Real Estate PE
What do people in real estate PE do? Do they get paid the same? What are the top firms? Are the hours different?
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Real estate PE is an LBO of a real estate portfolio (10, 20million dollar industrial facilities), REIT (a company that holds a large amount of real estate), or a large individual asset (think $500 million hotel in Florida).
The job is underwriting and sourcing potential investments (often including large renovations or repositioning in your business plan) and then once winning the deal, passing it over to the asset management team to manage the asset over a 5-7 year hold period.
Then you sell the stabilized asset, pay off ur remaining debt, and make money on the cash from the investment period and “cap rate compression” (which is the RE equivalent of multiple expansion).
In short, it’s just like corporate PE except instead of companies, you are investing in commercial real estate. (Like infrastructure PE is for infrastructure)… RE functions in different terms (cap rates, noi, dscr, Psf).
To get into REPE, you usually will come from investment banking or sometimes a top commercial broker (eastdil secured, JLL)
Like corporate RE, real estate PE firms all have slightly different strategies but the big players are: Blackstone (blackstone RE is their biggest PE division), Starwood, KKR, Ares, Apollo, Brookfield.
Question on cap rates:
Aren’t you supposed to underwrite a higher exit cap than your going in cap? So you’re not supposed to underwrite cap rate compression? If the exit cap is conservatively predicted to be higher than your going in cap, then how does one profit off of the investment if your purchase price is lower for your exit cap? Does the NOI throughout the hold period just make up for that?
You can do it both ways. For opportunistic deals, often you’ll get cap rate compression cause there is a fundamental problem with the NOI when u buy the asset (it’s too low cause of shitty property management or asset)… too difficult to say exactly cause it depends on the situation
So then let’s say for core investments, you underwrite a higher cap rate because the property will likely be worth less in 5-10 years. How do you make money off that if you’re selling it for less than you bought it for? Just through NOI throughout the hold period?
For a true core asset, unlevered, the exit cap will stay around the same as entry but if it does go higher it will only incrementally. (Say 100bps max.) you make your returns through the cash flow and spread across the loss in the property over 10 years or something…. I don’t do core so I’m no expert on it, but the goal with core is to return an IRR higher than the company’s bond coupon rate. It’s basically as safe as that.. the tenants in a true core building will have high credit, and u can basically guarantee they’ll pay their lease (unless Facebook goes bankrupt in the next 10 years)
Therefore, a 4-5% return is fine core office which is doable with a. 5 cap, maybe a little leverage, and exiting at a higher cap rate.
Core investors will underwrite cap rate expansion over the hold term (in the realm of 5 - 10 bps per year). You still make money on exit because NOI is growing over the period through rent growth. Even though your cap rate is higher, so is your NOI, which almost always results in a higher exit value than purchase price. If not, that’s a bad core investment.
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