MF Cap Rates: Metal vs. Wood Frame?
Does anybody have insights on if metal vs wood framing in multifamily projects effects the cap rate/sale price?
Given the volatility in lumber pricing recently, a project that we are investing in is considering moving to metal stud framing. Would be 5 stories on a podium. Appreciate any input.
Thanks.
I’ve looked at tons of MF and never had a discussion about being wood vs metal and effecting cap rates. Would love to hear if someone else does this, but if you start saying metal should trade inside of wood, I would say it’s semantics and splitting hairs.
At the end of the day I don’t think the current pricing for building materials would play into cap rates in a substantial way.. A rise in lumber prices wouldn’t effect the property’s ability to produce income, it would just effect total hard costs on the development.
Really good question...I'll take a stab...
I would assume maybe this more of just a by-product of the Class/Vintage that the building falls under and the geographic area.
Class A, newer product, has more of an expensive build due to newer/higher quality materials (generally), probably has better framing, block & plank construction, etc rather than take Class C/D on the polar end of the spectrum was probably built decades ago with cheaper/less time sustainable materials.
It all depends on the geographic area though, for example, in South Florida (wood doesn't bode well with hurricanes) you won't find the same type of build as you would with wood-framed garden-style Class C apartments that you would in the Colorado Springs area.
Please, someone, correct me if my logic is wrong/off
From the way you're framing the question (hah) I get the feeling you don't have a great grasp on what a cap rate represents. Higher cost of development will have a deleterious effect on your returns, of course, but in and of itself doesn't really impact exit cap rates. Even if you assume a wood framed building requires more ongoing maintenance to be habitable, that doesn't really mean much either - you can fund a capex reserve for this and maintain a steady cap rate.
As per a thread from last week, cap rates are tied to valuing cash flows, not to the actual underlying returns (though obviously it has a massive impact on returns).
Again, one could make the argument that a block and plank building (concrete) has a longer useful life than a wood frame building, and thus one could assume a lower cap rate because less replacement work will have to be done, but this can be nominally leveled by funding reserves.
I understand cap rates bud. To rephrase my question (hah), and touch on your last point. For two projects with identical cash flows, would a professional buyer pay more for the metal vs wood building. The answer is yes, but what I am really looking for is will there be any marginal return on moving to metal. For example if it costs us an extra million to move to metal, will we get an extra million or more back in the exit price?
I'd say yes. Logic being that using light-gauge steel or whatever should reduce sound attenuation and other issues with stick construction. This should result in a better renter experience (resulting in higher rents) and lower capital needs later in the hold. All of this should allow for more durable cash flows and impact a buyer's reversion. That's been my pitch to our IC before.
I doubt you’ll see those incremental funds back.
I lent on a deal in Chicago where they were all built with concrete blocks, so the replacement cost was super high, but it didn’t impact the sale price
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