Across every one of my firm's markets (southeast developer), we've seen cap rates on new construction multifamily melt down into the low 4s, sometimes even going below 4.
Here's a question for anyone working in acquisitions right now. What returns are you really underwriting? Not the bs you take to IC, but really what the deal will achieve when you write the round trip memo.
Asking because I always do a back of the envelope buyer pro-forma in my dev models and I can't see for the life of me how you folks are realistically getting much better than an 8%-9% levered IRR and a 6.0%-6.5% CoC at these prices. Is that all your investors need these days? Also, are prefs running in the 6%-7% range?
You underestimate our ability to believe our assumptions, as wild as they are. But yeah, I think you'll see a lot of people who bought today who get lower returns than the ones you highlighted. We haven't close on a core deal in almost a year, not because we're not trying, but because even things like a mediocre value-add deal in WEST COVINA is trading at a 4% ON STABILIZED INCOME. The world has gone crazy, but if you look at equities, the whole market is trading at a ~2%-3%% cap rate (very oversimplified conversion of the S&P 500 P/E ratio). I get equities are going to have a higher growth rate, but an 8%-9% doesn't sound all that bad in that context.
Helpful to know that I’m not the only crazy one out there
Everybody thought COVID would pop the bubble, but all it's done is inflate it. I'm really scared for what's going to happen over the next ~3 years. S&P 500 is valued at a 36 P/E ratio right now and sure, some of that is COVID impacts decreasing revenues, but when we get back to a stabilized environment do we really think that it won't revert back to at least close to the mean of ~15-20?
I assume you are talking about NOLA624...I literally CANNOT understand how guys are making deals like that work but more importantly getting LP's to sign off on it. My group is getting chased out of every B&F (if we even make it) and when I revisit the underwriting where it traded I have to double check with every broker on price. I can think of two value-add deals that will trade at a higher basis than ground up deals in similar submarkets. Have to imagine people are underwriting exit caps with zero expansion on certain deals just to make pref hurdles pencil. I just don't get it.
I think it’s fairly simple actually. Many buyers are relative value buyers not absolute value. For example, a Life Co which has*** to get money out the door for long term liability purposes is a relative value buyer. They chase the market up and down and will pay market due to the better risk adjusted returns than corporate debt. Absolute value buyers are funds. Funds have to hit certain return hurdles and can/will (should) only be buying deals that will hit their thresholds. It’s the relative value buyers that are showing up and able to pay these low cap rates.
Is the 8%-9% levered or unlevered?
Levered
Ouch. So unleveled at 5.5% or so?
2013 deal in Austin just went under agreement at a sub-2.7% cap rate on T-3 income, T-12 expenses, $250/u in reserves, and not accounting for any deferred maintenance. It is wild out there. The debt underwriting assumptions you have to make to get to a number like that are nuts...
Our core fund is solving to 5.5%-6.0% unlevered. 8%-9% levered.
What type of firm is the buyer? Are they using leverage?
Value-add fund, using leverage. I actually really like the basis, but you basically have to do a bridge with an agency takeout, because the deal doesn't cover for shit with the money the rent roll is throwing off today.
Everyone has bloated balance sheets and money has to move. So your options are equities, bond, treasuries, currencies, "alternative" assets, or crypto (all hail!). Where else can you get a 6% CoC return other than real estate? The Fed can't print trillions and expect things not to get outrageous.
11-15% IRR over a 7 year hold.
Strategy? Value-add, core plus, or core?
I never really understand this. Doesn't everyone buy something in order to add value? What do you define as a core asset? We buy a lot of Section 8 properties, and tax credits - those probably don't qualify under the traditional rubric of "core assets" but a government guarantee on rents pretty much means it's the safest income stream in commercial real estate. We add value through understanding how to manage affordable assets, and how to navigate the bureaucracy of marking up contracts, finding favorable comps for a rent comp study, etc. If you could be more specific in the question I can give you a more specific answer.
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