Hi All - would love to hear everyone’s thoughts - beginning to see many operators purchasing deals where financing today for their bridge loan is 5.25% (plus or minus) but they are still assuming they can sell in 36-60 months at a 4.75-5.0% exit cap. Curious - how is everyone looking at exit caps today? Of course in the above example, stabilized financing should theoretically price inside of the exit cap, but maybe it won’t, who knows. How is everyone look at their exit caps today in regards to interest rates and financing?
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Our perspective is that interest rates come back down to somewhere in between their lows and today's/expected end of year rates in the next 2-4 years.
We are underwriting higher exit caps than current market, but typically only 25bps.
Lol gl with that
Company has been around for 40+ years and has never lost money on a project, so I think we'll be just fine thanks :)
Interesting. Cap rates have already gapped at least 25 bps across multiple sectors and markets
CPRT on Bloomberg shows tighter spreads between financing and cap rates in all property sectors except for hospitals if I am remembering correctly
I guess the argument would be (a) that less volatility will lead to spreads coming in, and (b) the real risk of a recession means that we'll see interest rates tighten over the coming 12-18 months.
Personally I think it's crazy to underwrite that way, but if you have to get money out the door in order to pay overhead, then I guess you grasp at anything you can if you are already going under.
I'd also add c) inflation causes rents to spike which offsets increases in interest rates as why firms can get comfortable with rising interest rates or underwriting to lower interest rates.
For reasons why Cap Rates remain low:
1) Not much else to invest in that doesn't carry more considerable risk 2) CRE is inflation hedged to an extent 3) Borrowing less money isn't necessarily a bad thing when trying to de-risk
I mean I remember when LIBOR was 3 and spreads were sub 1
Cap rates compressed from there but all in rates didn't move much
Stressing caps 50bps each year of the deal unless it's an obvious situation where that's not realistic
You are getting deals to pencil at 6 exits?
Absolutely not... We have a fund where we do this business and almost nothing pencils for them
Most of the shops I see use SOFR or LIBOR forecasts via Chatham financial, which will show rates are gonna peak in the next year or so before declining and going back to low levels. This gives investors confidence to not worry about rates for now. I however, believe things will be much more ugly but who knows
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