This feels like a dumb question, but the more I think about it the more I'm unsure a difference exists. Say you have three properties in comparable markets, all the same vintage with the same parking ratios, would you expect your exit cap rate (or going in cap rate for acquisitions) to vary between the different multifamily construction types?
In my experience, the difference in valuation is due to the higher rents associated with podium or wrap product, as opposed to someone paying a premium (via a lower cap rate) for that construction type.
Would love to hear some thoughts or experiences.
I would argue that there is no difference in cap rate between the product types. In theory, cap rates are a function of the in-place rents, or said differently, projected rent growth. If in-place rents on a podium (or garden) deal are below markets relative to like-kind comps, next buyers are more willing to pay a lower cap rate for the project relative to at-market comps.
Thinking more broadly at the sector level, how are core investors/REITs able to pay sub-3% cap rates for MH properties across the country? Below market rents. It is my opinion that cap rates (for acquisitions, in this example) are really a function of the rent growth next buyers are undewriting vs. the product type of the underlying asset. When it is all said and done, construction type doesn't really matter to the next buyer -- yield does -- and that yield is based on in-place vs. market rents, across all asset classes.
I strongly disagree with this take, at least in theory.
Cap rates are not dependent on rents, they're dependent on NOI, which is a massive distinction in the context of this question. Which of these construction types will deteriorate the fastest? Which requires the most upkeep? How do you pay for utilities? Some of this will differ from municipality to municipality, but it might cost significantly less to have trash picked up in one location at a mid-rise podium building than in a community of low rise townhomes. Who is responsible for repairing broken water/sewer lines? And on and on, down the list of operating expenses.
If you can prove that one type of construction in a given market has significantly lower opex, you will get paid a premium on the cap rate for that product, because the assumption is that as time goes on, one asset type will require more additional maintenance than the other.
That being said... I don't know what the answer is, and it probably differs market to market, but I do think the construction type matters
This is exactly the debate I was having when I wrote up this post. +1 SB to both of you. I guess it depends on the buyer - I highly doubt many 3-year hold, value-add chop shops are taking a deep dive into garbage truck circulation because if the cost savings are there they will show up on the T12 and therefore justify a higher price with the same cap rate. However, I could absolutely see an experienced operator who plans to hold long-term taking these things into consideration and adjusting their offer accordingly.
Good shit, Maroki. Appreciate the response.
None. Depends on location/market/year built.
As others have said, product type should have less impact on cap rates for equal locations and sub markets. I think your question is more geared toward Construction type (I.e wood-frame, light gauge steel, concrete, etc) rather than product type. Construction types will play a role in asset longevity and many long term owners will look at construction type for predictable deferred maintenance down the line. I've seen assets in the same sub market with almost identical income/expenses trade within 3 months of each other, both were 5-story podiums over 2 stories of parking, but 1 was wood frame and the other was light gauge. The LG traded at a cap 25bps less than the WF. Both sold to institutional investors. My fund who looks at 10-15 year holds has a similar sentiment toward construction type and will favor steel/concrete.
I think that varies from investors underwriting.
if I were looking at this deal I would definitely pay a premium and project compressed cap rates for a property that has more lifespan than little less quality product, expect the same from next buyer. reason being 1. your Maintenance costs are low 2. less amount in capital reserves per door. these things directly affects NOI. i hope i got your question right.
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