Are you guys finding any good deals in NYC?
Hey guys,
So here is my situation. I used to work at a reputable brokerage firm in NYC for about two years and recently switched over to an acquisitions side at a small re investment company ~1billion AUM. Unlike other people around my age (~23), my primary role is to source deals, talk to broker/owners and try to find bargain retail properties. I was able to find few good opportunities, but since my boss has an extremely high expectation (at least 20% IRR without putting any work into it, but he has done it somehow), I’ve been struggling to put any deals into contract.
I realized this is more stressful than expected and wanted to ask how the deal flow is like at other acquisition shops in NYC. How are firms like Blackstone, Carlyle deploying hundreds of billions of capital into real estate and yielding 20%+ for investors, when the cap is so low??
Aside from talking to brokers, where do you go to source deals?
Also, aren’t you guys noticing slowing down of the real estate deal flow in NYC? I think it’s much less robust compare to 2013 & 2014.
Any insight would be appreciative. Thank you.
BX and others at that caliber are really in a separate game vs. companies like your shop. BX has the capability to take down portfolios at a whole - not many RE companies out there (in the world) that can do this. For example, BX bought an office portfolio from Duke Realty in 2010 when Duke was changing their company strategy and wanted to allocate more capital to industrial. BX took down essentially their whole office portfolio in one transaction and will earn the stated returns you mentioned above. Obviously they do one off transactions as well, but those are typically multi-million / billion dollar value add plays (such as the Sears Tower / Willis Tower in Chicago) where there is not much competition.
To answer your question on how others source deals - real estate is such a relationship driven business. It's all about who you know (esp. for off market transactions, or to be the first one to see an opportunity before others).
Lastly, I am not in NYC, but I think it's clear that the no-brainer investments are pretty much non existent, or soon will be. I'm not saying there is a soon to be bubble, but I am saying that the miss priced assets or forced sale assets are becoming harder and harder to find. I feel there is / will be more of a trend where institutional capital steps outside of primary markets to earn higher returns due to supply constraints.
Are Carlyle, et al really realizing 20% IRRs on most of their deals? I can see a few scores, but across their portfolio I'd think they be in the 11-12% range, at least on deals going forward.
I'm not in NYC, but there is NOTHING here in D.C. We're doing a deal at a 4--yes 4--percent return on cost just to get some idle capital deployed. I'm not saying there is an asset bubble, but I'm saying that real estate is not a profitable venture right now. My boss talked to me the other day about keeping my eyes peeled for some decent alternative investments...
There are "temporary" exemptions right now for RE from the patriot act and you don't have to disclose who your investors are. So a lot of people buying up properties right now (esp foreign individuals and institutions) are just doing it to hold or launder their money and aren't actually trying to make returns, which makes it harder for the rest of us who are. Luxury condos have been the face of this but it's common within CRE as well. Just one of a few different reasons why it's so hard right now, and ditto on the relationship nature of the business to scoring good deals. It's not totally uncommon to do one small shitty deal with someone just to get a good relationship going and hope they'll send you some good ones.
You can often get a leg up doing bulk portfolio deals too as it's generally better for all parties involved, hence the Blackstone/carlyle advantage. But at $1B AUM this isn't necessarily out of reach for you either. I'm in a similar position to you, feel free to PM me.
I would imagine that new international and institutional buyers saturating major US markets right now are killing acquisitions groups all over the place. A lot of these buyers we've seen in our local market are willing to pay way above replacement cost at outrageous cap rates just for the sake of owning a building in the US. In a lot of deals with existing buildings it seems almost impossible to achieve a yield on cost that is respectably higher than market cap rates, which I would argue is a solid baseline metric for whether you are making or losing money. Development deals where your land basis is low enough and supplemented by new construction rents seems to be one of the only ways to make cash right now.
The international capital is having a very distinct impact, in my opinion. i think of it this way - when new money enters a market and is willing to pay market clearing prices, it changes the capital "eco system". capital that previously was able to buy a core, trophy office asset at a 6.5% unlevered can no longer do that. instead of getting a trophy asset like PNC Place (1st deal in dc to break $1,000psf, traded at $1,075psf a 3.8% going in cap with a sub 6 IRR) at a 6.5% irr like they previously could, they now have to move to commodity A buildings or secondary/tertiary markets to get that6.5% irr.
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