Why do people buy value add apartments at 3% cap rate, net lease industrial and data centers at 3.5%, and stabilized office (yes, fucking office) at 4%?
Just because all those money sitting aside during COVID cannot wait anymore? Just because you can financial engineer the shit out of a deal? Are we gonna be like Europe or Japan where rates will stay 0 forever?
So frustrated losing deals to dumb money AND smart money buying deals at stupid numbers.
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Because for a lot of institutions it is all relative. If they can buy bonds at 2% or core office at 3-4% ROI, they're happy to take the 3-4%.
Not everyone invests on an absolute returns basis.
This is not new, even prior to Covid groups like Starlight have historically bought at 3 or 4 caps. They are one of our biggest clients. Crazy part is they never seem to get in trouble and we have never even put them in cash management. It's just really low cost of capital (we will bend over backwards for them) plus them accepting lower returns than their competitors. This is not rocket science.
There is such a scarcity in multifamily and industrial (and such strong demand fundamentals) that the risk profile is decreasing. There will always be money for low risk assets. For example, institutional investors that buy low risk corporate bonds may start increasing allocations for multifamily and industrial assets since the risk is the same but the yields are slightly higher, while existing institutional investors in multifamily/industrial who need a higher yield may lower their allocations for these assets.
Yup. There is way more money than there are deals and that money needs to go somewhere.
Even our equity partners are on our ass to bring them more for investment purposes.
That's the crazy part here. People would rather put the money at risk (very high risk of going under water imo) than have it sitting around and wait for the right time.
Ask people who cut their teeth in the inflationary environment of the 70s what they thought about returns in the early 2010's.
Life companies and high net worth individuals, pensions, etc. aren't necessarily looking for massive near term growth and then to exit a deal in 3 years with a 20% IRR and a 1.5x MOIC. They are matching assets to liabilities or just looking for an inflation hedge since they are already wealthy.
Also, because of the 0 or negative interest rates around the world, investors reallocate where they can get yield and that demand pushes down cap rates.
The industry is pretty much eat what you kill. Sounds like you need to become a more skilled hunter.
You just confirmed that market participants have responded to irrationality by playing into the irrationality! What choice do they have? But that's what the OP said. That's the whole problem. Hyperinflation across asset classes is crazy at this point - it's not OP's failure as a "hunter" for financial returns lol. From the stock market to construction supplies, prices don't make sense any more primarily because money is hastily being devalued. Or... is this time really different?
I work at a high yield shop and we are definitely not stupid money; we target 17-21% on equity and 10-12% on debt. This year equity will close on 5bn+ in deals and debt will do an additional 5bn+.
There are deals out there that pencil, but it is a matter of having good relationships and being ready to pounce when you see a good deal.
It’s because the money machine goes brrrrrrrrr and people are underwriting aggressive market rent growth. If you can turn at 3.5% cap into a 5.0% unlevered yield then it pencils and then sell it again at a 3.5% cap then it pencils.
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