Curious what everyone is underwriting to for acquisitions these days? I've seen this thread for development deals but nothing for income-producing deals.
Try to state the asset type, deal profile and size, general market/region, etc. so that we can contextualize it.
(I'm especially interested to hear from anyone buying office right now...)
Thanks!
IRRs are working out to 11-14% on 95% of deals I work on. IRRs have definitely decreased, used to be high teens.
Can confirm
Agreed, except I used to be mid teens, not high teens, mostly for 5 & 7 year holds. Primarily look at value add & core plus multifamily. Unlevered returns are still quite strong vs historical norms, and have been for years. So it’s the leverage component holding back IRRs (and thus price I can pay).
If I was a billionaire that could buy all cash, I’d be going on an absolute buying spree on “forever hold” multifamily. Could get an unlevered 9-10% on many deals - traditionally core meant pencil unlevered to a 6-7% then lever it up to 9-10%.
You would absolutely think this, but I’m blown away by how fickle that capital is being right now. Makes no sense to be honest, don’t see them buying platforms and teams for their real estate either…. It’s truly a weird market right now where those who COULD simply aren’t… and with stock accounts at all time highs? Somethings not making much sense
Aka Dean Weidner.
IMO he's made some of the best long-term hold/basis buys over the last three years . He's put fixed agency paper on some of them, but despite near-term negative leverage on those, they'll be yield home runs over the next 15+ years.
Just a tad jealous of his ability to close quickly with cash and look past any operational noise on anything and everything he likes...
10% unlevered on core assets? How do you define core? Are we talking about the same thing when you say unlevered? Like, I am operating the business (assume apartment building w/ 200 units) with actual reserves and capex numbers and day 1 or day whenever I finish my value add strategy, I am operating at a 10? Not considering market rent growth? I must be WAY out of touch.
That would amaze me and frankly maybe get me to change my strategy. I pivoted from distressed/heavy value add RE to investing in small businesses 5yrs ago because I didn't feel like I could compete any longer (I am an idiot). IF RE has corrected that much I could change my mind.
I am guessing he means 10% Unlevered IRR, and not 10% ULYOC. You can get a unlevered IRR of 9.37% assuming:
Hold everything above the same, but increase to 3.50% annual NOI growth, and you're at a 9.87% unlevered IRR.
If you have a view on supply-demand fundamentals shifting back in landlords favor, and therefore above average NOI growth, this doesn't seem so unreasonable. Plus, the above-average NOI growth will begin to push down cap rates at core money's eyes widen on the unlevered 9-10% IRRs.
Hotels. We buy existing flagged properties. Mainly value add.
We like to be at 19-20% IRR but sadly in order to be win we need to be at like 15%. Rising insurance costs, rising payroll, etc. It's killing us. Honestly anyone buying at that price point is either in a 1031 or just doesn't care. Still wait too much dumb money out there.
This. People are doing deals (or not) based on ability to survive in the near-term - not based on underlying economics. Fund dynamics can be very strong and incentivize capital deployment for the sake of it.
Hotel guy here and same here. Nothing pencils. Add in the cost of capex/PIPs these days in which half of it can be strictly defensive capital, as well, and it’s brutal. If you’re buying a deal today strictly on the hope of market growth..then you’re in for a rude awakening..
Retail sector - seeing core core plus being passed up at 17% IRRs
Why is retail core plus trading at a 17%? That’s very high. Surprised to see that. What’s the risk I’m not understanding?
This risk was it being a secondary/tertiary market. Low risk imo. Capital was looking for higher returns based on their retail appetite. Existing retail not ground up development either
I work in a core, HCOL market, for context.
Existing Industrial Value-Add: market is pricing to a high-5 / low-6s RoC which we struggle to capitalize. IRRs are low-teens. We tend to be mid-6 stabilized and high-teens levered. Major adversity to taking on lease-up risk or near-term vacancy. There is clear disconnect between leasing fundamentals and capital market fundamentals. We've concluded that fund dynamics are driving decisions vs. sound investment strategy.
Existing Office: the math doesn't work in my market but hearing high-20s levered with very conservative underwriting (static vacancy, rent declines, etc.). There are only a handful of folks in the space. Mostly HNW and hedge funds.
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