Fed Taper & Real Estate Development
Let's talk about what the Fed tapering down bond buying means for real estate development.
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Not too much --- IMHO. That is assuming that rates don't start going wild, which I think is unlikely.
You have to set your time horizon longer when thinking logically about this. This is because, to some degree, the end of a long QE MP is priced into the market. By releasing statements, the Fed has lowered the potential impact that "unexpected information" would have on the capital markets.
As a result, I don't think you will see much volatility in the short term (in any market). That being said, capital will slowly, but increasingly, flock to the DCM's (as a result of increasing returns on lending) over a 5-8 year cycle. I am not so sure that this creates many changes as it pertains to construction financing. Although, we probably will see more underwater projects when rates peak during the next cycle, assuming draw maturities increase and floating debt is still the status quo.
Everyone who uses floating debt whether it be for ground up construction or portfolio acquisitions, needs to profoma at a higher rate than the projected forward curve
Yup, but many won't. How often do you adjust your cap rate today to reflect the cap rate that you will dispo the asset at in 3 years?
Honestly, its all pissing in the wind at some point b/c we don't know where they will be in 3 years. If real estate was driven by fundamentals they would trend higher as the cost of capital increases but the capital markets portion will likely keep cap rates down longer than any buyers would hope.
Disagree - the forward curve is already conservative in nature. I think the actual future rate will lie between where it is today and the forward curve rate.
In response to DB13171, who doesn't adjust their exit cap from today's cap? I work in core assets and we typically expand it by 50-150 bps.
I don't know anyone at my firm who does this across this board. Your firm likely is equity multiple driven since you are investing in core assets and credit tenants. I assume you are underwriting acquisitions for already stabilized assets? Maybe your hold period is long; maybe you win a lot less deals that you should. Really at the end of the day, your adjustment of 50 BP's in exit cap is more along the lines of sandbagging instead of "adjusting" for increases in the risk-free rate.
When we look at core assets we'll adjust 50 bps up. If we adjusted 150 bp's our offers wouldn't be taken seriously, its competitive out there..
We are levered return driven, conservative in nature such that a ~10% levered IRR looks fine/good to our investment committee. In such a tight cap rate environment compared to historical metrics I don't understand how a reasonable analyst can assume the next buyer will acquire this for the exact same cap rate after a ten year hold. to account for this, we add a buffer. we still win deals, it doesn't have a huge impact on our ability to bid aggressively. Agree though it's very competitive and frothy...nyc commercial market still has a ton of room to grow though IMO
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