Every single deal that comes across my desk these days is just insanely expensive. With the uncertainty of interest rates, how the f*ck is anyone buying anything at these prices and do they realistically expect any sort of return?
Thoughts monkeys?
Edit 12/13/16:
Great insight monkey's. I am sorry for the vulgarity in my initial post (it seems to have offended some, hence the monkey shit).
God bless real estate and god bless america ;)
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People have money they need to put to work -period. The thing I've learned over the last few years in the markets (public, but also applies to private) is that in the short term liquidity is king.
Middle Eastern sovereign wealth funds that diarrhea cash in their sleep...pension fund advisors like Metlife, whose investment committee don't give a shit if they pay a 1 cap as long as they can tell their retirement account clients the building they paid up the butt for will cash flow like a boss until their great grandchildren are in wheelchairs. the list goes on.
Well, big funds that raise money have to spend it and compared to where other returns are there are still opportunities to hit their numbers.
On the private capital side I still see lean development shops doing deals but they make them happen as opposed to waiting for them to come across their desks.
The investors that are buying product that hits the general market are overpaying and not factoring in real capex numbers. A lot are going to make very little money over the long-term.
I see an occasional good deal pop up which is quantified as something that 99% of the market thinks is overpriced but there is some hidden value play people aren't realizing.
Could you give an example of a value play that you have realized in one of your investments?
How do you guys think Carson being named to lead HUD affects development, specifically affordable housing?
Can't really speak to affordable housing but what would be interested in what he does with the FHA. Millenials are relying more heavily on FHA insured loans to afford down payments for houses. Changes to this program could hurt or help the multifamily sector.
Considering the dude knows nothing about housing (frankly I'm not sure he knows much outside of medicine period), I really hope he doesn't rock the boat too much.
The poor people are too dependent on affordable housing (dependency is a bad thing, creates a vicious cycle) I hope that people that are advising him are competent enough to make sure he doesn't screw things up. Here in southern California, housing prices are skyrocketing and more expensive by the month.
Experience in this industry does play a big role, but let's see how he does. Only time will tell.
Deal pipeline has significantly decreased. The 2 deals that we are closing this year, 1 of them is off market / was due to a relationship of one of our principals, the 2nd the seller was willing to take back paper at an attractive rate, so both I would say are unique.
Capital Markets/Pipeline have softened significantly.
As a value-add fund we are still finding attractive deals. In fact, due to lack of investment activity we are surprised with how competitive our offers have been on deals that 2 years ago we would have had no shot at getting.
Everyone is pumping the breaks right now but there are still good deals to be had assuming conservative underwriting of debt and rental rate growth.
We're having a lot of luck picking up deals that fell out of contract after the election. We weren't initially competitive on quite a few deals that have now come back our way after some high-flyer dude dropped out when he couldn't get proceeds. That is the importance of staying close to the rim though (and having permanent capital).
Yeah I agree, it seems most deals that we have a chance at right now are deals that are coming back to us after a buyer fell through.
A hard part in modeling right now is trying to come up with a reasonable exit cap. I feel like a blind monkey throwing darts
In the same boat. Acquisitions wise we're fine. Easier to make deals happen now that are value-add. Tenants still trying to open up shop spaces and need somewhere to go. Has helped us a lot. Pure construction may be lacking but value-add and stabilized assets aren't hurting too much from what I've seen.
Only a matter of time before these guys emerge from the shadows again:
http://www.nytimes.com/2016/09/02/world/asia/china-anbang-insurance.htm…
japanese insurance companies that are willing to take zero yield vs. the negative yield offered domestically
This is a question that I really want someone to offer a converse to. What in the world do people mean when they say "cash is moving off of the sideline"?
There is no such thing as cash on the sideline. For someone to add cash to their portfolio, they must have sold securities to someone else (Who "put cash to work"). I just find it vexing when all of these analysts describe firms "putting cash to work" and "getting off the sideline".
Cash from the sideline could be from investors who normally would want to invest in real estate but can't justify the risk for the returns and are waiting for an opportune moment to put their money to work in real estate. Just a figure of speech mainly though. Might not be intuitive but it works.
There is a counter-party, but it's similar to statements like "more buyers than sellers". Obviously every transaction will have both parties exchanging equally valued assets/goods (equal as per market value), so the net effect is nil.
These words are used more so to describe the motivations of supply and demand on the market. To say that more cash is being put to work is essentially saying that participants are seeing metrics attractive enough to start buying back into the market (demand). Supply will reach demand through the price mechanism/valuation, so the net effect of total portfolio split will always have to be equal. But, again, it is about describing WHY.
In this case, good metrics have motivated allocation to risky assets, which has increased market prices, which has increased available sellers (at price x+y through the supply/demand model). Prices and volume have both presumably increased, and being a slow process of constant revaluation, it can often be assumed the sellers (on average) will also remain in the market. They may have cash temporarily, but they are implied to be reinvesting, as opposed to retiring, these funds. If this was not the case, describing the demand function as being driven by cash injection would be false, as sellers become demand immediately post transaction, so the net motivation would be untrue if characterized as such.
As you may see, the way our market gradually and constantly reevaluates is critical to these terms having any meaning.
Keynesian economics 101:
Inflate financial asset prices, expand private debt, misallocate capital, and stifle growth in the real economy (Lefties are against trickle down unless its government enforced). When the market, despite (not thanks to) all of this does manage to turn around... curb credit, increase the cost of debt (most debt is variable, don't forget), and monetize the tax bracket creep.
What the hell happened to Capitalism?
Pretty sure that's Hayek you're talking about there bud
OH there you are! And no its not, Hayek called reserve banking a fradulent scam.
Relative value. If you MUST put money out then what has the highest risk adjusted yield. It helps if it's a simple story that fits that relative value narrative.
The largest institutions are getting deals done because (i) they need to put out the capital as supposed to being able to wait around, and (ii) they have low cost of capital and can make sense of a deal that others couldn't.
Core-plus and value-add deals certainly exist today, while 20% risk-adjusted opportunistic deal are VERY rare to come by. That said, there are opp funds that are lowering their target returns and could probably get deals done at their new targets... I believe Oaktree is one of them shooting for 16% gross IRRs.
the chinese, the saudis, and the mafia
Big sales, then needing to 1031 into other properties. Bad deals are better then paying uncle sam. This is more on the private investor side rather than big funds.
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