Hey everyone,
Curious if anyone here has had a similar experience. I'm at a GP in a pretty competitive market, and have found that we just aren't able to be competitive on deals. We're usually a 20-25% discount to whatever the asking price is, and in this market deals tend to get done right around the ask. It doesn't help that we're seeing a lot of broadly-marketed deals. We have a knack for finding off-market deals, but even on those where there's only 4-5 groups in the mix, we're still getting out bid. Curious what others have done to encourage deals happening - I'm not fully in a position where I can call the assumptions, but I push as hard as I can in the underwriting. It can be frustrating underwriting deals when you know there's almost no chance it will happen.
What sort of asset class and sounds like existing product and not development?
Pretty much everything. Multi/Office/Industrial/Data Center/Storage and we do develop. We're actually pretty prolific developers
Not going after broadly marketed deals is the first thing you can do. You're never going to be able to compete on those if you aren't a mega shop.
Ehh. Agree and disagree. Broadly marketed deals will be competitive but more often than not off-market doesnt mean its an automatic discount that people generally believe. Off-market is usually like sellers with a stupid number that tells some broker to bring me a moron. Broadly marketed deals will transact for sure. Whereas off-market sellers have a number in mind, but then may change their mind or are not serious for the most part.
You need to pay more or source from other avenues.
Just change your exit cap
You are building a differentiated product so focus on chunk rents with tiny units. Tenants today want big windows and tiny units.
It's just the market unfortunately. People are overpaying and justifying it using very aggressive assumptions, banking on lower interest rates, rent growth, etc. Or they have extremely low cost of capital. True off-market will be your best chance. Not a listing brought to a few groups, but a deal where you source it directly from the owner and can negotiate a good deal. Not easy to do. Or find hairy deals that you can load up the capital stack with funding sources to get the equity a good return.
+1 to this. I hate the fact that people call deals off market if they are only shopped to a small group of folks. They are most definitely still on the market.
Who are the lowest cost of capital providers? Life-Co companies? I imagine private equity buyers would be on the opposite end of the spectrum there because they require a much higher rate of return in order to hit promote etc.
For debt, I would assume large public REITs have the lowest cost of capital by getting tighter spreads on typical mortgage loans and their ability to issue long-term fixed-rate bonds that are interest-only, while most small and mid-sized operators are getting higher spreads with amortizing debt for the most part. Just pulled up AVB latest 10Q as a check. They issued $400MM in 10-year bonds with an effective rate of 5.05%. I'm not seeing 10-year money fixed at 5.05% I/O from banks as a small operator. Say you get a spread of 250 bps over a 5 or 10-year swap rate of around 4% for an all-in rate of 6.50%, amortizing over 25 years is a loan constant of 8.1%. So the REIT will have higher cash yield to the equity since their debt service is much lower. Any deal with a yield on cost less than 8.1% will result in the private operator getting a lower than 8.1% cash on cash on their equity.
For equity, I would assume pensions and other similar institutional investors have lower required yields than most other investors. REIT shareholders are also happy with lower yields, like 4-5% dividends. Not sure many private investors would be happy with a 4-5% cash on cash.
Get on the phone and start dialing. You’re not going to find great deals from listings. Gotta go direct to owner! If you don’t like being on the phone, hire someone else or a VA to cold call for you. I lead investments for a family office and I set up an in-house call center so we can go direct. Sort of like having an in house Marcus & Millichap but working just for you. Mainly targeting multi family and industrial. Has been a game changer for us.
+1. I run my own shop and have my own team of cold callers. Agree going direct is the way to go. My callers are based in the Middle East. We focus on mobile home parks and RVs, have about 15 deals under contract. I primarily wholesale to retail buyers who are looking to get in the space or source deals for larger operators (who don’t have the bandwidth/know-how to source direct).
