High Debt Cost Environment
Hey guys,
Recently, the cost of debt has basically doubled, making deals very hard to underwrite and justify purchasing. My question is this - in the past with high cost of debt environments what did the buyers do? Purchase activity obviously didn't completely halt, so what did the buyer universe look like, and how did they justify buying these buildings and giving their investors much lower returns? Was it a lot of non-leveraged purchases and 1031s? Was it quiet for a while and everyone held?
Thanks in advance guys.
Can't speak on the past but what is truly different this time from say the 2000s hiking cycle is interest rates have risen so fast - this allowed for no time for the bid / ask to slowly migrate instead of gridlock
“Buy when capital is expensive and sell when capital is cheap.”
IMO, expensive capital should be an obstacle but not an absolute hindrance going forward, once rates stabilize. In 2021, you saw a lot of shops make deals work just because there was an endless supply of cheap money. Well the music has stopped and now operators who actually add value will differentiate (e.g. improving amenity spaces, eliminating operating inefficiencies, improving economic vacancy, negotiating better management and vendor contracts, etc.). Underwriting aggressive rent growth and cap rate compression won’t cut it anymore.
I think once rates settle, it’ll be a great time to scoop up deals from those who financed with floating rate debt and can’t service the debt anymore or those who didn’t realize the 10% rent growth they expected so the asset is just underperforming according to their criteria.
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