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We are UW 5.25-5.50 exits on a 3 year term in tier 1 mkt. need minimum 7.5% YoC. cant pencil out anything. brokers need to understand the math here and communicate to sellers or the market is going to be locked up for a bit.
Targeting 7.5% YOC by when? Year 3?
Is this for class B value-add?
Do you think brokers are in the business of taking six weeks out of their lives to prepare and market deals that don’t trade because seller/buyer expectations don’t meet? Did I mention brokers don’t get paid when that happens?
....Brokers aren't getting paid at the moment. OM asking prices are ~30% too high from what I've seen which is more or less the loss of value attributable to a rise in cap rates from 4% - 5.5%. Sellers are hanging on to 2021, buyers are living in the present. there's a disconnect right now.
Reminder that brokers don’t set pricing expectations.. sellers do. You may think we have much more say but we don’t. Brokers are probably the MOST dialed in to where the market is willing to transact right now. Sellers are not and we answer to them
Good brokers communicate the market to sellers and refuse listings with unrealistic sellers for the reason you said - why put in the effort? Bad brokers still promise sellers 2021/2022 pricing, hoping that they'll get the listing and can work them down over time.
I guess I am a bad broker for trying to pay my kids private school tuition
An analyst with kids in private school - pour one out for this homie
In the situation you’re depicting, the “good brokers” who convey realistic pricing to sellers lose the business to the “bad brokers” who promised something unrealistic to buy the business. Then the “bad brokers” go to market guiding to a 4% cap knowing they won’t get, gather offers consistent with what the “good brokers” told the seller in the first place, and then the “bad brokers” get paid for it because the seller now has pricing discovery and needs liquidity. The “good broker” is in a bad situation. Consider that brokers are neither the buyer, nor the seller, nor the fed.. They can’t force sellers living in “yesterdays market” to acknowledge where the market is today, and they can’t force buyers to underwrite to the yields that that same group would expect on the sell side. But if a group needs liquidity and someone is going to be hired to run the process, why is anyone the “bad broker” for trying to make a living in this market?
Not winning any deals either
An appraisal in SW Florida just used 4.75% on new multi. Ive heard 5-5.5% in tier 2 markets. We’re using that range for our UW now.
How do you back into a 5.5% exit when that is what debt costs today? As a reference point, my firm is doing the same thing and assuming 5.25% to 5.5% for multi and 100 bps spread on office exit caps - so 6.25-6.5%. But my acquisition folks still can’t explain any good logic for 5.25-5.5% on exit in multi. What does your firm use to explain it when that is the cost of debt?
Where are you guys underwriting vertical construction cost PSF?
It’s obviously not ideal. The best argument I’ve got is debt is where it’s at because of inflation risk. Multi rents/operating income are able to track inflation, so the inflation risk is lower and moderate exit cap rate compression is warranted in tier 1 markets.
Probably saying to yourself that your buyer can lock in 5.5% fixed rate debt with decent I/O duration, which gets you to an average CoC of 6-7% over a five-year hold. Not saying that's right, but not a bad assumption. Most core/core-plus buyers are looking to hit a current yield in that range.
Well exit caps are a function of the next buyer’s capital costs, not yours. So if you believe the fed can achieve their long term target rate of 2.5%, then exit caps should be something like this:
2.5% risk free rate
+ / - market premium based on historical spreads
+ execution risk
+ hold period risk (typically 5-10bps / yr)
5-5.25 seems defendable for a tier 1 market on a 5yr+ hold
Depends on the asset and the market and the tenant base and what is going on with the operating expenses and how the local municipality feels about taxation etc etc etc
Minimum 125 bps cap rate expansion based on peak 2021 comps, slightly more for sunbelt / vast land supply markets
We are seeing value-add deals in growth markets in the SE, Texas, and FL get awarded at in-place 4.2-4.5 cap rates (assumes tax reassessment and insurance). No idea how these buyers make it work unless they are aggressive on rent growth and sub-5 exit caps.
Right I literally saw a deal near Austin being marketed at 4.25% cap rate. I asked to let me know when it sells and what cap rate it actually goes for lol.
My sense is that the deals coming out in the institutional space (call it $80M +) are likely going to trade since you would assume those groups don't have their heads in the sand and understand where things stand in today's environment, and also probably need some form of liquidity if they are active across more beaten up asset classes (Office, retail, etc). The more sub-institutional stuff likely gets hung up until sellers have to face reality once the pain hits via cracks in unsustainable fundamentals.
Most institutional deals being listed now are rational. They might be priced richly, but they are not absurd. I haven't seen a Class B industrial deal listed in my market below a 7% cap in a few months. Sub-institutional is still all over the board. Everyone is trying to find that 1031 buyer who is dislocated from reality.
Typically pencilling in place 5.25% + tax adjusted with 5% exit caps for institutional multi VA product in Sun Belt markets for free and clear deals but need a clear path to positive leverage to get truly interested. Y1 growth estimates are between 0% - 2% depending on asset/market. More concerned about NOI growth than exit cap, I.e. how is a 6% exit conservative/meaningful if there’s a 6% revenue cagr getting there? Everyone’s talking about cap rate expansion due to rates, but have to factor in the close ended mega fund capital on the sidelines contributing to that. Once they start buying again cap rates will find equilibrium. Price per pound free and clear high-quality RE is really attractive right now - just have to stomach a weak risk adjusted IRR in the model due to conservative growth assumptions. What I don’t understand is assumption deals trading at below market caps just cause “positive leverage”. These are the times smart, well capitalized buyers will win with great assets vs those buying mediocre deals with financially engineered returns from “attractive assumable debt” at a 4 cap. Why push your cap rate down just because of interest rate in a rising cap rate environment? Your not selling the debt at exit your selling the real estate.
Peaking above 5.
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