What is your typical check size?
are these low paid dialers or are they in office employees that get a cut of the deal? curious on how you structed the personal "Marcus"
Probably not helpful for most GPs out there looking to earn a promote but I am seeing relative value on Class A industrial. I’ll take a new construction Amazon facility in a primary market MSA and a low not coverage ratio at a 6 cap all day over a treasury bond. It’s not going to earn a high enough IRR to hit your promote in the next year 5-10 years but for a group with conservative buckets of money, I’d take this all day over a T-bill.
Also, long-term holders can really make a fortune on these low lot coverage industrial plays. There are so many people in Brooklyn/Queens who bought a low lot coverage warehouse ~10-30+ years ago and then gentrification and a rezoning happens and the next thing you know, you’re sitting on a 9 figure development site.
Where are you finding newly built, Amazon-leased industrial in a primary market for a 6-cap? That's like 4.75-5.25% all day.
In the few specific cases I’ve seen them in the 5.5-6.0% cap rate range, they were actually suburbs of primary markets. Hence the term primary market MSA. But I’m talking like just outside city limits… not an exurb out in the middle of nowhere.
In addition to other commenters' contributions, I want to add that certainty of close plays a part in securing deals. My shop has a very strong reputation on always closing--this is barely exaggerated; we have high conviction even at the LOI stage and rarely back away from a deal. We offer terms such as a large nonrefundable deposit day one and provable committed capital. This should be relevant to you because we also are rarely the highest bid.
I imagine you need to conduct most of your DD before making a deposit if the deposit is going hard as soon as you go into contract. I wouldn’t want to get stuck with a ~200-300k DD bill just for the seller to try and re-trade me or maybe a better offer actually does come along while I’m spending money on DD before locking up the deal.
However, I work an asset class where spending a ton of money on environmental consultants and attorneys during DD is pretty common. Maybe your DD costs aren’t as bad.
You imagined right. DD starts early, and it's generally cheap. That's for multiple reasons, asset class among them. I haven't seen a lot of re-trades here, which I would attribute primarily to 1. reputation within the asset class and 2. using the right brokers who filter out bad actors.
As a good example, on a $60mm asset we just acquired, our environmental costs amounted to less than five grand.
Sounds like you guys aren't all that good at your job.
If you can't make a deal work, and someone else can, then maybe you're in the wrong line of business
Or maybe the guys making it work are overpaying in a negative leverage environment but still get to keep the lights on and collect fees from LPs.
There is making a deal work on a standalone basis and then there are people going around collecting fees from LPs on mediocre deals. I personally have made some deals work in this environment but I pass on deals a lot more frequently than I make them work.
That being said I am on the family office side of the business and we aren’t collecting fees from LPs, so there is a lot less pressure to “make it work”.
It's possible. Generally speaking that sounds like something an LP fund is more likely to do, than a GP, but nothing surprises me any more.
OK? Broadly speaking, everyone passes on more deals than they execute on.
However, in my experience its far more likely to see the kind of thing you're talking about in hot markets, not cooler ones. When everything is going up and every other day is a new story about a new high in the market, it's really easy to talk LPs or investment committees into being more active, because no one wants to miss out. When things are going crappy the opposite is true - no one wants to put in money on the way down, everyone talks themselves into waiting for the bottom, and generally speaking the mediocre deals and the mediocre sponsors get exposed.
Its the firms that can actually add value, the guys in the top quartile or whatever, who make shit work, because they genuinely have a play to make, not just a "buy and hope prices keep going up" disguised as whatever the buzzword of the month is.
If you are buying in a primary market, you are definitely buying with negative leverage lol! Stop being foolish. MF buyers over the last 18 months won’t make cashflow but their odds of making profit is stronger than any asshole that bought on 2021 or early 2022. Story is more critical than some BS you see in excel or Argus. Trust me, if funds run low, your team lead will do a bad deal to keep the lights on. It’s a fee game. Play it or drown!! Every deal either has mistakes or aggressive bets somewhere in the proforma to make it work.
Curious to hear more about these "off market" deals you have a knack for sourcing; how are you finding them? You said there are 4-5 other groups also bidding on these off market deals? That doesn't fit the definition of off market for me if there is anyone other than you chasing the deal.
