyer pool is strictly large, discretionary funds and family offices. It definitely sounds like these large funds are simply spending money to get it out the door. There is so much disequilibrium in the market that there is a scarcity premium on every deal out there. As long as rates are where they are I think the market is broken for the vast majority of shops with a higher cost of capital. I was look at a recent trade in the Nashville area and I simply can't figure out what return they're solving for even from an unleveraged IRR or cost basis perspective.
This is the hardest part here to grasp. SOFR is over 5% right now. Just trying to understand how much of a rate cut is everyone expecting. Seems a bit ridiculous. I honestly dont see the fed ever going back to previous levels unless there is a major recession.
What do you mean if lol....only a matter of time...the answer to that question is the big unknown
There is always a major recession at some point. I don’t expect more than 1 cut at most this year but they’ll come, it’s a matter of time. The economy and inflation is only being held up by deficit spending and that will come don’t either voluntarily by the admin or involuntarily due to the dollar losing steam. I’m not saying that as an investment strategy either.
Well there will be a major recession at some point if they don't. We can't just go from having <2% for so many years to now being over 5% and expect that we can hold it there for long term without any major economic hits.
Activity has picked up quite a bit in Manufactured Housing. High-quality stuff still trading in the 4s, even high 3s on T-12. Fundamentals are still very strong in the sector. We’re not pencils down
We're still seriously bidding on some value add high rise product. Some sellers are just cutting bait and leaving with their losses.
What is value add high-rise product? Just a building that's not fully leased/stabilized? Where are you adding value to a new tower lol
So, 1960's-1990's vintage towers. It's the same as old garden product except it's high-rise.
I think this will start to become more common with time. The reality is that most assets that are performing poorly weren't purchased that long ago. What that means is that the owners / sponsors can just kick the can down the road. They can hope that there is a 10% chance things come back and they're back in the money on promote, but almost more importantly is they don't have to chalk it as a poor investment yet as they're fundraising. Once some more time passes, these groups will get closer to a point where too much time has passed for them to make a promote, they've already fundraised new dollars for new deals, etc. and they will be more willing to cut bait. With enough time, the legacy deals won't be worth the resources they're using on them because they won't have a realistic window to making promote on them and they'll have new investments to worry about instead.
East coast mf and generally the same as noted above, except there’s not much actually transacting still. On market there seems to be a dichotomy between sellable deals and overpriced deals just sitting out there. The sellable deals with 10+ bids have a lot of the same characteristics - $15-20mm+, assumable debt to get neutral leverage going-in, partially renovated asset with “proven” value add story. Treasury surge causing a lot of non-assumable deals to retrade or fall out
Yeah I'd echo this. However... isn't this a "good" thing? Like, the reason there is this dichotomy is because for so long, people would buy anything and at stupid valuations. This feels like how the market should work, in the sense that assets that are performing will command a premium, and those that aren't won't trade anywhere near those prices. I've watched true value-add deals (as in, deals that needed a lot of work from the sponsor) trade close to stabilized deal yields for years. That isn't how it should work!
Sure. I agree with that. Things got a bit crazy for a few years there. Buyer pool out here has thinned and I know of a couple legit sponsors who have had to drop decent deals recently due to not being able to get the equity together. Rise and some other huge syndicators seem to be continuing on down in the sunbelt, but half the on market deals out here are lucky to have 1-2 groups interested near guidance.
I'm seeing more distressed sales. Lots of desire for quick off-market deals from Vendors. More and more instances of lenders taking control over sites and listing via brokers on open market or reaching out to a select group of potential buyers. For groups with capital, there are some great land deals right now if you can close with 100% equity. Feeling is that more will come into latter half of the year, even in the face of rate cuts. Key from what I've seen is that a company is fine until its not, then everything is for sale instantly.
IMO, the bigger concern is that institutional capital has a ton of money in CRE and a fair assessment of the office market would tank their portfolio. If you call it 200bps increase in cap rates, that takes out 30% of the equity which is roughly all of it assuming 60-70% LTV...not to mention the DSC issues if the debt is floating. Anyways, the knock-on effect is that institutional capital doesn't have money to invest in other asset classes (or less) because their office portfolios are a dumpster fire. Add on the boomers thinking it'll all go back to normal and we'll be wearing ties in-office 4 days a week, and you realize we're kinda screwed
I recently spoke to an executive investment professional and he mentioned that he’s “waiting for office to come back” to make investments in that space. This was a headscratching statement to me because 1) He was referring to Class B Office product, not your Class A product that has outperformed 2) I would say the office trends you see now will not get any better, in fact when the job market improves, more people will be reluctant to continue going in 4-5 days in office 3) Senior execs love self declaring themselves as “forward thinking” and “differentiated” but a lot of em are stuck in their ways and just hoping what has always worked will continue to work (referring to office demand/investment performance).
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