Replacement Cost in Practice
I know that firms typically look to buy "below replacement cost", but I'm curious how that analysis is implemented in practice when looking at tons of deals at the same time. Do firms calculate replacement cost on every deal and how granular is the analysis? If a firm is buying an office building in Austin for example, do they use the avg cost psf of an office building in Austin or do they calculate the cost of all the concrete, glass, steel, etc? Additionally, is this analysis part of the initial underwrite or the DD period?
You’ll have a general idea of what it costs for hard and soft costs PSf to build a building in your location. You can speak to brokers to get this info (or contractors). Now determine the value of land and you have your replacement cost. It’s a general usage to understand your proposed investment basis compared to a new building and what rents the new building would have to charge. You can than understand how competitive your pricing might be.
What would ppl think replacement costs in NYC and Boston would be?
Too broad a question to answer. Different markets so different costs. Do you want to build office, retail, resi, condo? With or without parking. Steel or wood frame. High rise or low rise. Too many questions to give you an answer.
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