It's actually extremely easy to source off market. All you have to do is this:
Call a bunch of owners using costar data. Then ask the owners how much they want. Owner will typically ask something like a 1 cap or maybe even a negative 1 cap. Since you approached them they now think theyre sitting on a goldmine. You then buy it. Win win situation. Seller offloads it to a moron for a ridiculous price. Buyer and LPs can jerk each other off around and keep saying the word "Off Market".
That's because the broker community has completely devalued the term.
Anything a broker shows you or mentions is by definition not off market. An off market deal is someone you have a pre-existing relationship with, calling you up and telling you a price at which they're willing to let an asset go.
I have not seen a marketed land deal trade for anywhere close to a land value that would hit an equity partner's return expectations (today). I am honestly shocked by some of the trades in my region. Based off our UW, deals are going for way less than a 6% UROC, which is still below what equity is quoting (6.25-6.5, depending on who you speak to).
This brings up a number of questions about how groups can get comfortable with these valuations. I think it's one of the following justifications:
1. Some groups are desperate for work having gone the last 2 years without a new deal. Any deal at any price is better than nothing.
2. Some groups expect capital market conditions to improve and are underwriting to a lower return/exit
3. Some want to tie up land a X value with the expectation that they can successfully retrade the seller later on (super risky, not worth it from a ethical or strategic standpoint, IMO)
4. Some have competitive advantage on a WACC basis or plan to hold forever and can look past the challenges of today's market.
These are the only explanations I can come up with. Am i missing any?
Either these groups who are aggressively tying up land will look like geniuses or idiots. Only time will tell...
Multifamily GP here. We've underwritten $20B this year and have close $0. I've gotten a couple of things under control but then the treasuries spike 25+ basis points and derail the deal (like the movement so far today). Also, institutional equity is still very difficult to get on board unless you have strong existing relationships. I track every sale in the Southeast and it is mostly the usual suspects doing deals with a much lower cost of capital and/or large balance sheet (or Grant Cardone paying cash). Everyone else is pretty much still priced out and its been that way for over two years now.
Spot on
A lot of negative leverage deals, or spun in another way a "Macro" bet. Meaning you are just looking at the relative value to peak or replacement costs. You would need to believe that there is a fundamental shortage in the market for housing, and that flattening of rent growth, and rising cap rates are a short run issue and the long run values will return, and (potentially) exceed, values today. Remember, deals made a lot of sense in 2021 that know look completely foolish. The same can inversely be true today, and some shops have discretionary capital to take this bet.
The other thing is cost of capital might be really cheep and discretionary. Or they are doing it for the fees.
Could be a combination of all three.
People are doing really dumb things because they are desperate to keep their jobs and/or need to keep the fee train rolling. Don't sweat it.
It's really this simple.
If the 'thesis' or 'macro bet' depends on some variable (rent, cap rates, interest rates, etc) projected 5 years into the future, you're just deluding yourself. Considering how far off everyone's '12-18 month' projections have been for the past three years, how can you be so arrogant as to make a 60 month projection? It's just gaslighting.
They're just making deals to earn fees on use-it-or-lose-it money.
Totally agree on the macro bet. Speaking with brokers, that is far and away the main justification for doing deals right now. Like the basis. Have been willing to ride out the supply pipeline with the bet that outsized rent growth picks up in 2026 and the deal "catches up" on a 7 or 10 year hold.
I've had some brokers tell me that buyers buying on a 10 year hold like the basis and "will figure the rest out later".
It's great for brokers who need to tell a story (and get paid in cash at close), but for everyone else, hope is not a strategy.
Does anyone here work for a family office / entrepreneurial RE operator? If so how do you look at negative leverage deals / macro bet? I find it so tough to justify paying a ridiculous price for assets when there is negative leverage, because on the entrepreneurial side CoC is so important for us.
If everyone starts transacting with negative leverage, will prices ever come down to a reasonable mark where we can transact and if not it seems like we'll just either have to panic buy / or never touch another asset again.
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