Wanted to start a discussion so some acquisitions guys can speak on some trends they are seeing in various asset classes. Whether it be market, or positioning of assets, foreign equity, cap rates/yields, anything.
Please comment with the type of asset you are referencing...
I'll share my secret sauce once I've made some money off it :D
For real though; the rhetoric surrounding industrial is becoming stale. The concept that supply is insufficient to satisfy growing demand is simply untrue in more markets than you would think. This is a classic case of people listening to talking heads without doing any individual research themselves. There seems to be this expectation that the e-commerce evolution will continue regardless of larger issues, ie; poor corporate debt ratios, decreasing trade flows, etc. The fact remains that e-commerce is a LOSS LEADER in nearly every single instance right now. There will be a recalibration in this market segment just like there is when every trend gets too hot.
Now, I'm not saying warehouse/e-commerce use projects should be avoided. I'm simply saying that you need to pay attention. There are several markets where demand is not keeping pace. Be weary of markets that are beginning to lag. It's a chain reaction that will affect all drivers of real estate valuations.
Some considerations; this is becoming a micro-market and even a pocket specific game - know why a certain micro performs a certain way, tangentially, understand the tenant base in these markets and what specifications they are looking for, industrial is going through an evolution on the owner side as well, keep pace or be left behind.
The space is maturing every day and reaching a new level of sophistication. Understand this and how to benefit for this evolution and you won't be caught with your hot dog in a hamburger bun.
Every institutional multifamily deal, across markets, is trading at a 4-cap on real, tax adjusted numbers. DC, Boston, Dallas, Austin, Atlanta, Orlando... you name it and it's a 4-cap; doesn't matter if it is brand new or 1995-built product, it is a 4-cap and the only difference between value-add and core is where you think you can take the stabilized cap rate. Seattle, LA, and SF are the exceptions and everything there is a 3.85-cap, but they have the same themes on where you can stabilize the cap rate.
Depends on the municipality. 100% obviously in California, 95% in Texas (unless we have a good reason not to), low to mid 90s in DC (varies in Maryland), Boston is a crap shoot and depends on the township, Seattle at 95% unless there is that wonky MFTE thing, but in all instances we're bringing it somewhere between 90% and 100% on a stabilized basis and that is what goes into our cap rates but it may take a year or three before it reaches that value.
I'm seeing values in that range or lower (we target returns in that range). Core is pricing between 6% and 6.5% unlevered (varies by market), and value-add (whatever that means these days) is between a 7 and an 8. We've focused more on deals coming out of lease-up in locations we like for our value-add/core-plus vehicle rather than missing on every single marketed value-add deal (unless it is over $75m). Thesis is that the yields aren't dissimilar and you aren't taking as much product-level risk or capex risk while reaching similar returns. Renovation deals are still a bloodbath and have pretty deep bid sheets, but on the newer deals the pack is smaller and if a 1031 group doesn't show up you can buy at a pretty compelling basis relative to replacement cost. Who knows if we're right?
I think this is a very smart approach to multifamily at this point in the cycle. There is so much capital chasing value-add deals, I don't get how it still makes sense unless you have an unbelievably low cost of capital. We are seeing groups underwrite assets built as little as 5-years ago as value-add to satisfy their capital's investment parameters and underwriting big premiums for a light refresh that is effectively a change in color palette. The capital is even more aggressive for garden style deals with pricing approaching replacement costs in many metros and groups continue to underwrite rent growth exceeding expense/cap ex growth.
Development is still seeing a lot of interest as well and the assumptions on untrended rents to justify a YoC that makes sense is extremely aggressive. And for well-located sites, many are even willing to close before entitlements.
This leaves new construction as the perfect sweet spot. Minimal capital chasing these deals, proven rents and often times below replacement cost with how fast construction costs are rising. I wouldn't be surprised if these new construction deals end up with higher returns than many value-add deals 5 years from now.