Return Targets
What is everyone underwriting to these days?
Would love to hear what different shops are looking for and the asset class.
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Mainly in multi development but has to be above a 7%, and likely higher, untrended YOC which doesn't exist.
Damn that's insane. We're targeting 6/6.25% at best (family office that has significant leeway in return profiles) which we've been able to hit on a few projects with good land basis.
Same situation. Family office targeting 6/6.5 YOC
Then what is your exit? A 5-5.5%? Doing development with 1 point spread is insane.
In Canada a 1 point spread on residential is standard, but we also only have 6-7 major markets with extreme capital concentration and our major institutions are still buying PBR at sub-4's in Vancouver/Toronto and banking on rent growth to get out of negative leverage (or buying all cash).
You're lucky to pencil to a 5.5% on apartment in Canada, usually close to 5%. That being said, not a lot of people building.
Isn't there a government backed loan program for residential construction that is pretty attractive to? I remember seeing a Canadian developer walking through his capital stack, and these tighter spreads started to make more sense if your senior was that attractive.
Yes, CMHC MLI Select and other CMHC programs
Yes, CMHC offers programs, the main one people are interested in today is the MLI Select program, that are very attractive. For example, MLI Select offers up to 95% LTC (they test on LTC and DSCR, I would say average LTC is ~85% but have seen some projects get the full 95%) that price out to roughly a 4.3-4.5% interest rate today on a 50 year amo. This loan also rolls from a construction to perm facility within 3 months from completion so you are taking out a huge amount risk in terms of lease-up issues and meeting underwritten rents.
There are a few catches (requires either a certain % affordable units or a certain spec for sustainability, is full recourse until you hit 12 months of proforma NOI but "proforma" is based on their underwriting which is very conservative, and there are pretty substantial premiums that get rolled into the loan amount, for example), but generally speaking its a great incentive.
Regardless, returns are still pretty thin compared to sunbelt development in the US over the past few years, mainly because there isn't a big market for wood-framed low rise in Canada so you're building concrete with below grade parking 90% of the time.
Exit is usually 4.75-5.0%, so 1.25% spread. It's tight but if you want to do deals you gotta try. T1 market with some of the highest rents in the country, btw, so it's different from a SE garden product.
Mezzanine Debt/Pref Equity - pricing coupons of 11-13% for existing product, 13-14.50% for development. Targeting all in IRRs in the 13-15% range with flexibility for lower levered deals to be priced inside of that.
JV Equity - Not that we're doing any, but minimum would need to be a 17-18%. My firm has multiple levered structured credit strategies in addition to JV equity. For us to pursue JV, it has to be a meaningful enough spread to our higher octane subordinate capital strategies, which as we all know generally doesn't exist in most major asset types in todays environment.
Mainly targeting Multi, Industrial, Self Storage (rarely, too small), select retail, Life Science & Advanced R&D.
When you say coupons - I assume you mean yield right? I always think of a coupon as what’s getting paid current, and 11-13 seems reasonable to me if you’re including points/fees in/out. Is that right?
Coupon as in the stated interest rate (combined current and accrued) not including any fees (origination/exit etc.)
Work for a national developer, our sole strategy is ground up, merchant build, developments.
Multi - Above a 7.00% in core markets, impossible to find
Industrial - Above a 7.25%, finding very few deals that work and the ones that do are usually smaller sized deals with total capital stacks <$30mm
Office - Pencils down
Data Center - Above a 7.50%, but most deals make sense and land in the 8.00% range. Land pricing is such a small % of the total budget that it doesn't move the needle as much as multi and industrial, allowing for us to be less sensitive to higher land pricing.
National developer but I can only speak to east coast, we are targeting a 6.5% untrended right now. That needs to be a real 6.5%, not a "developer" 6.5%. Have seen competitors say they have a 6.5% but you look at the UW and they are always light on Opex or have some wild rent/other income assumptions. The majority of things we look at don't work but the few we have found we have been able to get equity on at a 6.5%.
whats real vs not?
Real as in accurate underwriting showing realistic rent and opex assumptions. Developers often show some lofty numbers in what they send to LP's knowing the LP's will beat that number down no matter where you start. I'm saying it needs to be a real 6.5% untrended, and not an inflated 6.5% that is really a 6% or 6.25%.
To put it bluntly, 1.25% - 1.50% untrended development yield premium on existing cap rates in Europe for the living sector.
At the moment, it makes no sense to go into development when there are so many distressed asset sales and core+ / value-add properties achieving almost the same IRRs as developments.
Those selling land and development opportunities are way too greedy atm, and no wonder they are suffering. They still think land prices are at 2019 levels lol.
What are cap rates in EU right now? How much does it vary by country/city (ie France vs Germany vs BeNeLux vs Spain or Paris vs Frankfurt/Berlin vs Milan vs Barcelona).
It varies quite a lot between EU countries, depending on risk-free rates and currency in that specific country. For instance, last time I checked, Poland's cap rates were around 6.25% - 7.25% depending on the cities, whereas in Spain it's more like 4.75% - 5.75%. It's all about the location, interest rates, demand and currency risk. Also, currency has a big impact on the cost of interest, which is why cap rates vary a lot between countries that use EUR and others that use their own currencies.
For those of you buying (i.e. not developing) multifamily, industrial etc, what untrended YOCs are you targeting? By what year?
Buying multifamily - on core / core+ we like a 5% min yoc, for value add we like a stabilized 6.5% yoc with a 10% unlevered IRR target. Nothing is penciling for us.
Interesting. How are you getting min 5% yoc to pencil with debt at 5.5% or higher? Buying all cash?
6.5-7+ core+ and value-add multi east coast.
Multi-family developer. Deal is interesting if we get to an untrended 6.5. Would need to be an A+ site or have a good growth/limited supply story to get done at a 6.5, likely need 6.75 for most sites
second this for infill/type I
Value-add industrial. Low to mid 7's stabilized YOC and 14%-18% LIRR. Haven't found anything yet but delusion is a great motivator.
What markets?
National but have been focusing on core markets in the Southeast, TX, and DC as of late.
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