Low cap rate environment thought process
If you are buying industrial and multifamily properties at 3.5 caps how are you all's firms thinking about this on a five-year hold basis? Especially with rising interest rates in the future how are you all reasoning with the idea that the value of the property will inherently fall and thus kill exit caps.
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It is a core plus fund deal that is looking at secondary market acquisitions.
Bruh every deal is just a covered land play
Depends on what happens with rent growth. Anyone assuming there will be cap rate contraction from here on out deserves to lose their money. If inflation continues at this rate, rents will go up.
Also, lock in a longer term loan. If cap rates skyrocket then having 20 years left on a mortgage at 3.5% will be worth a lot on sale.
This is a great question and assuming for a lot of us on WSO, majority of us have not seen a high interest rate environment before. It would be interesting to hear from someone who has a lot of experience in the industry and has been around for quite some time.
I am not sure if we will ever see high interest rates again.
I think those with aggressive underwriting have added too much risk to their acquisitions. With too much dependence on higher NOI growth if it doesn't pan out those that acquired the property are (in my opinion) in for a rude awakening.
Would be interesting to see how people are looking at their sell-hold analysis for debt that is maturing in 2-3 years.
I thought the feds were going to raise rates to stabilize inflation?
I can’t comment on justification of buying at historical low cap rates, as that’s firm dependent, but Peter Linnemans interview with Willy Walker in the Walker webcast touched a bit on this subject. Linneman made a very interesting observation on cap rates going forward. Historically, cap rates and interest rates have been positively correlated. However, real estate as an asset class has seen unprecedented amounts of capital being poured into the space, which Linneman views will keep cap rates low(er) than expected.
I've wanted to hear him take this one step further. It makes sense to me that the amount of capital chasing real estate more directly impacts cap rates than where interest rates are, but will higher interest rates at some point start reducing the amount of capital being put into the space? So then cap rates are still tracking interest rates to a degree, just indirectly in the form of less capital. Answer could very well be no because of how raising rates also impacts other non-real estate asset classes, just would be curious to hear his thoughts on it.
Lots of buyers just want to put money out and turn blind eye to the crazy cap rates. For them, overpaying is better than not buying. I'm talking about mega funds like BX, KKR, etc. Then you also have ultra high net worth/family offices from all over the world who just want to park money in a safe asset class in the US, and they tend to buy unlevered. In this environment, short-term hold buyers generally get screwed on the acquisitions front, because they can't buy anything or they need to get very creative. But on the dispositions front, they have their exit buyers.
This is an interesting perspective. I am wondering if people will ever be able to generate the same level of returns in real estate that we have historically seen especially with a significant amount of capital chasing deals. For people who are looking to enter the market, if they need to get very creative it will be a challenge to drive returns or will have to accept a lower return.
A lot of us entered into real estate because there was money to be made and historically could make a killing - maybe it isn't as great of an industry as it once was but who knows how everything will play out.
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